PNC Reports Third Quarter 2019 Net Income Of $1.4 Billion, $2.94 Diluted EPS

10/16/19

The PNC Financial Services Group, Inc. (NYSE: PNC) today reported:

The Consolidated Financial Highlights accompanying this news release include additional information regarding reconciliations of non-GAAP financial measures to reported amounts. Fee income, a non-GAAP financial measure, refers to noninterest income in the following categories: asset management, consumer services, corporate services, residential mortgage and service charges on deposits. Information in this news release, including the financial tables, is unaudited.

Total revenue for the third quarter of 2019 increased $54 million compared with the second quarter and $136 million compared with the third quarter of 2018 due to higher noninterest income and net interest income.Net interest income for the third quarter of 2019 increased slightly by $6 million compared with the second quarter reflecting the benefits of higher loan and securities balances, lower borrowing costs and an additional day partially offset by lower loan and securities yields. In comparison with the third quarter of 2018, net interest income increased $38 million due to higher loan and securities balances and higher loan yields partially offset by higher deposit costs and higher deposit and borrowing balances. The net interest margin declined to 2.84 percent for the third quarter of 2019 from 2.91 percent for the second quarter driven primarily by lower commercial loan yields, and decreased from 2.99 percent in the third quarter of 2018 as higher deposit costs were partially offset by higher loan yields.
Noninterest income for the third quarter of 2019 increased $48 million compared with the second quarter as fee income growth of 5 percent was partially offset by lower other noninterest income. Asset management revenue increased $19 million reflecting higher earnings from PNC's equity investment in BlackRock. Consumer services increased $10 million due to higher brokerage revenue and seasonally higher debit and credit card fees. Corporate services decreased $15 million primarily as a result of a lower benefit from commercial mortgage servicing rights valuation, net of economic hedge, and lower merger and acquisition advisory fees. Residential mortgage revenue increased $52 million due to a higher benefit from residential mortgage servicing rights valuation, net of economic hedge, and higher loan sales revenue from increased origination volumes. Service charges on deposits grew $7 million reflecting a seasonal increase in consumer spending. Other noninterest income decreased $25 million primarily as a result of the second quarter gain on the sale of the retirement recordkeeping business and lower net securities gains partially offset by higher revenue from private equity investments.Noninterest income for the third quarter of 2019 increased $98 million compared with the third quarter of 2018, including fee income growth of $57 million, or 4 percent. Residential mortgage revenue increased $58 million due to a higher benefit from residential mortgage servicing rights valuation, net of economic hedge, and higher loan sales revenue. Consumer services increased $25 million driven by higher debit card, credit card and brokerage revenue. Asset management revenue declined $22 million primarily due to lower yielding assets under management and lower earnings from PNC's equity investment in BlackRock. Service charges on deposits decreased $8 million and included a reduction of ATM fees charged. Other noninterest income increased $41 million reflecting higher capital markets-related revenue, the benefit of lower negative Visa Class B derivative fair value adjustments of $8 million in the third quarter of 2019 compared with $32 million in the third quarter of 2018 and higher net gains on commercial mortgage loans held for sale partially offset by lower revenue from private equity investments.

Noninterest expense for the third quarter of 2019 increased $12 million compared with the second quarter. Personnel expense increased $35 million primarily due to higher compensation associated with business activity and an additional day. This increase was partially offset by declines in all other expense categories.Noninterest expense for the third quarter of 2019 increased $15 million compared with the third quarter of 2018. Lower personnel expense related to variable compensation and lower FDIC insurance due to the surcharge elimination were more than offset by ongoing business investments reflected in higher equipment, occupancy and marketing expense.

The effective tax rate was 17.5 percent for the third quarter of 2019, 16.6 percent for the second quarter of 2019 and 15.7 percent for the third quarter of 2018.

CONSOLIDATED BALANCE SHEET REVIEW

Average total assets of $406.7 billion in the third quarter of 2019 increased 2 percent compared with $397.0 billion in the second quarter of 2019 primarily due to loan growth, higher balances held with the Federal Reserve Bank and higher investment securities. Average total assets increased 8 percent compared with $377.9 billion in the third quarter of 2018 reflecting higher loans, investment securities and other assets including resale agreements. Total assets were $408.9 billion at September 30, 2019, $405.8 billion at June 30, 2019 and $380.1 billion at September 30, 2018.

Average loans for the third quarter of 2019 grew $2.8 billion compared with the second quarter. Average commercial lending balances increased $1.3 billion primarily in PNC's real estate business, including an increase in multifamily agency warehouse lending balances of $.7 billion, and in PNC's corporate banking business. Average consumer lending balances increased $1.5 billion due to growth in residential mortgage, auto, credit card and unsecured installment loans partially offset by lower home equity and education loans. Total loans at September 30, 2019 grew $.2 billion compared with June 30, 2019. Growth in consumer lending balances of $1.6 billion was substantially offset by a decrease of $1.4 billion in the commercial lending portfolio driven by lower multifamily agency warehouse lending balances of $1.1 billion and the sale of franchise finance loans.Third quarter 2019 average and period end loans increased $14.4 billion compared with third quarter 2018 driven by growth in both commercial and consumer lending.

Average investment securities for the third quarter of 2019 increased $1.5 billion compared with the second quarter due to net purchase activity primarily of agency residential mortgage-backed securities partially offset by net sales of U.S. Treasury securities. Investment securities at September 30, 2019 decreased $.4 billion compared with June 30, 2019. Third quarter 2019 average and period-end investment securities increased $4.4 billion and $7.1 billion, respectively, compared with the third quarter of 2018. Net unrealized gains on available for sale securities were $1.4 billion at September 30, 2019 and $1.2 billion at June 30, 2019 compared with net unrealized losses of $.7 billion at September 30, 2018.Average balances held with the Federal Reserve Bank increased to $15.3 billion in the third quarter of 2019 from $13.2 billion in the second quarter and decreased from $18.8 billion in the third quarter of 2018. Balances held with the Federal Reserve were $18.8 billion at September 30, 2019, $18.1 billion at June 30, 2019 and $19.6 billion at September 30, 2018.

Average deposits for the third quarter of 2019 increased $6.2 billion compared with the second quarter driven by seasonal growth in commercial deposits. Deposits at September 30, 2019 increased $12.3 billion over June 30, 2019 and included $3.9 billion of balances for a new sweep deposit product for asset management clients previously held off-balance sheet primarily in PNC proprietary money market mutual funds. Third quarter 2019 average and period-end deposits increased $16.6 billion and $20.7 billion, respectively, compared with third quarter 2018, and the decrease in noninterest-bearing deposits reflected a shift to interest-bearing.

Average borrowed funds for the third quarter of 2019 increased $1.6 billion compared with the second quarter due to higher Federal Home Loan Bank borrowings partially offset by lower federal funds purchased. Borrowed funds at September 30, 2019 decreased $7.6 billion compared with June 30, 2019 as a result of lower short-term Federal Home Loan Bank borrowings. Average and period-end borrowed funds for the third quarter of 2019 increased $4.1 billion and $3.4 billion, respectively, compared with the third quarter of 2018 primarily due to increases in Federal Home Loan Bank borrowings.

PNC maintained a strong capital position. Common shareholders' equity at September 30, 2019 increased $.1 billion compared with June 30, 2019 reflecting an increase in accumulated other comprehensive income related to net unrealized securities gains, as third quarter net income was more than offset by share repurchases and dividends.PNC returned $1.5 billion of capital to shareholders in the third quarter of 2019 through repurchases of 7.5 million common shares for $1.0 billion and dividends on common shares of $.5 billion. Repurchases were made under share repurchase programs of up to $4.3 billion for the four-quarter period beginning in the third quarter of 2019. A new 100 million share repurchase authorization became effective July 1, 2019. For the nine months ended September 30, 2019, capital returned to shareholders totaled $3.9 billion through repurchases of 19.4 million common shares for $2.5 billion and dividends on common shares of $1.4 billion.

On October 3, 2019, the PNC board of directors declared a quarterly cash dividend on common stock of $1.15 per share effective with the November 5, 2019 dividend payment date.

The Basel III common equity Tier 1 capital ratio was calculated based on the standardized approach for the risk-weighting of assets. See Capital Ratios in the Consolidated Financial Highlights.

Overall credit quality for the third quarter of 2019 remained strong. Provision for credit losses for the third quarter increased $3 million compared with the second quarter. A higher provision for the consumer loan portfolio driven by higher auto loan and credit card reserves was substantially offset by a lower provision for the commercial lending portfolio reflecting the sale of franchise finance loans and comparatively lower loan growth.Nonperforming assets at September 30, 2019 decreased slightly by $3 million compared with June 30, 2019 with lower nonperforming loans in the consumer lending and commercial real estate portfolios offset by higher nonperforming commercial loans. Nonperforming assets increased $22 million compared with September 30, 2018 due to higher nonperforming commercial loans partially offset by lower nonperforming loans in the consumer lending portfolio. Nonperforming assets to total assets were .45 percent at September 30, 2019, .46 percent at June 30, 2019 and .48 percent at September 30, 2018.

Overall delinquencies at September 30, 2019 increased $39 million, or 3 percent, compared with June 30, 2019 primarily due to an increase in past due auto and credit card loans. Overall delinquencies at September 30, 2019 decreased $80 million, or 6 percent, compared with September 30, 2018 driven by lower government insured residential mortgage and education loans 90 days or more past due. In the comparison with September 30, 2018, auto loan and credit card delinquencies increased.

Net charge-offs for the third quarter of 2019 increased $13 million compared with the second quarter primarily due to higher auto loan net charge-offs. Compared with third quarter 2018, net charge-offs increased $64 million as both consumer and commercial net charge-offs increased. Net charge-offs were .26 percent of average loans on an annualized basis for the third quarter of 2019 compared with .24 percent for the second quarter of 2019 and .16 percent for the third quarter of 2018.

The allowance for loan and lease losses to total loans was 1.15 percent at both September 30, 2019 and June 30, 2019 and 1.16 percent at September 30, 2018. The allowance to nonperforming loans was 158 percent at both September 30, 2019 and June 30, 2019 and increased compared with 153 percent at September 30, 2018.

Retail Banking earnings for the third quarter of 2019 increased in both comparisons. Noninterest income increased in both comparisons due to higher residential mortgage revenue attributable to a higher benefit from residential mortgage servicing rights valuation, net of economic hedge, and increased loan sales revenue, growth in consumer services, including brokerage and debit and credit card fees, and a benefit from improvement in negative derivative fair value adjustments related to Visa Class B common shares. Growth in service charges on deposits also contributed to the increase compared with the second quarter. Provision for credit losses increased in both comparisons as a result of higher auto loan and credit card portfolio reserves attributable in part to loan growth. Noninterest expense increased in both comparisons primarily due to higher personnel and equipment expense and, compared with third quarter 2018, increased ATM expense resulting from enhanced checking product benefits and higher marketing, including expenses related to retail national expansion.
  • Average loans increased 2 percent compared with second quarter 2019 and 5 percent compared with third quarter 2018 due to growth in residential mortgage, auto, credit card and unsecured installment loans partially offset by lower home equity and education loans.
  • Average deposits were stable with the second quarter and increased 4 percent compared with third quarter 2018 due to increases in savings, noninterest-bearing demand and certificates of deposit partially offset by lower money market deposits reflecting a shift to relationship-based savings products.
  • Net charge-offs were $128 million for the third quarter of 2019 compared with $120 million in the second quarter and $96 million in the third quarter of 2018.
  • Residential mortgage loan origination volume increased to $3.4 billion for the third quarter of 2019 compared with $2.9 billion for the second quarter and $2.1 billion for the third quarter of 2018. Approximately 44 percent of third quarter 2019 volume was for home purchase transactions compared with 54 percent and 72 percent for the second quarter of 2019 and third quarter of 2018, respectively.
  • The third party residential mortgage servicing portfolio was $123 billion at September 30, 2019 compared with $124 billion at June 30, 2019 and $127 billion at September 30, 2018. Residential mortgage loan servicing acquisitions were $3 billion for third quarter 2019 compared with $5 billion for the second quarter and $6 billion for the third quarter of 2018.
  • Approximately 70 percent of consumer customers used non-teller channels for the majority of their transactions during the third quarter of 2019 compared with 69 percent in the second quarter and 66 percent in the third quarter of 2018.
  • Deposit transactions via ATM and mobile channels were 58 percent of total deposit transactions in the third quarter of 2019 compared with 56 percent in the second quarter and 55 percent in the third quarter of 2018.

Asset Management Group earnings for the third quarter of 2019 decreased in both comparisons. Noninterest income declined from the second quarter as a result of the gain on sale of the retirement recordkeeping business in the second quarter. Additionally, lower noninterest income in both comparisons reflected lower fee revenue resulting from the sale of the retirement recordkeeping business as well as the impact of lower yielding assets under management. Noninterest expense decreased compared with the second quarter primarily due to costs associated with the retirement recordkeeping sale.

Client assets under administration at September 30, 2019 included discretionary client assets under management of $163 billion and nondiscretionary client assets under administration of $135 billion. Discretionary client assets under management increased $1 billion compared with June 30, 2019 and $4 billion compared with September 30, 2018 primarily attributable to increases in equity markets.

The Asset Management Group entered into a definitive agreement in May 2019 to divest components of its PNC Capital Advisors investment management business, including its PNC family of proprietary mutual funds totaling approximately $16 billion in assets under management as of September 30, 2019. The transaction is expected to close in the fourth quarter of 2019.

Other, including BlackRock

The "Other, including BlackRock" category, for the purposes of this release, includes earnings and gains or losses related to PNC's equity investment in BlackRock, and residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities, certain trading activities, certain non-strategic runoff consumer loan portfolios, private equity investments, intercompany eliminations, certain corporate overhead, tax adjustments that are not allocated to business segments, exited businesses, and differences between business segment performance reporting and financial statement reporting under generally accepted accounting principles.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

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