PITTSBURGH, Jan. 16, 2014 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported 2013 net income of $4.2 billion, or $7.39 per diluted common share, compared with 2012 net income of $3.0 billion, or $5.30 per diluted common share. Fourth quarter 2013 net income was $1.1 billion, or $1.85 per diluted common share, compared with $1.0 billion, or $1.79 per diluted common share, for the third quarter of 2013 and $719 million, or $1.24 per diluted common share, for the fourth quarter of 2012.

"PNC reported record net income for 2013," said William S. Demchak, president and chief executive officer. "These results validate the strategy that we've been executing. As the new year begins, PNC has a strong balance sheet along with a clear set of strategic priorities that position us to continue to deliver for all of our constituencies even as the economic and regulatory climates continue to evolve."

Income Statement Highlights

• Fourth quarter results reflected loan and deposit growth, strong fee income, overall credit quality improvement and continued disciplined expense management.
• Net interest income of $2.3 billion for the fourth quarter increased $32 million, or 1 percent, compared with the third quarter primarily due to loan growth and higher investment securities balances.
• Noninterest income of $1.8 billion increased $121 million compared with the third quarter.
  • Strong fee income growth included higher asset management and consumer service fees.
  • Residential mortgage revenue increased due to a benefit from release of reserves for residential mortgage repurchase obligations of $124 million partially offset by a decrease in net hedging gains on servicing rights.
  • The ratio of noninterest income to total revenue increased to 44 percent in the fourth quarter from 43 percent in the third quarter and 40 percent in the fourth quarter of 2012.
• Noninterest expense of $2.5 billion for the fourth quarter increased $123 million compared with the third quarter reflecting higher incentive compensation costs associated with increased business activity. In addition, the fourth quarter included a contribution to the PNC Foundation and higher legal accruals.
• Provision for credit losses declined to $113 million for the fourth quarter compared with $137 million for the third quarter as overall credit quality continued to improve.

Balance Sheet Highlights

• Loans grew $2.8 billion, or 1 percent, to $196 billion at December 31, 2013 compared with September 30, 2013. 
  • Total commercial lending grew $2.7 billion, or 2 percent, primarily in real estate and other specialty lending businesses including public finance.
  • Total consumer lending increased $.1 billion as growth in automobile and credit card loans was partially offset by lower residential mortgage, home equity and education loans.
• Overall credit quality continued to improve during the fourth quarter of 2013 compared with the third quarter.
  • Nonperforming assets of $3.5 billion at December 31, 2013 declined $165 million, or 5 percent.
  • Net charge-offs of $189 million decreased $35 million, or 16 percent.
• Deposits grew $4.9 billion, or 2 percent, to $221 billion at December 31, 2013 compared with September 30, 2013 driven by higher transaction deposits.
• PNC enhanced its liquidity position in light of anticipated regulatory requirements as reflected in higher balances of interest-earning deposits with banks, investment securities and borrowed funds.
• PNC's well-positioned balance sheet remained core funded with a loans to deposits ratio of 89 percent at December 31, 2013.
• PNC continued to build its strong capital position.
  • The Basel I Tier 1 common capital ratio increased to an estimated 10.5 percent at December 31, 2013 compared with 10.3 percent at September 30, 2013.
  • The pro forma fully phased-in Basel III Tier 1 common capital ratio increased to an estimated 9.4 percent at December 31, 2013 from 8.7 percent at September 30, 2013.

The Consolidated Financial Highlights accompanying this news release include additional information regarding selected income statement items and reconciliations to reported amounts of non-GAAP financial measures, including a reconciliation of tangible book value per common share to book value per common share and a reconciliation of business segment income to net income. Reference to core net interest income is to total net interest income less purchase accounting accretion, which consists of scheduled accretion and excess cash recoveries, as detailed in the Consolidated Financial Highlights. Information in this news release including the financial tables is unaudited. See the notes and other information in the Consolidated Financial Highlights. 

Total revenue for the fourth quarter of 2013 increased $153 million compared with the third quarter of 2013 and $4 million compared with the fourth quarter of 2012. The linked quarter increase was due to higher noninterest income and net interest income. In the comparison with fourth quarter 2012, an increase in noninterest income was predominantly offset by a decline in net interest income.

Net interest income for the fourth quarter of 2013 increased $32 million compared with the third quarter as a result of continued loan growth and higher investment securities balances and yields. Net interest income decreased $158 million compared with fourth quarter 2012 due to lower purchase accounting accretion and lower core net interest income, which was driven by lower yields on loans and securities partially offset by lower rates paid on deposits and borrowed funds and loan growth. The net interest margin decreased to 3.38 percent for the fourth quarter of 2013 compared with 3.47 percent for the third quarter of 2013 and 3.85 percent for the fourth quarter of 2012. The decline in the margin compared with third quarter primarily reflected the impact of higher interest-earning deposits maintained at banks in light of anticipated regulatory requirements. 

Noninterest income for the fourth quarter of 2013 increased $121 million compared with the third quarter of 2013 primarily due to a benefit related to residential mortgage repurchase obligations and strong fee income growth.

Asset management revenue increased $34 million compared with the third quarter driven by stronger equity markets and business growth. Consumer service fees increased $11 million as a result of a higher volume of customer-initiated transactions. Corporate service fees decreased $5 million primarily due to lower net commercial mortgage servicing rights valuations substantially offset by an increase in merger and acquisition advisory fees. Residential mortgage banking revenue declined $46 million principally from lower net hedging gains on residential mortgage servicing rights. A fourth quarter benefit from release of reserves for residential mortgage repurchase obligations of $124 million was largely attributable to the impact of previously disclosed agreements with FNMA and FHLMC. Service charges on deposits grew $2 million. Net gains on sales of securities decreased $18 million from a lower volume of sales as part of portfolio management activities. Other noninterest income increased $23 million primarily due to higher revenue from private equity investments and higher credit valuations related to customer-initiated hedging activities partially offset by the impact of a third quarter $85 million pretax gain on the sale of Visa Class B common shares. 

Noninterest income for the fourth quarter of 2013 increased $162 million compared with the fourth quarter of 2012 primarily as a result of the release of reserves for residential mortgage repurchase obligations in fourth quarter 2013 compared with a provision in fourth quarter 2012. Strong growth in client fee income was reflected in higher asset management revenue, consumer service fees and service charges on deposits. Corporate service fees decreased $48 million compared with fourth quarter 2012 primarily from lower net commercial mortgage servicing rights valuations and lower merger and acquisition advisory fees. Residential mortgage banking revenue declined due to lower loan sales revenue resulting from lower origination volume. Net gains on sales of securities decreased $42 million reflecting lower net sales volume. Other noninterest income declined $137 million primarily due to the impact of a fourth quarter 2012 gain on the sale of Visa Class B common shares. 

Noninterest expense for the fourth quarter of 2013 increased $123 million compared with the third quarter of 2013. The linked quarter increase reflected higher incentive compensation costs associated with increased business activity. In addition, the fourth quarter included a contribution to the PNC Foundation of $50 million and higher legal accruals including a previously disclosed residential mortgage fair lending settlement with the Consumer Financial Protection Bureau and the Department of Justice. Third quarter 2013 reflected a noncash charge of $27 million for unamortized discounts related to redemptions of trust preferred securities.

Noninterest expense for the fourth quarter of 2013 declined $282 million compared with the fourth quarter of 2012 reflecting a focus on disciplined expense management. The prior year fourth quarter included noncash charges related to redemptions of trust preferred securities of $70 million, a goodwill impairment charge of $45 million, adjustments to accruals of $38 million primarily for loan origination costs, and integration costs of $35 million. The decrease in noninterest expense from fourth quarter 2012 was also due to lower expenses for residential mortgage foreclosure-related matters. These declines were partially offset by higher legal accruals and a higher fourth quarter 2013 contribution to the PNC Foundation.

The effective tax rate was 24.9 percent for the fourth quarter of 2013 compared with 23.5 percent for the third quarter of 2013 and 22.0 percent for the fourth quarter of 2012.

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were a record $320.3 billion at December 31, 2013 compared with $308.6 billion at September 30, 2013 and $305.1 billion at December 31, 2012. In the comparison with third quarter end, the increase in assets of $11.7 billion was primarily due to higher interest-earning deposits with banks in light of anticipated regulatory requirements for liquidity, higher investment securities and loan growth. Total assets increased $15.2 billion compared with year end 2012 largely attributable to loan growth and higher interest-earning deposits with banks.

Total loans grew $2.8 billion as of December 31, 2013 compared with September 30, 2013. Commercial lending increased $2.7 billion during the fourth quarter of 2013 primarily in real estate and other specialty lending businesses including public finance. Consumer lending grew $.1 billion compared with September 30, 2013 due to growth in automobile and credit card loans partially offset by lower residential mortgage and home equity loans and paydowns of education loans. Average loans for the fourth quarter of 2013 increased $4.1 billion over third quarter from growth in commercial, commercial real estate and consumer loans. Fourth quarter 2013 period end and average loans increased $9.7 billion and $11.4 billion, respectively, compared with fourth quarter 2012 primarily due to commercial, commercial real estate and consumer loan growth.

Investment securities balances at December 31, 2013 increased $3.0 billion compared with September 30, 2013 and average balances increased $.8 billion for the fourth quarter compared with the third quarter. Net purchases, which were partially offset by prepayments that slowed during the quarter, in part reflected actions to enhance PNC's liquidity position in light of anticipated regulatory requirements. Fourth quarter 2013 period end and average investment securities balances decreased $1.1 billion and $2.0 billion, respectively, compared with fourth quarter 2012 primarily as a result of a decline in agency residential mortgage-backed securities from principal prepayments partially offset by net purchase activity.

The available for sale investment securities balance included a net unrealized pretax gain of $.6 billion at December 31, 2013 compared with $.7 billion at September 30, 2013 and $1.6 billion at December 31, 2012, representing the difference between fair value and amortized cost. The decrease in the net unrealized pretax gain compared with year end 2012 was attributable to an increase in market interest rates and widening asset spreads.

Interest-earning deposits with banks were $12.1 billion at December 31, 2013, an increase of $4.1 billion compared with September 30, 2013 and $8.2 billion compared with December 31, 2012 as PNC enhanced its liquidity position in light of anticipated regulatory requirements.

Total deposits at December 31, 2013 increased $4.8 billion compared with September 30, 2013 and average deposits increased $5.1 billion in the fourth quarter compared with the third quarter driven by growth in transaction deposits which in part reflected seasonal increases. Fourth quarter 2013 period end and average deposits increased $7.8 billion and $9.5 billion, respectively, compared with fourth quarter 2012 as growth in transaction deposits was partially offset by lower retail certificates of deposit due to runoff of maturing accounts.

Borrowed funds at December 31, 2013 increased $5.8 billion compared with September 30, 2013 and average borrowed funds increased $4.4 billion in the fourth quarter compared with the third quarter. Increases in Federal Home Loan Bank borrowings and bank notes and senior debt supported an enhanced liquidity position in light of anticipated regulatory requirements and loan growth. Also, higher federal funds purchased and repurchase agreements were partially offset by a decrease in commercial paper. The decline in commercial paper reflected the wind down of Market Street Funding LLC, a consolidated commercial paper conduit, whose commercial paper was repaid in full as of December 31, 2013. Borrowed funds increased $5.2 billion at December 31, 2013 compared with December 31, 2012 and average borrowed funds increased $2.8 billion in the fourth quarter of 2013 compared with fourth quarter 2012 as higher Federal Home Loan Bank borrowings and bank notes and senior debt were partially offset by a decrease in commercial paper.

PNC continued to increase its strong capital levels and ratios. The Tier 1 capital ratios increased in all comparisons primarily due to growth in retained earnings. The increase in the pro forma fully phased-in Basel III Tier 1 common capital ratio, which was calculated using PNC's estimated risk-weighted assets under the Basel III advanced approaches, also included lower quantitative limits deductions and a benefit from higher accumulated other comprehensive income primarily related to annual changes in the funded status of pension plans partially offset by an increase in estimated advanced approaches risk-weighted assets. The Basel III Tier 1 common capital information is subject to additional regulatory guidance and the ongoing evolution, validation and regulatory approval of capital-related models. See Capital Ratios in the Consolidated Financial Highlights. Common shareholders' equity increased principally due to growth in retained earnings and, in the comparison with third quarter end, higher accumulated other comprehensive income.

On January 2, 2014, the PNC board of directors declared a quarterly common stock cash dividend of 44 cents per share with a payment date of February 5, 2014.

Overall credit quality continued to improve during the fourth quarter of 2013. Nonperforming assets at December 31, 2013 decreased $165 million compared with September 30, 2013 as a result of improvements in commercial lending as commercial real estate nonperforming loans declined $80 million and commercial nonperforming loans decreased $41 million. Additionally, other real estate owned and foreclosed assets declined $47 million. Nonperforming assets decreased $337 million from fourth quarter 2012 as a result of improvements in commercial lending portfolios and other real estate owned and foreclosed assets. Nonperforming assets to total assets were 1.08 percent at December 31, 2013 compared with 1.17 percent at September 30, 2013 and 1.24 percent at December 31, 2012.

Overall delinquencies decreased $179 million, or 7 percent, as of December 31, 2013 compared with September 30, 2013 driven by accruing loans past due 90 days or more which declined $142 million primarily from lower past due government insured residential real estate loans. Additionally, a decrease in accruing loans past due 60 to 89 days was partially offset by an increase in accruing loans past due 30 to 59 days.

Net charge-offs for the fourth quarter of 2013 decreased $35 million compared with third quarter 2013. Lower commercial, commercial real estate and residential real estate loan net charge-offs were partially offset by higher home equity loan net charge-offs primarily related to ongoing collateral value refinements for certain loans. In the comparison with fourth quarter 2012, net charge-offs declined $121 million attributable to improving credit quality. Net charge-offs for the fourth quarter of 2013 were .39 percent of average loans on an annualized basis compared with .47 percent for the third quarter of 2013 and .67 percent for the fourth quarter of 2012.

Provision for credit losses for fourth quarter 2013 decreased $24 million compared with third quarter 2013 and $205 million compared with fourth quarter 2012 due to continued improvement in overall credit quality, including the purchased impaired loan portfolio, and improved housing prices which favorably impacted loss estimates.

The allowance for loan and lease losses declined in both comparisons reflecting overall improvement in credit quality. The allowance to total loans was 1.84 percent at December 31, 2013, 1.91 percent at September 30, 2013 and 2.17 percent at December 31, 2012. The allowance to nonperforming loans was 117 percent at December 31, 2013 compared with 115 percent at September 30, 2013, and 124 percent at December 31, 2012.

Retail Banking earnings for the fourth quarter of 2013 decreased compared with the third quarter of 2013 and the fourth quarter of 2012. Noninterest income declined in both comparisons reflecting the impact of gains on sales of Visa Class B common shares in the third quarter of 2013 and the fourth quarter of 2012. This decrease in both comparisons was partially offset by fee income growth from higher customer-initiated transactions. Net interest income declined compared with fourth quarter 2012 due to spread compression, primarily on deposits. The linked quarter increase in provision for credit losses was primarily attributable to updates of home equity loan loss assumptions. Provision for credit losses for fourth quarter 2013 decreased from fourth quarter 2012 due to overall credit quality improvement. Lower noninterest expense reflected a focus on disciplined expense management and, in the prior year quarter comparison, the impact of fourth quarter 2012 adjustments to accruals primarily for deferred loan origination costs.

• Retail Banking continued to focus on providing service channel choices while lowering delivery costs as customer preferences continue to evolve.
  • Approximately 39 percent of consumer customers used non-branch channels for the majority of their transactions during the fourth quarter of 2013 compared to 36 percent for the fourth quarter of 2012.
  • Non-branch deposit transactions via ATM and mobile increased to 30 percent of total deposit transactions in the fourth quarter of 2013 compared with 18 percent for the fourth quarter of 2012.
  • PNC closed or consolidated 16 branches in the fourth quarter for a total of 186 branches closed or consolidated for the full year 2013. PNC had a branch network of 2,714 branches and 7,445 ATMs at December 31, 2013.
  • Checking relationships increased 173,000, or 3 percent, to 6,648,000 at December 31, 2013 from year end 2012.
• Average transaction deposits continued to grow in the fourth quarter of 2013, increasing $1.2 billion over the third quarter. Average certificates of deposit declined $625 million in the same comparison due to net runoff of maturing accounts. In the comparison with fourth quarter 2012, average transaction deposits increased $5.0 billion, or 5 percent, while average certificates of deposit decreased $3.1 billion, or 13 percent.
• Average loans increased in the fourth quarter of 2013 by 1 percent over the third quarter and 3 percent over fourth quarter 2012 as a result of growth in automobile, home equity, auto dealer floor plan and credit card loans partially offset by paydowns of education loans.
• Net charge-offs were $168 million for fourth quarter 2013 compared with $143 million in the third quarter and $217 million in the fourth quarter of 2012. The linked quarter increase in net charge-offs was due in part to ongoing collateral value refinements on certain home equity loans. Nonperforming assets of $1.3 billion at December 31, 2013 were stable with September 30, 2013.

Corporate & Institutional Banking earnings increased in the fourth quarter of 2013 compared with the third quarter of 2013 and decreased compared with the fourth quarter of 2012. Net interest income declined compared with fourth quarter 2012 as a result of spread compression on loans and deposits and lower purchase accounting accretion partially offset by higher average loans and deposits. Corporate service fees were stable with the third quarter largely attributable to lower net commercial mortgage servicing rights valuations substantially offset by higher merger and acquisition advisory fees. The decrease in corporate service fees in the prior year fourth quarter comparison was primarily due to lower net commercial mortgage servicing rights valuations and lower merger and acquisition advisory fees. Other noninterest income increased compared with third quarter reflecting higher credit valuations related to customer-initiated hedging activities and decreased compared with fourth quarter 2012 primarily as a result of lower revenue associated with asset sales and commercial mortgage loans held for sale. Provision for credit losses, which was a benefit in fourth quarter 2013, reflected overall credit quality improvement. Noninterest expense increased in the linked quarter comparison principally from higher incentive compensation costs associated with increased business activity. The decline in noninterest expense compared with fourth quarter 2012 was attributable to continued disciplined expense management.

• Average loans increased in both comparisons primarily due to growth in real estate and other specialty lending businesses including business credit and public finance. 
• Average deposits increased in both comparisons as a result of business growth and inflows into noninterest-bearing and money market deposits. Additionally, linked quarter growth reflected seasonal increases.
• Net charge-offs were $10 million in the fourth quarter of 2013 compared with $56 million in the third quarter of 2013 and $34 million in the fourth quarter of 2012.

Asset Management Group earnings for the fourth quarter of 2013 decreased compared with the third quarter of 2013 and increased compared with the fourth quarter of 2012. Noninterest income grew in both comparisons driven by increases in the equity markets and strong sales production resulting in net positive flows. Noninterest expense increased compared with third quarter due to timing of marketing activities and an increase in legal accruals.

• Asset Management Group core growth strategies include investing in higher growth geographies, increasing sales sourced from other PNC lines of business and adding new front line sales staff with the goal of creating meaningful growth over time in assets under management and noninterest income.
  • New business activities were strong with a 22 percent increase in primary client acquisitions and a 44 percent increase in sales sourced from other PNC lines of business in 2013 compared with 2012. 
• Assets under administration at December 31, 2013 included discretionary assets under management of $127 billion and nondiscretionary assets under administration of $120 billion. Discretionary assets under management increased $5 billion compared with September 30, 2013 and $15 billion compared with December 31, 2012 driven by stronger equity markets and net positive flows net of cyclical client activities.
• Average loans increased 2 percent compared with the third quarter and 11 percent compared with the fourth quarter of 2012 as new client originations, primarily home equity loans, benefited from an attractive interest rate environment and loan referrals from other lines of business.
• Average deposits increased 6 percent compared with the third quarter of 2013, reflecting seasonal growth, and 7 percent compared with the fourth quarter of 2012. 

Residential Mortgage Banking earnings for the fourth quarter of 2013 increased compared with both the third quarter of 2013 and the fourth quarter of 2012. Fourth quarter 2013 earnings benefited from release of reserves for residential mortgage repurchase obligations largely attributable to the impact of previously disclosed agreements with FNMA and FHLMC. Other noninterest income declined compared with the third quarter due to lower net hedging gains on residential mortgage servicing rights. In the comparison with fourth quarter 2012, reduced loan sales revenue from lower origination volume drove the decrease in other noninterest income.

Noninterest expense increased compared with the third quarter primarily due to higher legal accruals, including a previously disclosed residential mortgage fair lending settlement with the Consumer Financial Protection Bureau and the Department of Justice, partially offset by lower production expense on lower origination volume. Noninterest expense decreased compared with fourth quarter 2012 primarily as a result of lower residential mortgage foreclosure-related expenses, the impact of a fourth quarter 2012 goodwill impairment charge, and lower production expense on lower origination volume partially offset by higher legal accruals.

Loan origination volume in the fourth quarter of 2013 was down 33 percent from the third quarter and down 44 percent from the fourth quarter of 2012. Approximately 41 percent of fourth quarter 2013 origination volume was for home purchase transactions, an increase over both quarters of comparison. Originations under the revised Home Affordable Refinance Program remained a significant portion of fourth quarter volume at approximately 28 percent.

Non-Strategic Assets Portfolio segment earnings decreased slightly in the fourth quarter of 2013 compared with the third quarter of 2013 and increased compared with the fourth quarter of 2012. Net interest income decreased compared with fourth quarter 2012 as a result of portfolio runoff including higher yielding commercial loans. Noninterest income declined in both comparisons and included the impact of an increased provision for home equity repurchase obligations. Provision for credit losses, which was a benefit in the fourth and third quarters of 2013, reflected overall improvement in credit quality. Noninterest expense decreased compared with fourth quarter 2012 from lower other real estate owned expense and lower loan servicing costs.

• The Non-Strategic Assets Portfolio primarily consists of non-strategic assets obtained through acquisitions of other companies. The business activity of this segment is to manage the wind-down of the portfolio while maximizing value and mitigating risk.
• Average loans decreased in both comparisons reflecting customer payment activity and portfolio management activities to reduce underperforming assets.
• Net charge-offs were $9 million for the fourth quarter of 2013 compared with $23 million for the third quarter and $60 million for the fourth quarter of 2012. The decreases reflected continued improvement in credit quality.

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 interest in BlackRock, and residual activities that do not meet the criteria for disclosure as a separate reportable business, such as integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and differences between business segment performance reporting and financial statement reporting under generally accepted accounting principles.

PNC recorded earnings of $176 million in "Other, including BlackRock" for the fourth quarter of 2013 compared with $136 million for the third quarter of 2013 and $48 million for the fourth quarter of 2012. The increase in earnings over third quarter was attributable to higher revenue, including from private equity investments, and the impact of third quarter noncash charges related to redemptions of trust preferred securities partially offset by a contribution to the PNC Foundation. Earnings increased compared with fourth quarter 2012 as a result of the impact of fourth quarter 2012 noncash charges related to redemptions of trust preferred securities and integration costs partially offset by a higher contribution to the PNC Foundation in fourth quarter 2013. In addition, higher revenue from private equity investments and higher net interest income from asset and liability management activities in fourth quarter 2013 contributed to the increase in earnings.

CONFERENCE CALL AND SUPPLEMENTAL FINANCIAL INFORMATION

PNC President and Chief Executive Officer William S. Demchak and Chief Financial Officer Robert Q. Reilly will hold a conference call for investors today at 10:00 a.m. Eastern Time regarding the topics addressed in this news release and the related financial supplement. Dial-in numbers for the conference call are (800) 268-5851 or (303) 223-4360 (international) and Internet access to the live audio listen-only webcast of the call is available at www.pnc.com/investorevents. PNC's fourth quarter and full year 2013 earnings release, the related financial supplement, and presentation slides to accompany the conference call remarks will be available at www.pnc.com/investorevents prior to the beginning of the call. A telephone replay of the call will be available for one week at (800) 633-8284 or (402) 977-9140 (international), conference ID 21695530 and a replay of the audio webcast will be available on PNC's website for 30 days.

The PNC Financial Services Group, Inc. (www.pnc.com) is one of the nation's largest diversified financial services organizations providing retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management.

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