Financial Derivatives

9 Months Ended

Sep. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivatives

FINANCIAL DERIVATIVES

We use derivative financial instruments primarily to help manage exposure to interest rate, market and credit risk and reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. We also enter into derivatives with customers to facilitate their risk management activities. Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract.

For more information regarding derivatives see Note 1 Accounting Policies and Note 13 Financial Derivatives in our Notes To Consolidated Financial Statements in our 2016 Form 10-K.

The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by us.

Table 59: Total Gross Derivatives

	September 30, 2017								December 31, 2016
In millions	Notional / Contract Amount		Asset Fair Value (a)			Liability Fair Value (b)			Notional / Contract Amount		Asset Fair Value (a)			Liability Fair Value (b)
Derivatives used for hedging under GAAP
Interest rate contracts (c):
Fair value hedges (d)	$	32,820	$	165		$	62		$	34,010	$	551		$	214
Cash flow hedges (d)	22,383		83			2			20,831		313			71
Foreign exchange contracts:
Net investment hedges	1,038					51			945		25
Total derivatives designated for hedging	$	56,241	$	248		$	115		$	55,786	$	889		$	285
Derivatives not used for hedging under GAAP
Derivatives used for mortgage banking activities (e):
Interest rate contracts:
Swaps (d)	$	50,902	$	337		$	141		$	49,071	$	783		$	505
Futures (f)	37,396								36,264
Mortgage-backed commitments	10,074		27			20			13,317		96			56
Other	25,031		13			9			31,907		28			4
Subtotal	123,403		377			170			130,559		907			565
Derivatives used for customer-related activities:
Interest rate contracts:
Swaps (d)	190,003		2,125			1,730			173,777		2,373			2,214
Futures (f)	3,670								4,053
Mortgage-backed commitments	2,649		4			3			2,955		10			8
Other	19,189		83			33			16,203		55			53
Subtotal	215,511		2,212			1,766			196,988		2,438			2,275
Foreign exchange contracts and other	24,569		246			244			21,889		342			309
Subtotal	240,080		2,458			2,010			218,877		2,780			2,584
Derivatives used for other risk management activities:
Foreign exchange contracts and other (g)	6,785		10			313			5,581		40			405
Total derivatives not designated for hedging	$	370,268	$	2,845		$	2,493		$	355,017	$	3,727		$	3,554
Total gross derivatives	$	426,509	$	3,093		$	2,608		$	410,803	$	4,616		$	3,839
Less: Impact of legally enforceable master netting agreements (d)			(1,373		)	(1,373		)			(2,460		)	(2,460		)
Less: Cash collateral received/paid (d)			(397		)	(691		)			(657		)	(484		)
Total derivatives			$	1,323		$	544				$	1,499		$	895

(a) Included in Other assets on our Consolidated Balance Sheet.

(b) Included in Other liabilities on our Consolidated Balance Sheet.

(c) Represents primarily swaps.

(d) In the first quarter of 2017, PNC changed its accounting treatment for variation margin related to certain derivative instruments cleared through a central clearing house. Previously, variation margin was treated as collateral subject to offsetting. As a result of changes made by the clearing house to its rules governing such instruments with its counterparties, effective for the first quarter of 2017, variation margin will be treated as a settlement payment on the derivative instrument. The impact at September 30, 2017 was a reduction of gross derivative assets and gross derivative liabilities of $.8 billion and $.7 billion, respectively. The accounting change had no impact on the net fair value of the derivative assets and liabilities that otherwise would have been reported on our Consolidated Balance Sheet. See Table 63 for more information.

(e) Includes both residential and commercial mortgage banking activities.

(f) Futures contracts settle in cash daily and, therefore, no derivative asset or derivative liability is recognized on our Consolidated Balance Sheet.

(g) Includes our obligation to fund a portion of certain BlackRock LTIP programs and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

All derivatives are carried on our Consolidated Balance Sheet at fair value. Derivative balances are presented on the Consolidated Balance Sheet on a net basis taking into consideration the effects of legally enforceable master netting agreements and, when appropriate, any related cash collateral exchanged with counterparties. Further discussion regarding the offsetting rights associated with these legally enforceable master netting agreements is included in the Offsetting, Counterparty Credit Risk and Contingent Features section below. Any nonperformance risk, including credit risk, is included in the determination of the estimated net fair value of the derivatives.

Derivatives Designated As Hedging Instruments under GAAP

Certain derivatives used to manage interest rate and foreign exchange risk as part of our asset and liability risk management activities are designated as accounting hedges under GAAP. Derivatives hedging the risks associated with changes in the fair value of assets or liabilities are considered fair value hedges, derivatives hedging the variability of expected future cash flows are considered cash flow hedges, and derivatives hedging a net investment in a foreign subsidiary are considered net investment hedges. Designating derivatives as accounting hedges allows for gains and losses on those derivatives, to the extent effective, to be recognized in the income statement in the same period the hedged items affect earnings.

Fair Value Hedges

We enter into receive-fixed, pay-variable interest rate swaps to hedge changes in the fair value of outstanding fixed-rate debt caused by fluctuations in market interest rates. We also enter into pay-fixed, receive-variable interest rate swaps and zero-coupon swaps to hedge changes in the fair value of fixed rate and zero-coupon investment securities caused by fluctuations in market interest rates. For these hedge relationships, we use statistical regression analysis to assess hedge effectiveness at both the inception of the hedge relationship and on an ongoing basis. There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for all periods presented.

Further detail regarding gains (losses) on fair value hedge derivatives and related hedged items is presented in the following table:

Table 60: Gains (Losses) on Derivatives and Related Hedged Items – Fair Value Hedges

			Three months ended												Nine months ended
			September 30, 2017						September 30, 2016						September 30, 2017					September 30, 2016
In millions	Hedged Items	Location	Gain (Loss) on Derivatives Recognized in Income			Gain (Loss) on Related Hedged Items Recognized in Income			Gain (Loss) on Derivatives Recognized in Income			Gain (Loss) on Related Hedged Items Recognized in Income			Gain (Loss) on Derivatives Recognized in Income			Gain (Loss) on Related Hedged Items Recognized in Income		Gain (Loss) on Derivatives Recognized in Income			Gain (Loss) on Related Hedged Items Recognized in Income
Interest rate     contracts	U.S. Treasury and Government  Agencies and Other Debt Securities	Investment securities (interest income)	$	9		$	(8	)	$	51		$	(53	)	$	(3	)	$	4	$	(158	)	$	161
Interest rate     contracts	Subordinated Debt and Bank Notes and Senior Debt	Borrowed funds (interest expense)	(56		)	50			(232		)	231			(84		)	61		330			(369		)
Total (a)			$	(47	)	$	42		$	(181	)	$	178		$	(87	)	$	65	$	172		$	(208	)

(a) The difference between the gains (losses) recognized in income on derivatives and their related hedged items represents the ineffective portion of the change in value of our fair value hedge derivatives.

Cash Flow Hedges

We enter into receive-fixed, pay-variable interest rate swaps to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to market interest rate changes. For these cash flow hedges, any changes in the fair value of the derivatives that are effective in offsetting changes in the forecasted interest cash flows are recorded in Accumulated other comprehensive income and are reclassified to interest income in conjunction with the recognition of interest received on the loans. We use statistical regression analysis to assess the effectiveness of these hedge relationships at both the inception of the hedge relationship and on an ongoing basis.

We also periodically enter into forward purchase and sale contracts to hedge the variability of the consideration that will be paid or received related to the purchase or sale of investment securities. The forecasted purchase or sale is consummated upon gross settlement of the forward contract itself. As a result, hedge ineffectiveness, if any, is typically minimal. Gains and losses on these forward contracts are recorded in Accumulated other comprehensive income and are recognized in earnings when the hedged cash flows affect earnings.

In the 12 months that follow September 30, 2017, we expect to reclassify net derivative gains of $143 million pretax, or $93 million after-tax, from Accumulated other comprehensive income to interest income for both cash flow hedge strategies. This reclassified amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to September 30, 2017. As of September 30, 2017, the maximum length of time over which forecasted transactions are hedged is seven years. During the first nine months of 2017 and 2016, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transaction would not occur.

There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to either cash flow hedge strategy for all periods presented.

Further detail regarding gains (losses) on derivatives and related cash flows is presented in the following table:

Table 61: Gains (Losses) on Derivatives and Related Cash Flows – Cash Flow Hedges (a) (b)

	Three months ended September 30						Nine months ended September 30
In millions	2017			2016			2017			2016
Gains (losses) on derivatives     recognized in OCI – (effective     portion)	$	(2	)	$	(63	)	$	15		$	328
Less: Gains (losses) reclassified     from accumulated OCI into     income – (effective portion)
Interest income	43			61			144			190
Noninterest income	2			1			5
Total gains (losses) reclassified     from accumulated OCI into     income – (effective portion)	$	45		$	62		$	149		$	190
Net unrealized gains (losses)     on cash flow hedge derivatives	$	(47	)	$	(125	)	$	(134	)	$	138

(a) All cash flow hedge derivatives are interest rate contracts as of September 30, 2017 and September 30, 2016.

(b) The amount of cash flow hedge ineffectiveness recognized in income was not significant for the periods presented.

Net Investment Hedges

We enter into foreign currency forward contracts to hedge non-U.S. dollar net investments in foreign subsidiaries against adverse changes in foreign exchange rates. We assess whether the hedging relationship is highly effective in achieving offsetting changes in the value of the hedge and hedged item by qualitatively verifying that the critical terms of the hedge and hedged item match at the inception of the hedging relationship and on an ongoing basis. Net investment hedge derivatives are classified as foreign exchange contracts. There were no components of derivative gains or losses excluded from the assessment of the hedge effectiveness for all periods presented. During the first nine months of 2017 and 2016, there was no net investment hedge ineffectiveness. Gains and losses on net investment hedge derivatives recognized in OCI were net losses of $26 million for the three months ended September 30, 2017 and net losses of $76 million for the nine months endedSeptember 30, 2017, compared with net gains of $27 million for the three months ended September 30, 2016 and net gains of $136 million for the nine months ended months ended September 30, 2016.

Derivatives Not Designated As Hedging Instruments under GAAP

We also enter into derivatives that are not designated as accounting hedges under GAAP. For additional information on derivatives not designated as hedging instruments under GAAP see Note 13 Financial Derivatives in our 2016 Form 10-K.

Further detail regarding the gains (losses) on derivatives not designated in hedging relationships is presented in the following table:

Table 62: Gains (Losses) on Derivatives Not Designated for Hedging under GAAP

	Three months ended September 30					Nine months ended September 30
In millions	2017			2016		2017			2016
Derivatives used for mortgage     banking activities:
Interest rate contracts (a)	$	19		$	18	$	92		$	431
Derivatives used for customer-     related activities:
Interest rate contracts	$	10		$	23	$	63		$	20
Foreign exchange contracts and     other	38			26		110			72
Gains (losses) from customer-     related activities (b)	$	48		$	49	$	173		$	92
Derivatives used for other risk     management activities:
Foreign exchange contracts and     other (c)	$	(101	)	$	4	$	(257	)	$	(91	)
Gains (losses) from other risk     management activities (b)	$	(101	)	$	4	$	(257	)	$	(91	)
Total gains (losses) from     derivatives not designated as     hedging instruments	$	(34	)	$	71	$	8		$	432

(a) Included in Residential mortgage, Corporate services and Other noninterest income.

(b) Included in Other noninterest income.

(c) Includes BlackRock LTIP funding obligation and the swaps entered into in connection with sales of a portion of Visa Class B common shares.

Offsetting, Counterparty Credit Risk and Contingent Features

We generally utilize a net presentation on the Consolidated Balance Sheet for those derivative financial instruments entered into with counterparties under legally enforceable master netting agreements. The master netting agreements reduce credit risk by permitting the closeout netting of all outstanding derivative instruments under the master netting agreement with the same counterparty upon the occurrence of an event of default. The master netting agreement also may require the exchange of cash or marketable securities to collateralize either party’s net position. For additional information on derivative offsetting, counterparty credit risk and contingent features see Note 13 Financial Derivatives in our 2016 Form 10-K.

Table 63 shows the impact legally enforceable master netting agreements had on our derivative assets and derivative liabilities as of September 30, 2017 and December 31, 2016. The table includes cash collateral held or pledged under legally enforceable master netting agreements. The table also includes the fair value of any securities collateral held or pledged under legally enforceable master netting agreements. Cash and securities collateral amounts are included in the table only to the extent of the related net derivative fair values.

Table 63: Derivative Assets and Liabilities Offsetting

September 30, 2017 In millions			Amounts Offset on the Consolidated Balance Sheet							Securities Collateral Held / (Pledged) Under Master Netting Agreements
	Gross Fair Value		Fair Value Offset Amount		Cash Collateral		Net Fair Value					Net Amounts
Derivative assets
Interest rate contracts:
Over-the-counter cleared (a)	$	472	$	177	$	261	$	34				$	34
Exchange-traded	3						3					3
Over-the-counter	2,362		1,080		133		1,149			$	65	1,084
Foreign exchange and other contracts	256		116		3		137					137
Total derivative assets	$	3,093	$	1,373	$	397	$	1,323	(b)	$	65	$	1,258
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared (a)	$	196	$	177			$	19				$	19
Exchange-traded
Over-the-counter	1,804		1,027		$	590	187					187
Foreign exchange and other contracts	608		169		101		338					338
Total derivative liabilities	$	2,608	$	1,373	$	691	$	544	(c)			$	544
December 31, 2016
In millions
Derivative assets
Interest rate contracts:
Over-the-counter cleared	$	1,498	$	940	$	480	$	78				$	78
Exchange-traded	9						9					9
Over-the-counter	2,702		1,358		164		1,180			$	62	1,118
Foreign exchange and other contracts	407		162		13		232					232
Total derivative assets	$	4,616	$	2,460	$	657	$	1,499	(b)	$	62	$	1,437
Derivative liabilities
Interest rate contracts:
Over-the-counter cleared	$	1,060	$	940	$	25	$	95				$	95
Exchange-traded	1						1					1
Over-the-counter	2,064		1,395		431		238					238
Foreign exchange and other contracts	714		125		28		561					561
Total derivative liabilities	$	3,839	$	2,460	$	484	$	895	(c)			$	895

(a) Reflects our first quarter 2017 change in accounting treatment for variation margin for certain derivative instruments cleared through a central clearing house. The accounting change reduced the asset and liability gross fair values with corresponding reductions to the fair value and cash collateral offsets, resulting in no changes to the net fair value amounts.

(b) Represents the net amount of derivative assets included in Other assets on our Consolidated Balance Sheet.

(c) Represents the net amount of derivative liabilities included in Other liabilities on our Consolidated Balance Sheet.

Table 63 includes over-the-counter (OTC) derivatives, cleared derivatives and exchange-traded derivatives. OTC derivatives represent contracts executed bilaterally with counterparties that are not settled through an organized exchange or cleared through a central clearing house. The majority of OTC derivatives are governed by ISDA documentation or other legally enforceable industry standard master netting agreements. Cleared derivatives represent contracts executed bilaterally with counterparties in the OTC market that are novated to a central clearing house who then becomes our counterparty. Exchange-traded derivatives represent standardized futures and options contracts executed directly on an organized exchange.

In addition to using master netting agreements and other collateral agreements to reduce credit risk associated with derivative instruments, we also seek to manage credit risk by evaluating credit ratings of counterparties and by using internal credit analysis, limits and monitoring procedures.

At September 30, 2017, we held cash, U.S. government securities and mortgage-backed securities totaling $.7 billion under master netting agreements and other collateral agreements to collateralize net derivative assets due from counterparties, and we pledged cash totaling $1.5 billion under these agreements to collateralize net derivative liabilities owed to counterparties and to meet initial margin requirements. These totals may differ from the amounts presented in the preceding offsetting table because these totals may include collateral exchanged under an agreement that does not qualify as a master netting agreement or because the total amount of collateral held or pledged exceeds the net derivative fair values with the counterparty as of the balance sheet date due to timing or other factors, such as initial margin. To the extent not netted against the derivative fair values under a master netting agreement, the receivable for cash pledged is included in Other assets and the obligation for cash held is included in Other liabilities on our Consolidated Balance Sheet. Securities held from counterparties are not recognized on our balance sheet. Likewise securities we have pledged to counterparties remain on our balance sheet.

Certain derivative agreements contain various credit-risk related contingent provisions, such as those that require our debt to maintain a specified credit rating from one or more of the major credit rating agencies. If our debt ratings were to fall below such specified ratings, the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on September 30, 2017 was $1.1 billion for which we had posted collateral of $.7 billion in the normal course of business. The maximum additional amount of collateral we would have been required to post if the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2017 would be $.4 billion.