PNC, §1A diff (2017 → 2018)

ITEM 1A - RISK FACTORS We are subject to a number of risks potentially impacting our business, financial condition, results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in what we do and the business decisions we make. Thus, we encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks. Our success is dependent on our ability to identify, understand and manage the risks presented by our business activities so that we can appropriately balance revenue generation and profitability. We discuss our principal risk management oversight and processes and, in appropriate places, related historical performance and other metrics in the Risk Management section included in Item 7 of this Report. The following are the key risk factors that affect us. Any one or more of these risk factors could have a material adverse impact on our business, financial condition, results of operations or cash flows. In addition, these risks present other possible adverse consequences, including those described below. These risk factors and other risks we face are also discussed further in other sections of this Report. Our business and financial performance are vulnerable to the impact of adverse economic conditions. As a financial services company, our business and overall financial performance are affected to a significant extent by economic conditions. We are currently in a prolonged economic expansion. This is not likely to continue forever, and at some point economic conditions are likely to turn recessionary. Adverse economic conditions generally result in reduced business activity, which may decrease the demand for our products and services. The ability of borrowers to repay loans is often weakened as a result of economic downturns. Such economic conditions also 14 The PNC Financial Services Group, Inc. - Form 10-K may lead to turmoil and volatility in financial markets. Any of these effects would likely have an adverse impact on financial institutions such as PNC, with the significance of the impact generally depending on the severity of the adverse economic conditions. Even when economic conditions are relatively good or stable, specific economic factors can negatively affect the business and performance of financial institutions. This can be especially true when the factors relate to particular industries or geographical regions. For example, shifting consumer behavior with respect to retail purchases being made over the internet rather than in physical stores has negatively impacted performance by some retailers. This likely decreases demand for financial services in that sector, possibly harming the creditworthiness of some shopping malls and retail companies. As another example, trade wars leading to increased tariffs likely adversely affect companies more dependent on imports or exports. Increased tariffs may also result in increased prices for some products or services, leading to decreases in demand. Here, as well, affected companies may experience lower levels of business and possible declining creditworthiness. Recently increased tariffs on imports into, as well as exports out of, the U.S. could have some or all of these effects on the U.S. economy and on our business. Given the geographic scope of our business and operations, we are most exposed to issues within the U.S. economy and financial markets. Within the U.S., we are most exposed to issues within markets located in the Mid-Atlantic, Midwest and Southeast. This will continue to be the case for at least some period of time, even as we expand the national reach of some of our businesses. Our international business activities continue to be a relatively small part of our overall business. As a result, the direct impact on our business and performance from international economic conditions is not likely to be significant. We are nonetheless susceptible to the risk that international economic conditions could affect our business and financial performance. Primarily, this risk results from the possibility that poor economic conditions or financial market disruptions affecting other major economies around the world would also affect the U.S. One example is the United Kingdom’s impending exit from the European Union. This has led to uncertainty regarding the impact on the economy and capital markets of the United Kingdom and Europe more generally, including the risk that other countries might seek to exit the European Union in the future. The extent to which these uncertainties will affect the U.S. economy and capital markets is unclear. The more severe the impact, the more likely it would have adverse effects on PNC and its business. Government legislation, regulation and policy frequently impacts the economy in ways that could have an adverse effect on our business and financial performance. Changes in law or governmental policy affecting the economy, business activity, or personal spending, investing or saving activities may cause consumers and businesses to alter behavior in ways that impact demand for our products and services. Even to the extent that demand is not affected, such changes may also alter the profitability of the transactions in which we engage. PNC may also adjust the types of transactions we seek to pursue under those circumstances. Uncertainty regarding future law or policy may have similar impacts. A recent example of such a change was the 2017 Tax Cuts and Jobs Act, representing the most significant change in U.S. federal tax law in decades. It has had and is likely to continue to have an impact on corporate and consumer behavior, including decisions made by PNC in response to the changes in law. Changes in PNC’s behavior or that of our customers as a result of future substantial revisions to U.S. federal tax law could negatively impact us. Concern regarding the ability of Congress and the President collectively to reach agreement on federal budgetary matters (including the debt ceiling), or prolonged stalemates leading to total or partial governmental shutdowns, such as the partial shutdown from December 2018 until January 2019, also can have adverse economic consequences and create the risk of economic instability or market volatility, with potential adverse consequences to our business and financial performance. The divided control of the U.S. government following the 2018 elections may make this type of event more likely going forward. The policies of the Federal Reserve and other governmental agencies have a significant impact on interest rates and overall financial market performance. These in turn drive much of our business and financial performance. The monetary policies of the Federal Reserve have a significant impact on interest rates and overall financial market performance. These policies can thus affect the activities and results of operations of financial companies such as PNC. An important function of the Federal Reserve is to monitor the national supply of bank credit and set certain interest rates. The actions of the Federal Reserve influence the rates of interest that we charge on loans and that we pay on borrowings and interest-bearing deposits. Rates of interest can also affect the value of our on-balance sheet and off-balance sheet financial instruments. As a general matter, increasing rates tend to decrease the value of fixed rate financial instruments. We cannot predict the nature or timing of future changes in monetary policies or the precise effects that they may have on our activities and financial results. Starting in late 2015, the Federal Reserve has regularly increased its benchmark interest rate from the near-zero level that had prevailed following the financial crisis that began in 2007. We expect this to continue at least into 2019. The amount and timing of future increases will likely depend on economic conditions, including rates of inflation and unemployment. The PNC Financial Services Group, Inc. - Form 10-K 15 After an extended period during which the Federal Reserve increased its balance sheet substantially above historical levels through the purchase of debt securities, the Federal Reserve has started reducing its balance sheet from these elevated levels. Its reduction in holdings of longer term Treasury securities and mortgage-backed securities would tend to push long-term interest rates higher. It is unclear what other impacts the Federal Reserve's actions will have on the economy or on the markets and values of financial assets, including assets of the types that we hold, purchase and sell. In addition, monetary policy actions by governmental authorities in the European Union or other countries could have an impact on global interest rates, which could affect rates in the U.S. as well as rates on instruments denominated in currencies other than the U.S. dollar, any of which could have one or more of the potential effects on us described above. As a regulated financial services firm, we are subject to numerous governmental regulations and comprehensive oversight by a variety of regulatory agencies and enforcement authorities. These regulations and the manner in which they are implemented can have a significant impact on our businesses and operations. The PNC Financial Services Group, Inc. is a bank holding company (BHC) and a financial holding company and is subject to numerous laws and regulations involving both its business and organization. In addition, our businesses are subject to examination and supervision by multiple banking, consumer protection, securities and derivatives regulatory bodies. These laws, regulations and supervisory activities are intended to promote the safety and soundness of financial institutions, financial market stability, the transparency and liquidity of financial markets, and consumer and investor protection. We are also subject to oversight by criminal and civil enforcement authorities. Over time, the scope of the laws and regulations affecting our businesses, as well as the number of requirements or limitations imposed by legislative or regulatory actions, has increased. This trend is likely to continue, at least over the long term. Legislative or regulatory actions can result in increased compliance costs, reduced business opportunities, or new requirements and limitations on how we conduct our business. Applicable laws and regulations impose capital adequacy requirements and restrict our ability to repurchase stock or to receive dividends from subsidiaries that operate in the banking and securities businesses. PNC’s ability to service its obligations and pay dividends to shareholders is largely dependent on the receipt of dividends and advances from its subsidiaries, primarily PNC Bank. The Federal Reserve requires a BHC to act as a source of financial and managerial strength for its subsidiary banks. The Federal Reserve could require PNC to commit resources to PNC Bank when doing so is not otherwise in the interests of PNC or its shareholders or creditors. Applicable laws and regulations also restrict permissible activities and investments and require compliance with provisions designed to protect loan, deposit, brokerage, fiduciary, mutual fund and other customers, and for the protection of customer information, among other things. We also are subject to laws and regulations designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities. We are subject to supervision and examination by numerous governmental bodies. The results of these supervisory or examination activities could result in limitations on our ability to engage in new activities or expand geographically. These activities also could result in significant fines, penalties, or required corrective actions, some of which could be expensive and difficult to implement. As we expand our product and service offerings into additional states or countries, there could be an increase in state or foreign regulation affecting our operations. Different approaches to regulation by different jurisdictions could increase our compliance costs or risks of non-compliance. A failure to comply, or to have adequate policies and procedures designed to comply, with regulatory requirements and expectations could expose us to damages, fines and regulatory penalties and other regulatory or enforcement actions or consequences, such as limitations on activities otherwise permissible for us or additional requirements for engaging in new activities, and could also injure our reputation with customers and others with whom we do business. New regulatory requirements or other initiatives may well be pursued and implemented in the future. Such future regulatory requirements or initiatives could further increase our compliance costs and the risks associated with non-compliance and could affect our ability to pursue or take full advantage of some desirable business opportunities. See Supervision and Regulation in Item 1 of this Report for more information concerning the regulation of PNC and recent initiatives to reform financial institution regulation, including some of the matters discussed in this Risk Factor. Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements in Item 8 of this Report also discusses some of the regulation applicable to us. 16 The PNC Financial Services Group, Inc. - Form 10-K We are subject to regulatory capital and liquidity standards that affect our business, operations and ability to pay dividends, or otherwise return capital, to shareholders. These regulatory capital and liquidity standards are subject to modification. Changes in these requirements could require us to maintain higher levels of capital and liquidity than currently required. PNC and PNC Bank are subject to regulatory capital and liquidity requirements established by the Federal Reserve and the OCC, respectively. These regulatory capital and liquidity requirements are typically developed at an international level by the Basel Committee on Banking Supervision (Basel Committee) and then applied, with adjustments, in each country by the appropriate domestic regulatory bodies. Domestic regulatory agencies have the ability to apply stricter capital and liquidity standards than those developed by Basel Committee. In several instances, the U.S. banking agencies have done so with respect to U.S. banking organizations. Requirements to maintain specified levels of capital and liquidity, and regulatory expectations as to the quality of our capital and liquidity, impact our business activities and may prevent us from taking advantage of opportunities in the best interest of shareholders or force us to take actions contrary to their interests. For example, PNC may be limited in its ability to pay or increase dividends or otherwise return capital to shareholders. In addition, these requirements may impact the amount and type of loans we make. We may be constrained in our ability to expand, either organically or through acquisitions. These requirements may force us to sell or refrain from acquiring assets where the capital requirements appear inconsistent with the assets’ underlying risks. In addition, liquidity standards require us to maintain holdings of highly liquid short-term investments, thereby reducing our ability to invest in longer-term or less liquid assets, even if more desirable from a balance sheet or interest rate risk management perspective. Regulatory capital and liquidity requirements are subject to regular review and revision by the Basel Committee and the U.S. banking agencies. Future changes to the capital and liquidity rules that require PNC or PNC Bank to maintain more or higher quality capital, or greater liquidity, could increase some of the potential adverse effects described above. Until the scope and terms of pending or future rulemakings relating to capital, liquidity or other prudential standards are known, the extent to which such rules may apply to us and the potential impact of such rules on us will remain uncertain. In 2018, the U.S. banking agencies proposed several changes to the capital and liquidity frameworks, including the Basel III capital standards and Liquidity Coverage Ratio (LCR) requirements, applicable to PNC and PNC Bank. If adopted, these proposed changes would provide meaningful benefits to us, but the core elements of the current regulatory framework would remain in place. Until the proposed changes are finalized, the scope of any changes, the extent to which they would apply to us and the potential impact of such changes on us will remain uncertain. The proposed changes are summarized in the Supervision and Regulation section included in Item 1 of this Report. The Basel Committee continues to engage in capital- and liquidity-related initiatives. For example, the Basel Committee in 2017 finalized additional, significant changes to the international capital framework for banking organizations. The changes would impact the market risk capital requirements for trading positions and the standardized risk weighting approach for credit risk and the measurement of operational risk. In addition, among other things, the changes would establish a standardized approach floor for capital ratios calculated by banking organizations that use the advanced approaches for the risk weighting of assets. Moreover, the Basel Committee continues to consider other changes to the international regulatory capital framework to enhance the transparency and consistency of capital requirements among banks and jurisdictions, including, among others, the treatment of securitization positions. As it is unclear, at this time, whether or how these initiatives will be implemented in the U.S., we are unable to estimate what potential impact such initiatives may have on us. The liquidity standards applicable to large U.S. banking organizations also are expected to be supplemented in the coming years. For example, in May 2016, the U.S. banking agencies proposed rules to implement the Net Stable Funding Ratio (NSFR), which is designed to ensure that banking organizations maintain a stable, long-term funding profile in relation to their asset composition and off-balance sheet activities. The U.S. rules have not yet been finalized and recent proposals would adjust the scope and effect of the originally-proposed U.S. rules. Thus, the potential impact of the NSFR on us remains unclear. The regulatory capital and liquidity frameworks, as well as certain other prudential requirements and standards, that are applicable to PNC are discussed in the Supervision and Regulation section included in Item 1 of this Report and the Liquidity and Capital Management portion of the Risk Management section of Item 7 of this Report. The PNC Financial Services Group, Inc. - Form 10-K 17 The planned discontinuance of the requirement that banks submit rates for the calculation of LIBOR presents risks to the financial instruments originated or held by PNC that use LIBOR as a reference rate. LIBOR is used as a reference rate for many of our transactions, which means it is the base on which relevant interest rates are determined. Transactions include those in which we lend and borrow money, issue, purchase and sell securities, and enter into derivatives to manage our or our customers’ risk. LIBOR is the subject of recent national and international regulatory guidance and proposals for reform. The United Kingdom Financial Conduct Authority, which regulates the process for setting LIBOR, announced in July 2017 that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. There are ongoing efforts to establish an alternative reference rate. The Secured Overnight Financing Rate (or SOFR) is considered the most likely alternative reference rate suitable for replacing LIBOR, but issues remain with respect to its implementation. As a result, the scope of its ultimate acceptance and the impact on rates, pricing and the ability to manage risk, including through derivatives, remain uncertain. No other alternative rate is currently under wide consideration. If SOFR or another rate does not achieve wide acceptance as the alternative to LIBOR, there likely will be disruption to all of the markets relying on the availability of a broadly accepted reference rate. Even if SOFR or another reference rate ultimately replaces LIBOR, risks will remain for us with respect to outstanding loans, derivatives or other instruments using LIBOR. Those risks arise in connection with transitioning those instruments to a new reference rate and the corresponding value transfer that may occur in connection with that transition. That is because a new reference rate likely will not exactly mimic LIBOR. As a result, for example, over the life of a transaction that transitions from LIBOR to a new reference rate, our monetary obligations to our counterparties and our yield from transactions with clients may change, potentially adversely to us. For some instruments, the method of transitioning to a new reference rate may be challenging, especially if parties to an instrument cannot agree as to how to effect that transition. If a contract is not transitioned to a new reference rate and LIBOR ceases to exist, the impact on our obligations is likely to vary by asset class and contract. In addition, prior to LIBOR cessation, instruments that continue to refer to LIBOR may be impacted if there is a change in the availability or calculation of LIBOR. Risks related to transitioning instruments to a new reference rate or to how LIBOR is calculated and its availability include impacts on the yield on loans or securities held by us, amounts paid on securities we have issued, or amounts received and paid on derivative instruments we have entered into. The value of loans, securities, or derivative instruments tied to LIBOR and the trading market for LIBOR-based securities could also be impacted upon its discontinuance or if it is limited. While we expect LIBOR to continue to be available in substantially its current form until the end of 2021 or shortly before that, it is possible that LIBOR quotes will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. These risks may also be increased due to the shorter time for preparing for the transition. We rely on technology to conduct our business and could suffer a material adverse impact from interruptions in the effective operation of those systems and we are vulnerable to the impact of attempts to breach data security involving our or our customers’ information. Generally. As a large financial services company, we handle a substantial volume of customer and other financial transactions. As a result, we rely heavily on information systems to conduct our business and to process, record and monitor our transactions and those of our customers. Over time, we have seen more customer usage of technological solutions for financial needs as well as higher expectations of customers and regulators regarding effective and safe systems operation. We expect these trends to continue for the foreseeable future. The need to ensure proper functioning and resiliency of these systems has become more challenging, and the costs involved in that effort continue to be high. The risks resulting from use of these systems result from a variety of factors, both internal and external. We are vulnerable to the impact of failures of our systems to operate as needed or intended. Such failures could include those resulting from human error, unexpected transaction volumes, or overall design or performance issues. In addition, our ability to use our technology effectively could be impacted due to bad weather, disasters, terrorism and the like affecting our systems specifically or necessary infrastructure more broadly. In some cases, the risk results from the potential for bad acts on the part of hackers, criminals, foreign governments or their agents, rogue employees, contractors and others. These risks are further described below. The consequences of failures to operate our systems properly can include disruptions to our ability to use our accounting, deposit, loan and other systems. Such events could also cause errors in transactions or impair system functionality with customers, vendors or other parties. Throughout our businesses, we rely on other companies and on the information systems they maintain. We do so both for the provision of products and services directly to us and for assistance in providing products and services to our customers. Others may provide the infrastructure that supports, for example, communications, payment, clearing and settlement systems, or information processing and storage. These companies range from those providing highly sophisticated information processing to those that provide fundamental 18 The PNC Financial Services Group, Inc. - Form 10-K services, such as electric power and telecommunications. These other companies are generally subject to many of the same risks we face with respect to our systems. To the extent we rely on these other companies, we could be adversely affected if they are impacted by system failures, cyber attacks or employee misconduct. The occurrence of any failure, interruption or security breach of any of our information or communications systems, or the systems of other companies on which we rely, could result in a wide variety of adverse consequences to us. This risk is greater if the issue is widespread or results in financial losses to our customers. Possible adverse consequences include damage to our reputation or a loss of customer business. We also could face litigation or additional regulatory scrutiny. This in turn could lead to liability or other sanctions, including fines and penalties or reimbursement of adversely affected customers. Even if we do not suffer any material adverse consequences as a result of events affecting us directly, successful attacks or systems failures at other financial institutions could lead to a general loss of customer confidence in financial institutions, including us. Also, system problems, including those resulting from third party attacks, whether at PNC or at our competitors, would likely broadly increase legislative, regulatory and customer concerns regarding the functioning, safety and security of such systems. In that case, we would expect to incur even higher levels of costs with respect to prevention and mitigation of these risks. Risk of cyber attacks. We are faced with ongoing efforts by others to breach data security at financial institutions or with respect to financial transactions. Some of these involve efforts to enter our systems directly by going through or around our security protections. Others involve the use of social engineering schemes to gain access to confidential information from our employees or customers. Most corporate and commercial transactions are now handled electronically, and our retail customers increasingly use online access and mobile devices to bank with us. The ability to conduct business with us in this manner depends on the transmission and storage of confidential information in electronic form. As a result, efforts by bad actors to engage in various types of cyber attacks pose a serious risk to our business and reputation. The same risks are presented by attacks potentially affecting information held by third parties on our behalf. Bad actors may attempt to harm us by gaining access to confidential or proprietary company and customer information, often with the intent of stealing from or defrauding us or our customers. In some cases, they seek to disrupt our ability to conduct our business, including by destroying information maintained by us. The protections we have in place to prevent this harm may be insufficient to do so. If our measures to prevent unauthorized access or other malicious acts are inadequate, the ability of bad actors to cause harm would be increased. Ultimately, actions by bad actors are to some extent beyond our ability to prevent. Our ability to protect confidential or proprietary information is even more limited with respect to information held by third parties. Our customers often use their own devices, such as computers, smartphones and tablets, to do business with us and may provide their PNC customer information (including passwords) to a third party in connection with obtaining services from the third party. Although we take steps to provide safety and security for our customers’ transactions with us and their customer information to the extent they are utilizing their own devices or providing third parties access to their accounts, our ability to assure such safety and security is necessarily limited. As our customers regularly use PNC-issued credit and debit cards to pay for transactions with retailers and other businesses, there is also the risk of data security breaches at those other businesses covering PNC account information. When our customers use PNC-issued cards to make purchases from those businesses, card account information may be provided to the business. If the business’s systems that process or store card account information are subject to a data security breach, holders of our cards who have made purchases from that business may experience fraud on their card accounts. We may suffer losses associated with reimbursing our customers for such fraudulent transactions on customers’ card accounts, as well as for other costs related to data security compromise events, such as replacing cards associated with compromised card accounts. In addition, we provide card transaction processing services to some merchant customers under agreements we have with payment networks such as Visa and MasterCard. Under these agreements, we may be responsible for certain losses and penalties if one of our merchant customers suffers a data security breach. Over the last few years, several large companies disclosed that they had suffered substantial data security breaches compromising millions of user accounts and credentials. To date, our losses and costs related to these breaches have not been material, but other similar events in the future could be more significant to us. Moreover, to the extent more consumer confidential information becomes available to bad actors through the cumulative effect of data breaches at companies generally, bad actors may find it easier to use such information to gain access to our customer accounts. There have been other recent publicly announced cyber attacks that were not focused on gaining access to credit card or user credential information but instead sought access to a range of other types of confidential information including internal emails and other forms of customer financial information. Ransomware attacks have sought to deny access to data and possibly shut down systems and devices maintained by target companies. In a ransomware attack, system data is encrypted or access is otherwise denied, accompanied by a demand for ransom to restore access to the data. The PNC Financial Services Group, Inc. - Form 10-K 19 A number of companies have fallen victim to business email compromise scams (BEC) scams in recent years. BEC scams involve using social engineering to cause employees to wire funds to the perpetrators in the mistaken belief that the requests were made by a company executive or established vendor. While we have not experienced such losses to date, some of our commercial customers have been victimized. Attacks on our customers may put these relationships at risk, particularly if customers’ ability to continue operations is impaired due to the losses suffered. Other attacks in recent years have included distributed denial of service (DDoS) attacks, in which individuals or organizations flood commercial websites with extraordinarily high volumes of traffic with the goal of disrupting the ability of commercial enterprises to process transactions and possibly making their websites unavailable to customers for extended periods of time. We (as well as other financial services companies) have been subject to such attacks. To date, none of these types of attacks have had a material financial impact on us, but attacks on others demonstrate the risks posed by new and evolving types of cyber attacks. We could suffer material financial and reputational losses in the future from any of these or other types of attacks. Methods used by others to attack information systems change frequently (with generally increasing sophistication), often are not recognized until launched against a target, may be supported by foreign governments or other well-financed entities, and may originate from less regulated and remote areas around the world. As a result, we may be unable to implement adequate preventive measures to address these methods in advance of attacks. In addition to threats from people external to us, insider threats represent a significant risk to us. Insiders, including those having legitimate access to our systems and the information contained in them, have the easiest opportunity to make inappropriate use of the systems and information. Addressing that risk requires understanding not only how to protect us from unauthorized use and disclosure of data, but also how to engage behavioral analytics and other tools to identify potential internal threats before any damage is done. Risks associated with inadequate planning and mitigation. We have policies, procedures and systems (including cyber security and business continuity programs) designed to prevent or limit the effect of possible failures, interruptions or breaches in security of information systems. We design our business continuity and other information and technology risk management programs to manage our capabilities to provide services in the case of an event resulting in material disruptions of business activities affecting our employees, facilities, technology or suppliers. We regularly seek to test the effectiveness of and enhance these policies, procedures and systems. Nonetheless, we cannot guarantee the effectiveness of our policies, procedures and systems to protect us in any particular future situation. Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our business continuity planning, our ability to understand threats to us from a holistic perspective, and our ability to anticipate the timing and nature of any such event that occurs. The adverse impact of natural and other disasters, terrorist activities, international hostilities and the like could be increased to the extent that there is a lack of preparedness on the part of national or regional governments, including emergency responders, or on the part of other organizations and businesses with which we deal, particularly those on which we depend, many of which we have little or no control over. In recent years, we have devoted significant resources towards improving the reliability of our systems and their security against external and internal threats. Even with our proactive and defensive measures in place, there remains the risk that one or more adverse events might occur. If one does occur, we might not be able to remediate the event or its consequences timely or adequately, particularly to the extent that it represents a novel or unusual threat. To the extent that the risk relates to products or services provided by others, we seek to engage in due diligence and monitoring to limit the risk, but here, as well, we cannot eliminate this risk. Should an adverse event affecting another company’s systems occur, we may not have financial protection from the other company sufficient to compensate us or otherwise protect us from the consequences. New customer privacy initiatives will impose additional operational burdens on PNC, may limit our ability to pursue desirable business initiatives and increase the risks associated with any future use of customer data. Recently there has been an increase in legislative and regulatory efforts to protect the privacy of consumer data. Significant examples include the General Data Protection Regulation of the European Union and the California Consumer Privacy Act. These initiatives, among other things, limit how companies can use customer data and impose obligations on companies in their management of such data. Financial services companies such as PNC necessarily gather, maintain and use a significant amount of customer data. Other jurisdictions may adopt similar requirements that impose different and potentially inconsistent compliance burdens. These initiatives, particularly to the extent multiple jurisdictions adopt inconsistent requirements, could increase compliance complexity and related costs, result in significant financial penalties for compliance failures, and limit our ability to develop new products or respond to technological changes. They also could heighten the reputational impact of perceived misuses of customer data, by us, our vendors, or others who gain unauthorized access to our customer data. 20 The PNC Financial Services Group, Inc. - Form 10-K We depend on the effectiveness and integrity of employees, and the systems and controls for which they are responsible, to manage operational risks. We are a large company that offers a wide variety of products and services to a broad and diverse group of customers. We rely on our employees to design, manage, and operate our systems and controls to assure that we properly enter into, record and manage processes, transactions and other relationships with customers, suppliers and other parties with whom we do business. In some cases, we rely on employees of third parties to perform these tasks. We also depend on employees and the systems and controls for which they are responsible to assure that we identify and mitigate the risks that are inherent in our relationships and activities. These concerns are increased when we change processes or procedures, introduce new products or services, or implement new technologies, as we may fail to adequately identify or manage operational risks resulting from such changes. As a result of our necessary reliance on employees, whether ours or those of third parties, to perform these tasks and manage resulting risks, we are thus subject to human vulnerabilities. These range from innocent human error to misconduct or malfeasance, potentially leading to operational breakdowns or other failures. Our controls may not be adequate to prevent problems resulting from human involvement in our business, including risks associated with the design, operation and monitoring of automated systems. Errors by our employees or others responsible for systems and controls on which we depend and any resulting failures of those systems and controls could result in significant harm to PNC. This could include customer remediation costs, regulatory fines or penalties, litigation or enforcement actions, or limitations on our business activities. We could also suffer damage to our reputation, impacting our ability to attract and retain customers and employees. The reputational impact is likely greater to the extent that the mistakes or failures are pervasive, long-standing or affect a significant number of customers, particularly retail consumers. It is possible that the damage to our reputation may be disproportionate to the actual harm suffered by our customers or may be severe even if we fully remediate any harm suffered by our customers. We use automation to help reduce some risks of human error. Recently, we have started taking greater advantage of machine learning, artificial intelligence and robotic process automation tools. Nonetheless, we continue to rely on many manual processes to conduct our business and manage our risks. In addition, use of automation tools does not eliminate the need for effective design and monitoring of their operation to make sure they operate as intended. Enhanced use of automation may present its own risks. These tools are dependent on the quality of the data used by the tool to learn and enhance the process for which it is responsible. Not only bad or missing data but also anomalous data can adversely affect the functioning of such tools. In addition, use of automation tools may increase the possible impact of errors should they occur. Our business and financial results are subject to risks associated with the creditworthiness of our customers and counterparties. Credit risk is inherent in the financial services business. It results from, among other things, 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, particularly given the high percentage of our assets represented directly or indirectly by loans and securities and the importance of lending activity to our overall business. We manage credit risk by assessing and monitoring the creditworthiness of our customers and counterparties, by diversifying our loan portfolio and by investing primarily in high quality securities. A borrower’s ability to repay a loan can be adversely affected by many factors. Individual borrowers can be affected, for example, by declines in income, job losses, health issues or family issues. Commercial borrowers can be affected, for example, by poor business performance or catastrophe losses. Weakness in the economy or in financial markets would typically adversely impact the ability of our borrowers to repay outstanding loans. Borrowers with higher leverage (that is, higher ratios of indebtedness to total capitalization or income) have an increased risk that they will be unable to repay loans, particularly when economic conditions worsen. We may also be exposed to credit risk if we fail to evaluate properly at origination the likely ability of a borrower to repay a loan. A failure to identify declining creditworthiness of a borrower at a time when remedial actions could reduce our exposure also increases credit risk. Any decrease in our borrowers’ ability to repay loans would result in higher levels of nonperforming loans, net charge-offs, provision for credit losses and valuation adjustments on loans held for sale. In addition to credit risk associated with our lending activities, we have credit risk arising from many other types of business relationships. Routine transactions give us credit exposure to brokers and dealers, commercial banks, investment banks, mutual and hedge funds, other institutional clients, as well as vendors and other non-financial entities. In the ordinary course of business, we may have heightened credit exposure to a particular industry, region or financial market. As an example, loans secured by commercial and residential real estate typically represent a significant percentage of our overall credit portfolio. They also represent a portion of the assets underlying our investment securities. Although there are limitations on the extent of total exposure to an individual or business borrower, we may have outsized exposure to a particular borrower. Events adversely affecting specific customers or counterparties, industries, regions or financial markets, including a decline in their creditworthiness or The PNC Financial Services Group, Inc. - Form 10-K 21 a worsening overall risk profile, could materially adversely affect us. Thus, in the example above, a decline in commercial real estate activity or valuations in a region or more broadly could have a material impact on us. This could be the case even if the rest of our portfolio was performing well. Declining economic conditions also may impact commercial borrowers more than consumer borrowers, or vice versa. The last recession, for example, impacted consumers more than commercial borrowers, particularly in residential real estate. A future recession may have the opposite result. Thus, the relative balance and mix of our loan portfolio may affect the severity of the impact of a future recession. Our credit risk may be exacerbated when collateral held by us to secure obligations to us cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of the loan or derivative exposure due us. We reserve for credit losses on our loan and lease portfolio, as well as for unfunded loan commitments and letters of credit, through our Allowances for loan and lease losses and unfunded loan commitments and letters of credit. Changes in the allowances are reflected in Net income through Provision for credit losses. An increase in credit risk would likely lead to an increase in Provision for credit losses with a resulting reduction in our Net income and would increase our allowances. As described in the Recently Issued Accounting Standards portion of the Critical Accounting Estimates and Judgments section in Item 7 of this Report, the implementation of pending changes in the accounting for credit losses is likely to result in an increase in total credit loss reserves at the adoption date. Our business and financial performance are impacted significantly by market interest rates and movements in those rates. As a result of the high percentage of our assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates, in the shape of the yield curve, or in spreads between different market interest rates can have a material effect on our business, our profitability and the value of our financial assets and liabilities. For example: • Changes in interest rates or interest rate spreads can affect the difference between the interest that we earn on assets and the interest that we pay on liabilities, which impacts our overall net interest income and margin as well as our profitability. • Such changes can affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt instruments, and can, in turn, increase our credit losses on those assets. • Such changes may decrease the demand for interest rate-based products and services, including loans and deposit accounts. • Such changes can also affect our ability to hedge various forms of market and interest rate risk and may decrease the effectiveness of those hedges in helping to manage such risks. • Movements in interest rates also affect mortgage prepayment speeds and could result in impairments of mortgage servicing assets or otherwise affect the profitability of such assets. • Increases in interest rates can lower the price we would receive on fixed-rate customer obligations if we were to sell them. The rates on some interest-bearing instruments adjust promptly in accordance with changes in market rates, while others adjust only periodically or are fixed throughout a defined term. As a result, the impact of changes in interest rates can be either increased or diluted due to differences in the relative variability of the rates paid on our liabilities in relation to the rates received on our assets. The extent to which we have elected to hedge interest rate risk through interest rate swaps also affects the impact of rate changes. We attempt to manage the balance sheet to increase our benefit or reduce negative impacts from future movements in interest rates, but failures to anticipate actual movements may have the opposite result. Currently, market interest rates are generally increasing. While, in general, higher interest rates enhance our ability to grow our net interest income, there are risks associated with a rising interest rate environment. For one thing, customers may be less willing overall to borrow at higher rates and the value of asset classes typically financed through secured loans may be negatively affected. These effects are likely to be found in home lending and other real estate finance businesses. As another example, there may be increased competitive pressures as rates on deposit products rise. The benefits of higher interest rates are best achieved if we can increase the rates on loans and other assets faster than the rates on deposits and other liabilities increase. We may not be able to achieve this result in a rising rate environment. We discuss the impact of governmental monetary policy on interest rates, including recent increases by the Federal Reserve in its benchmark interest rates, under “The policies of the Federal Reserve and other governmental agencies have a significant impact on interest rates and overall financial market performance” Risk Factor in this Item 1A. Our business and financial performance are vulnerable to the impact of changes in the values of financial assets. As a financial institution, a substantial majority of our assets and liabilities are financial in nature. Examples include loans, securities, servicing rights, deposits and borrowings. Such assets and liabilities will fluctuate in value, often significantly, due to movements in the financial markets or market volatility as well as developments specific to the asset or liability in question. Credit-based assets and liabilities will fluctuate in value due to changes in the perceived creditworthiness of borrowers or other counterparties and also due to changes in market interest rates. 22 The PNC Financial Services Group, Inc. - Form 10-K Changes in loan prepayment speeds, usually based on fluctuations in market interest rates, could adversely impact the value of our mortgage servicing rights. Also, the underlying value of assets under lease or securing an obligation may decrease due to supply and demand for the asset or the condition of the asset. This could negatively impact the ability to collect fully on the secured obligation. In many cases, we mark our assets and liabilities to market on our financial statements, either through Net income and Retained earnings or through adjustments to Accumulated other comprehensive income. We may need to record losses in the value of financial assets even where our expectation of realizing the face value of the underlying instrument has not changed. Other assets and liabilities are not marked to market. As a result, our balance sheet may not precisely represent the fair market value of our financial assets and liabilities. In addition, asset management revenue is earned primarily based on a percentage of the value of the assets being managed and thus is impacted by general changes in market valuations. Thus, although we are not directly impacted by changes in the value of such assets, decreases in the value of those assets would affect related Noninterest income. Our asset and liability valuations and the determination of the amount of loss allowances and impairments taken on our assets are highly subjective. Inaccurate estimates could materially impact our results of operations or financial position. We must use estimates, assumptions and judgments when assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Changes in underlying factors or assumptions in any of the areas underlying our estimates could materially impact our future financial condition and results of operations. During periods of market disruption, it may be more difficult to value certain assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were historically traded in active markets with significant observable data that rapidly become illiquid due to market volatility, a loss in market confidence or other factors. In addition, we have certain assets and liabilities carried at fair value that are estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. The valuation of any asset or liability substantially based on unobservable inputs is necessarily less reliable than those based on active trading markets. Further, rapidly changing and unprecedented market conditions in any particular market could materially impact the valuation of assets as reported within our consolidated financial statements. Our ability to hedge exposure is in part dependent on our ability to value the related assets or liabilities. The determination of the amount of loss allowances and asset impairments varies by asset type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. Although we have policies and procedures in place to determine loss allowance and asset impairments, due to the subjective nature of this area, there can be no assurance that our management has accurately assessed the level of impairments taken and allowances reflected in our financial statements. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Historical trends may not be indicative of future impairments or allowances. There are risks resulting from the extensive use of models in our business. We rely on quantitative models to measure risks and to estimate many financial values. We use models throughout much of our business, relying on them for much of our decision making. Examples of areas we use models include determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting or estimating losses, assessing capital adequacy, and calculating economic and regulatory capital levels. We also use models to estimate the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating model output will be adversely affected due to the inadequacy of that information. Also, information we provide to the public or to our regulators based on poorly designed or implemented models could be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distributions to our shareholders, could be affected adversely if they perceive that the quality of the relevant models used is insufficient. Our success depends on our ability to attract and retain customers for our products and services, which may be negatively impacted by a lack of consumer and business economic confidence as well as our actions, including our ability to anticipate and satisfy customer demands for products and services. As a financial institution, our performance is subject to risks associated with declines in customer demand for our products and services, including as a result of a loss of economic confidence or customer trust in us. Economic and market developments may affect consumer and business confidence levels. If customers lose confidence due to concerns regarding the economy, the demand for our products and services could suffer. We may also fail to attract or retain customers if we are unable to develop and market products and services that meet evolving customer needs or demands or if we are unable to The PNC Financial Services Group, Inc. - Form 10-K 23 deliver them effectively and securely to our customers. This is particularly true to the extent that our competitors are better able to do so. News or other publicity that harms our reputation, or the reputation of our industry generally, also could cause a loss of customers or a reduction in the extent to which customers do business with us. Financial companies are highly vulnerable to reputational damage when they are found to have harmed customers, particularly retail customers, through conduct that is seen as illegal, unfair, deceptive, manipulative or otherwise wrongful. The negative impact of such reputational damage on our business may be disproportionate to the actual harm caused to customers. In addition, we could suffer reputational harm and a loss of customer trust as a result of conduct of others in the industry even where we have not engaged in the conduct. We use third parties to help in many aspects of our business, with the risk that their conduct can affect our reputation regardless of the degree to which we are responsible for it. We are also subject to the risk of reputational harm resulting from conduct of employees outside of the scope of their employment, including through activities on social media. If we fail to attract and retain customers, demand for our loans and other financial products and services could decrease and we could experience adverse changes in payment patterns. We could lose interest income from a decline in credit usage and noninterest income from a decline in product sales, investments and other transactions. Our customers could remove money from checking, savings or other types of deposit accounts in favor of other banks or other types of investment products. Deposits are a low cost source of funds for us. Therefore, losing deposits could increase our funding costs and reduce our net interest income. The U.S. is emerging from an extended period of very low interest rates. Very low interest rates decrease the attractiveness of alternatives to bank checking and savings accounts, which may lack deposit insurance and some of the convenience associated with more traditional banking products. As interest rates rise, customers may be less willing to maintain balances in noninterest-bearing or low interest bank accounts. In addition, if the spread between the rates we offer and those offered by alternatives to bank accounts widens, customers could be willing to forego benefits of bank accounts for the higher return. As a result, we could suffer a relatively higher cost of funds, with a negative impact on net interest income. Loss of customers could also harm noninterest income. In our asset management business, investment performance is an important factor influencing the level of assets that we manage. Poor investment performance could hurt revenue and growth as existing clients might withdraw funds in favor of better performing products. Additionally, the ability to attract funds from existing and new clients might diminish. Overall economic conditions may limit the amount that customers are able or willing to invest as well as the value of the assets they do invest. The failure or negative performance of products of other financial institutions could lead to a loss of confidence in similar products offered by us without regard to the performance of our products. Such a negative contagion could lead to withdrawals, redemptions and liquidity issues in such products and have an adverse impact on our assets under management and asset management revenues and earnings. We rely on third party vendors, service providers and other counterparties to help support many aspects of our business. To this extent, our direct control of activities related to our business is reduced, which could introduce risk. Our use of third parties to support our business needs typically means that we do not directly control the activities we are having them perform. Risks can arise through greater complexity and inadequate performance by the third party, specifically where that performance could affect us or our customers. Many of the kinds of risks presented by activities performed by third parties are described elsewhere in these Risk Factors. For example, outside companies may assist us in processing confidential customer or employee information. In such a case, a cyber attack on another company may result in access to our customers’ or employees’ information. An outside company may also fail to comply with legal requirements relevant to its work on our behalf. We may in those circumstances suffer financial losses, legal consequences and injury to our reputation. Even if the other company makes us whole for financial losses, which is not necessarily the case, it is unlikely that it would be able to restore our reputation. As a result, the use of third parties to assist in our business activities heightens the risks to us inherent in those activities. We operate in a highly competitive environment in terms of the products and services we offer and the geographic markets in which we conduct business. The labor markets where we compete for talented employees are also highly competitive. Competition could adversely impact our customer acquisition, growth and retention, as well as our credit spreads and product pricing, causing us to lose market share and deposits and revenues. We are subject to intense competition from various financial institutions as well as from non-bank entities that engage in many similar activities without being subject to bank regulatory supervision and restrictions. This competition is described in Item 1 of this Report under “Competition.” The principal bases for competition are pricing, product structure, the range of products and services offered and the quality of customer service. Pricing in our industry includes interest rates on loans and deposits as well as fees for various services. Customer service expectations include ease of doing business and responsiveness to needs and concerns. The ability to access and use technology is an increasingly important competitive factor in the financial services industry. Having the right technology is a critically 24 The PNC Financial Services Group, Inc. - Form 10-K important component to customer satisfaction as it affects our ability to deliver the products and services that customers desire and in a manner that they find convenient and attractive. Banks generally are facing the risk of increased competition from products and services offered by non-bank financial technology companies, particularly related to payment services and lending. Consolidation in our industry, including among smaller banks combining to form more competitive larger ones and between banks and non-bank entities, could result in PNC facing more intense competition, particularly in impacted regions or with respect to particular products. Another increasingly competitive factor in the financial services industry is the ability to attract and retain talented employees across many of our businesses and support areas. This factor presents greater risk when we are expanding into new markets, developing new product lines, or significantly enhancing staffing in certain areas, particularly technology. This competition leads to increased expenses in many business areas and can also cause us to not pursue certain business opportunities. Limitations on the manner in which regulated financial institutions can compensate their officers and employees, including those contained in pending rule proposals implementing requirements of Dodd-Frank, may make it more difficult for regulated financial institutions, including PNC, to compete with unregulated financial institutions for talent. A failure to adequately address the competitive pressures we face could make it harder for us to attract and retain customers across our businesses. On the other hand, meeting these competitive pressures could require us to incur significant additional expense or to accept risk beyond what we would otherwise view as desirable under the circumstances. In addition, in our interest rate sensitive businesses, pressures to increase rates on deposits or decrease rates on loans could reduce our net interest margin, resulting in a negative impact on our net interest income. We continually encounter technological change and need to keep pace with this change in order to maintain or enhance the competitiveness of our businesses. The financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products and services. Examples include expanded use of cloud computing, artificial intelligence and machine learning, virtual and augmented reality, biometric authentication, voice and natural language, and data protection enhancements, as well as increased online and mobile device interaction with customers. The effective use of technology increases efficiency and enables financial institutions to better serve customers. We have been investing in technology and connectivity in order to automate functions previously performed manually, to facilitate the ability of customers to engage in financial transactions, and otherwise to enhance the customer experience with respect to our products and services. On the retail banking side, this has included developments such as more sophisticated ATMs (including the ability to cash checks using exact change), cashless bank branches, and expanded access to banking transactions (including mobile deposits, instant availability of funds, online loan applications and real time payment processing) through the internet, smart phones, tablets and other mobile devices. These efforts have all been in response to actual and anticipated customer behavior and expectations. Our continued success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that satisfy customer demands, including demands for faster and more secure payment services, and create efficiencies in our operations. A failure to maintain or enhance our competitive position with respect to technology, whether because we fail to anticipate customer expectations or because our technological developments fail to perform as desired or are not rolled out in a timely manner, may cause us to lose market share or incur additional expense. Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers. Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. PNC and its customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes, and the like. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to PNC could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior. Our business and financial results could be impacted materially by adverse results in legal proceedings. Many aspects of our business involve substantial risk of legal liability. We have been named or threatened to be named as defendants in various lawsuits arising from our business activities. In addition, we are regularly the subject of governmental investigations and other forms of regulatory inquiry. We also are at risk when we have agreed to indemnify others for losses related to legal proceedings The PNC Financial Services Group, Inc. - Form 10-K 25 they face, such as in connection with the sale of a business or assets by us. The results of these legal proceedings could lead to significant monetary damages or penalties, restrictions on the way in which we conduct our business, or reputational harm. Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to us from the legal proceedings in question. Thus, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies. We discuss further the unpredictability of legal proceedings and describe certain of our pending legal proceedings in Note 19 Legal Proceedings in the Notes To Consolidated Financial Statements in Item 8 of this Report. We have a substantial minority equity interest in BlackRock, a publicly traded company, and its business operations and financial performance can adversely affect PNC and our results. Our investment in BlackRock represents a significant investment for PNC and contributes both income (through equity method accounting) and cash inflows (through dividends) to PNC. See Note 22 Segment Reporting in the Notes To Consolidated Financial Statements in Item 8 of this Report. In 2018, BlackRock contributed 15% of our net income. The value of our investment in BlackRock and its contribution to our financial results are vulnerable to poor financial performance or other issues at BlackRock affecting its business. In addition, we rely on BlackRock for its financial results that, as discussed above, are included in our financial statements. BlackRock is responsible for, and has control over, the preparation of its financial statements and its internal controls over financial reporting. PNC may be impacted by factors such as poor performance or other issues, as well as by financial reporting control failures, at BlackRock, with the extent of the impact on us and our financial results depending on the severity of the issue at BlackRock. BlackRock is a public company that files separately with the SEC. In its filings with the SEC, BlackRock provides disclosure as to its business, including disclosure regarding its views as to the drivers of its financial performance and the most significant risks it faces. Its SEC filings also include certifications and disclosure regarding internal controls over financial reporting and disclosure controls. We grow our business in part by acquiring other financial services businesses from time to time. Sometimes these are businesses with technologies or other assets valuable to us even if they do not themselves provide financial services to customers. These acquisitions present a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses into PNC after closing. Acquisitions of other companies or of financial assets and related deposits and other liabilities present risks and uncertainties to us in addition to those presented by the nature of the business acquired. Acquisitions may be substantially more expensive or take longer to complete than anticipated. This risk includes unanticipated costs incurred in connection with the integration of the acquired business. Anticipated benefits (such as cost savings from synergies or strategic gains from being able to offer product sets to a broader potential customer base) may not be fully realized. It can take longer or require greater resources to achieve these benefits. It also may prove impossible to achieve them at all or in their entirety as a result of unexpected factors or events. Specific factors that can affect our ability to achieve anticipated results from acquisitions may include, depending on the nature of the business acquired, the following: • If the acquisition includes loan portfolios, the extent of credit losses following completion of the acquisition. Similarly, if the acquisition includes deposits, the extent of deposit attrition post-closing. Acquisitions of banking companies typically include both loans and deposits. These factors will be affected by a number of factors, including the state of the economy following the acquisition and the quality of our pre-acquisition analysis of the acquired business. • If a significant aspect of the value of an acquired business is intellectual property, the extent to which the intellectual property may be protected and commercialized by PNC following the acquisition. • If the acquisition involves entering into new businesses or geographic or other markets, our inability to take advantage of these opportunities as a result of our inexperience with respect to them. • The results of litigation and governmental investigations that may be pending at the time of the acquisition or be filed or commenced thereafter, as a result of an acquisition or otherwise. It is often hard to predict the results of such legal proceedings. It may also be hard to anticipate what legal proceedings may be started following an acquisition. • The extent to which client attrition from the acquired business exceeds expectations. Our ability to analyze the risks presented by prospective acquisitions, as well as our ability to prepare in advance of closing for integration, depends, in part, on the information we can gather with respect to the business we are acquiring, which can be quite limited. Our pre-acquisition review of the business may also impact our ability to prepare for and execute on the integration of an 26 The PNC Financial Services Group, Inc. - Form 10-K acquired business. As a regulated financial institution, our ability to pursue or complete attractive acquisition opportunities could be negatively impacted by regulatory issues, including delays in obtaining required approvals. Our ability to make large acquisitions in the future may be negatively impacted as well by regulatory rules or future regulatory initiatives designed to limit systemic risk and the potential for a financial institution to become “too big to fail.” Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, by terrorist activities or by international hostilities. Neither the occurrence nor the potential impact of disasters (whether caused naturally or by human conduct), terrorist activities and international hostilities can be predicted. However, these occurrences could adversely impact us, for example, by causing significant damage to our facilities or preventing us from conducting our business in the ordinary course. Also, their impact on our borrowers, depositors, other customers, suppliers or other counterparties could result in indirect adverse effects on us. Other indirect adverse consequences from disasters, terrorist activities or international hostilities could result from impacts to the financial markets or the economy in general or in any particular region. These types of indirect effects could lead, for example, to an increase in delinquencies, bankruptcies or defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses. They could also cause a reduction in demand for lending or other services that we provide. Climate change may be increasing the frequency or severity of adverse weather conditions, making the impact from these types of natural disasters on us or our customers worse. Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning. This includes our ability to anticipate the nature of any such event that might occur. The adverse impact of disasters, terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, many of which we depend on but have limited or no control over. ITEM 1B