PITTSBURGH, Jan. 15, 2016 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported 2015 net income of $4.1 billion, or $7.39 per diluted common share, compared with 2014 net income of $4.2 billion, or $7.30 per diluted common share. Fourth quarter 2015 net income was $1.0 billion, or $1.87 per diluted common share, compared with $1.1 billion, or $1.90 per diluted common share, for the third quarter of 2015 and $1.1 billion, or $1.84 per diluted common share, for the fourth quarter of 2014.

"PNC delivered consistent, quality results and advanced our strategic priorities in 2015," said William S. Demchak, chairman, president and chief executive officer. "We increased fee income, reduced expenses and managed a strong balance sheet that will benefit from rising interest rates heading into 2016. Our strong capital position enabled us to increase the amount of capital returned to shareholders in 2015. We're positioned to continue to drive long-term value through our execution in 2016 and beyond."

Income Statement Highlights

• Fourth quarter results reflected revenue growth over the third quarter in both net interest income and fee income, a continued focus on disciplined expense management, and higher loans and deposits.
• Net interest income of $2.1 billion for the fourth quarter grew $30 million, or 1 percent, compared with the third quarter driven by higher core net interest income.
• Noninterest income of $1.8 billion for the fourth quarter increased $48 million, or 3 percent, compared with the third quarter primarily due to strong fee income growth.
• Noninterest expense of $2.4 billion increased $44 million, or 2 percent, compared with the third quarter reflecting higher variable compensation costs associated with business activity.
• Provision for credit losses was $74 million for the fourth quarter compared with $81 million for the third quarter as overall credit quality remained relatively stable.

Balance Sheet Highlights

• Loans grew $1.7 billion to $206.7 billion at December 31, 2015 compared with September 30, 2015. 
  • Total commercial lending grew $2.4 billion, or 2 percent, primarily in PNC's real estate business, including an increase in multifamily agency warehouse lending.
  • Total consumer lending decreased $.7 billion reflecting declines in the non-strategic consumer loan portfolio.
• Overall credit quality in the fourth quarter remained relatively stable with the third quarter. 
  • Nonperforming assets of $2.4 billion at December 31, 2015 decreased $.1 billion, or 3 percent, compared with September 30, 2015.
  • Net charge-offs increased to $120 million for the fourth quarter compared with $96 million for the third quarter.
  • PNC implemented its planned change in the derecognition policy for purchased impaired pooled loans effective December 31, 2015, resulting in a reduction of the recorded investment balance included in total loans and the associated allowance for loan losses balance each by $468 million.
• Deposits grew $4.0 billion, or 2 percent, to $249.0 billion at December 31, 2015 compared with September 30, 2015.
• Investment securities increased $2.5 billion, or 4 percent, in the fourth quarter to $70.5 billion at December 31, 2015. 
• PNC's well-positioned balance sheet remained core funded with a loans to deposits ratio of
  83 percent at December 31, 2015.
• PNC returned capital to shareholders through repurchases of 5.8 million common shares for
  $.5 billion during the fourth quarter.
  • Repurchases for full year 2015 totaled 22.3 million common shares for $2.1 billion.
• PNC maintained a strong capital position.
  • Transitional Basel III common equity Tier 1 capital ratio was an estimated 10.7 percent at December 31, 2015 and 10.6 percent at September 30, 2015, calculated using the regulatory capital methodology applicable to PNC during 2015.
  • Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated 10.0 percent at December 31, 2015 and 10.1 percent at September 30, 2015 based on the standardized approach rules.

 

 

The Consolidated Financial Highlights accompanying this news release include additional information regarding reconciliations of non-GAAP financial measures to reported amounts, including reconciliations of tangible book value to book value per common share and 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. Fee income 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. See the notes and other information in the Consolidated Financial Highlights. 

 

 

Total revenue for the fourth quarter of 2015 increased $78 million compared with the third quarter driven by growth in both net interest income and noninterest income, which reflected strong fee income. Total revenue declined $94 million compared with the fourth quarter of 2014 primarily attributable to higher fourth quarter 2014 gains on asset dispositions.

Net interest income for the fourth quarter of 2015 increased $30 million compared with the third quarter from growth in core net interest income. Net interest income decreased $5 million compared with the fourth quarter of 2014 due to lower purchase accounting accretion substantially offset by higher core net interest income. The increase in core net interest income in both periods reflected higher securities balances and loan growth partially offset by lower securities and loan yields.

The net interest margin of 2.70 percent for the fourth quarter of 2015 increased over the third quarter margin of 2.67 percent driven by the impact of a reduction in low-yielding balances on deposit with the Federal Reserve Bank partially offset by lower securities yields. The margin declined from 2.89 percent in the fourth quarter of 2014 primarily as a result of lower interest-earning asset yields and lower benefit from purchase accounting accretion.

 

 

Noninterest income for the fourth quarter of 2015 increased $48 million compared with the third quarter reflecting strong fee income growth. Asset management revenue reflected stronger equity markets and increased $23 million due to higher earnings from PNC's equity investment in BlackRock and to new sales production. Consumer service fees grew $8 million driven by higher merchant services and credit card activity. Corporate service fees increased $10 million attributable to higher merger and acquisition advisory fees and loan syndication fees. Residential mortgage banking noninterest income decreased $12 million primarily as a result of lower loan sales revenue. Other noninterest income increased $21 million and included gains on the sale of Visa Class B common shares of $47 million for the fourth quarter compared with $43 million for the third quarter as well as higher gains on sales of securities in the fourth quarter of 2015.

Noninterest income for the fourth quarter of 2015 decreased $89 million compared with the fourth quarter of 2014. Strong fee income growth was reflected in higher asset management revenue and consumer service fees. Corporate service fees declined as a result of lower merger and acquisition advisory fees partially offset by higher loan syndication fees. Residential mortgage banking noninterest income decreased from lower loan sales revenue. Other noninterest income declined due to higher fourth quarter 2014 gains on asset dispositions, including a gain of $94 million on the sale of PNC's Washington, D.C. regional headquarters building. Gains on sales of Visa Class B common shares were $36 million in the fourth quarter of 2014.  

 

 

Noninterest expense for the fourth quarter of 2015 increased $44 million compared with the third quarter primarily due to higher variable compensation costs associated with business activity. Equipment expense increased as a result of technology and infrastructure investments and associated write-offs of obsolete equipment.

Noninterest expense for the fourth quarter of 2015 decreased $143 million compared with the fourth quarter of 2014 reflecting the impact of a fourth quarter 2014 contribution to the PNC Foundation. Additionally, legal and residential mortgage compliance costs were lower in the fourth quarter of 2015. These declines were partially offset by higher personnel expense associated with overall higher business activity.

The effective tax rate was 26.1 percent for the fourth quarter of 2015, 20.0 percent for the third quarter of 2015 and 22.1 percent for the fourth quarter of 2014. Lower income tax expense for third quarter 2015 reflected tax benefits attributable to effectively settling acquired entity tax contingencies, and for fourth quarter 2014 reflected the tax favorability of the PNC Foundation contribution.

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $358.5 billion at December 31, 2015 compared with $362.1 billion at September 30, 2015 and $345.1 billion at December 31, 2014. Assets declined 1 percent compared with third quarter end. Higher investment securities and loan balances were more than offset by a decrease in other assets and lower deposit balances maintained with the Federal Reserve Bank. Assets grew 4 percent compared with December 31, 2014 primarily due to an increase in investment securities.

 

 

Total loans grew $1.7 billion as of December 31, 2015 compared with September 30, 2015. Commercial lending balances increased $2.4 billion in the fourth quarter primarily from growth in PNC's real estate business, including an increase in multifamily agency warehouse lending, partially offset by capital and liquidity management activities in the corporate banking business. Consumer lending decreased $.7 billion as a result of declines in the non-strategic portfolio of residential mortgage and brokered home equity loans. Lower balances of other home equity loans and education loans were offset by growth in credit card and automobile loans. Average loans increased $1.2 billion in the fourth quarter of 2015 compared with the third quarter due to growth in average commercial lending balances of $1.6 billion partially offset by a decrease in average consumer lending balances of $.4 billion. Fourth quarter 2015 period end and average loans increased $1.9 billion and $3.1 billion, respectively, compared with fourth quarter 2014 reflecting commercial real estate and commercial loan growth offset in part by lower consumer loans.

 

 

Investment securities balances at December 31, 2015 increased $2.5 billion compared with September 30, 2015 and average balances for the fourth quarter increased $5.8 billion compared with the third quarter. Portfolio purchases were primarily agency residential mortgage-backed securities and U.S. Treasury securities. Fourth quarter 2015 period end and average investment securities increased $14.7 billion and $13.6 billion, respectively, compared with fourth quarter 2014. The available for sale investment securities balance included a net unrealized pretax gain of $.5 billion at December 31, 2015 compared with $.9 billion at September 30, 2015 and $1.1 billion at December 31, 2014, representing the difference between fair value and amortized cost. The decline in the unrealized pretax gain in both comparisons was primarily due to higher market interest rates.

Interest-earning deposits with banks, primarily with the Federal Reserve Bank, were $30.5 billion at December 31, 2015, a decrease of $3.7 billion compared with September 30, 2015. Average balances of $31.5 billion during the fourth quarter declined $5.8 billion from the third quarter. These decreases reflected growth in investment securities and loans. Fourth quarter 2015 period end interest-earning deposits with banks declined $1.2 billion compared with fourth quarter 2014, while average balances increased $3.8 billion in the comparison reflecting higher average balances on deposit with the Federal Reserve Bank in fourth quarter 2015 in part due to regulatory short-term liquidity standards phased in starting January 1, 2015.

Other assets of $23.1 billion at December 31, 2015 decreased $4.2 billion, or 15 percent, from September 30, 2015 due in part to lower unsettled securities sales. A decrease in unsettled securities purchases contributed to a lower balance of other liabilities, which declined $5.0 billion at December 31, 2015 compared with September 30, 2015.

 

 

Total deposits at December 31, 2015 grew $4.0 billion compared with September 30, 2015 and average deposits increased $3.5 billion in the fourth quarter of 2015 compared with the third quarter. Deposit growth resulted from higher demand deposits as well as an increase in savings deposits offset by lower money market deposits reflecting a shift to new relationship-based savings products. Fourth quarter 2015 period end and average deposits increased $16.8 billion and $17.5 billion, respectively, compared with fourth quarter 2014 due to overall strong deposit growth. 

 

 

Borrowed funds at December 31, 2015 decreased $2.1 billion compared with September 30, 2015, and average borrowed funds decreased $2.5 billion in the fourth quarter compared with the third quarter, due to lower bank borrowings, commercial paper and subordinated debt partially offset by the issuance of senior bank notes in the fourth quarter. Fourth quarter 2015 period end borrowed funds decreased $2.2 billion and average borrowed funds increased $2.6 billion compared with fourth quarter 2014. In both comparisons, declines in commercial paper and federal funds purchased and repurchase agreements were partially offset by higher bank notes and senior debt. The average balance comparison was further impacted by higher average bank borrowings in the fourth quarter of 2015 resulting in an overall increase.

 

 

PNC maintained a strong capital position. Common shareholders' equity decreased compared with September 30, 2015 due to growth in retained earnings more than offset by share repurchases and lower accumulated other comprehensive income primarily related to net unrealized securities gains. The transitional Basel III common equity Tier 1 capital ratios were calculated using the regulatory capital methodologies, including related phase-ins, applicable to PNC during 2015 and 2014. The Basel III standardized approach took effect on January 1, 2015. For 2014, PNC followed the methodology that became effective on January 1, 2014 for advanced approaches banks. The pro forma ratios were calculated based on the standardized approach. See Capital Ratios in the Consolidated Financial Highlights.

PNC returned capital to shareholders through repurchases totaling 22.3 million common shares for $2.1 billion for the full year 2015, including 5.8 million common shares for $.5 billion during the fourth quarter of 2015. Of the full year total repurchases, 17.9 million common shares for $1.7 billion took place under current share repurchase programs of up to $2.875 billion for the five quarter period beginning in the second quarter of 2015. These programs include repurchases of up to $375 million during this five quarter period related to stock issuances under employee benefit-related programs.

On January 7, 2016, the PNC board of directors declared a quarterly common stock cash dividend of 51 cents per share payable on February 5, 2016.

PNC continued to maintain a strong liquidity position. The estimated Liquidity Coverage Ratio at December 31, 2015 exceeded 100 percent for both PNC and PNC Bank, N.A., above the minimum phased-in requirement of 80 percent in 2015, calculated as of month end.

 

 

Overall credit quality for the fourth quarter of 2015 remained relatively stable with the third quarter. Nonperforming assets at December 31, 2015 declined $65 million compared with September 30, 2015 due to decreases in home equity, commercial real estate and residential mortgage nonperforming loans partially offset by an increase in nonperforming commercial loans. Nonperforming assets declined $455 million from fourth quarter 2014 reflecting improvements in the residential mortgage, commercial real estate and home equity nonperforming loan portfolios. Nonperforming assets to total assets were .68 percent at December 31, 2015, down from .69 percent at September 30, 2015 and .83 percent at December 31, 2014.

Overall delinquencies decreased $23 million, or 1 percent, as of December 31, 2015 compared with September 30, 2015. Accruing loans past due 90 days or more declined $9 million, accruing loans past due 60 to 89 days decreased $17 million, or 6 percent, primarily in commercial real estate loans, and the 30 to 59 day category increased $3 million, or 1 percent.

Net charge-offs for the fourth quarter of 2015 increased $24 million compared with the third quarter reflecting higher net charge-offs primarily for commercial and home equity loans. In the comparison with fourth quarter 2014, net charge-offs were relatively stable as higher commercial loan net charge-offs were offset by lower home equity loan net charge-offs. Net charge-offs for the fourth quarter of 2015 were .23 percent of average loans on an annualized basis compared with .19 percent for the third quarter and .23 percent for the fourth quarter of 2014.

Provision for credit losses for fourth quarter 2015 decreased $7 million compared with the third quarter, and increased $22 million over fourth quarter 2014 reflecting slowing credit quality improvement.  

The allowance for loan and lease losses at December 31, 2015 decreased $510 million compared with September 30, 2015 and $604 million compared with December 31, 2014. The decline in the allowance reflected PNC's implementation of its planned change effective December 31, 2015 in the derecognition policy for purchased impaired loans that are pooled and accounted for as a single asset, resulting in a reduction of the recorded investment balance included in total loans and the associated allowance for loan losses balance each by $468 million. The allowance to total loans was 1.32 percent at December 31, 2015, 1.58 percent at September 30, 2015 and 1.63 percent at December 31, 2014. The allowance to nonperforming loans was 128 percent at December 31, 2015 compared with 149 percent at September 30, 2015 and 133 percent at December 31, 2014.

 

 

Net interest income in business segment results reflects PNC's internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors. Enhancements were made to PNC's funds transfer pricing methodology in the first quarter of 2015 primarily for costs related to new regulatory short-term liquidity standards. The enhancements incorporate an additional charge assigned to assets, including for unfunded loan commitments. Conversely, a higher transfer pricing credit has been assigned to those deposits that are accorded higher value under the regulatory liquidity rules. These adjustments apply to business segment results prospectively beginning with the first quarter of 2015, primarily impacting two business segments with a benefit to Retail Banking earnings and a decrease in Corporate & Institutional Banking earnings.

 

 

Retail Banking earnings for the fourth quarter of 2015 decreased compared with the third quarter and increased compared with the fourth quarter of 2014. Net interest income increased in the comparison with fourth quarter 2014 as a result of the benefit from enhancements to PNC's funds transfer pricing methodology in first quarter 2015. Noninterest income included gains on sales of Visa Class B common shares of $47 million in the fourth quarter of 2015, $43 million in the third quarter of 2015 and $36 million in the fourth quarter of 2014. Noninterest income, excluding the Visa gains, decreased $7 million from third quarter 2015 and increased $26 million over fourth quarter 2014. In the comparison with fourth quarter 2014, strong growth in consumer services fees resulted from higher debit and credit card activity and merchant services revenue, and brokerage fees increased. Provision for credit losses increased in both comparisons reflecting slowing credit quality improvement and, in the comparison with the third quarter, credit card loan growth.

• Retail Banking continued to focus on the strategic priority of transforming the customer experience through transaction migration, branch network transformation and multi-channel sales strategies.
  • Approximately 55 percent of consumer customers used non-teller channels for the majority of their transactions during the fourth quarter of 2015 compared with 53 percent for the third quarter and 49 percent for the fourth quarter of 2014.
  • Deposit transactions via ATM and mobile channels increased to 46 percent of total deposit transactions in the fourth quarter of 2015 compared with 45 percent for the third quarter and 38 percent for the fourth quarter of 2014.
  • Integral to PNC's retail branch transformation strategy, more than 375 branches operate under the universal model designed to drive higher ATM and mobile deposits and enhance sales opportunities for branch personnel. PNC had a network of 2,616 branches and 8,956 ATMs at December 31, 2015.
• Average deposits grew 2 percent over the third quarter due to higher demand deposits as well as an increase in savings deposits partially offset by lower money market deposits reflecting a shift to new relationship-based savings products. In the comparison with fourth quarter 2014, average deposits grew 8 percent from overall strong growth in demand, savings and money market deposits.
• Average loans decreased 3 percent compared with the fourth quarter of 2014 as growth in automobile and credit card loans was more than offset by lower home equity and education loans.
• Net charge-offs for the fourth quarter of 2015 were $93 million compared with $66 million in the third quarter and $104 million in the fourth quarter of 2014. The increase from third quarter was primarily in commercial and home equity loans.

 

 

Corporate & Institutional Banking earnings for the fourth quarter of 2015 increased compared with the third quarter and decreased compared with the fourth quarter of 2014. Net interest income declined compared with the fourth quarter of 2014 reflecting enhancements to PNC's funds transfer pricing methodology in the first quarter of 2015. Corporate service fees increased compared with the third quarter primarily due to higher merger and acquisition advisory fees and loan syndication fees. Other noninterest income increased in both comparisons reflecting higher revenue associated with multifamily loans originated for sale to agencies, higher gains on asset sales and increased securities underwriting activity. Provision for credit losses decreased compared with the third quarter due to reductions in reserve requirements partially offset by provision attributed to industry-specific weaknesses and loan growth. Noninterest expense increased in both comparisons as a result of higher variable compensation and other costs associated with business activity and, in the comparison with the third quarter, higher asset writedowns.

• Average loans increased 1 percent over the third quarter and 5 percent over the fourth quarter of 2014 primarily due to growth in PNC's real estate and business credit businesses as well as increased lending to large corporate customers partially offset by the impact of capital and liquidity management activities.
• Average deposits increased 5 percent over the fourth quarter of 2014 driven by business growth and increases in demand and certificates of deposit products.
• Net charge-offs in the fourth quarter were $24 million compared with net charge-offs of $26 million in the third quarter and a net recovery position of $2 million in the fourth quarter of 2014.

 

 

Asset Management Group earnings for the fourth quarter of 2015 increased in both comparisons. Noninterest income grew in the periods of comparison due to new sales production and stronger equity markets. Noninterest expense was well controlled. 

• Asset Management Group continued to focus on driving growth through sales sourced from other PNC lines of business, maximizing front line productivity and optimizing market presence in high opportunity markets. Its business strategies primarily focus on growing client assets under management, building retirement capabilities and expanding product solutions for all customers.  
• Client assets under administration at December 31, 2015 included discretionary client assets under management of $134 billion and nondiscretionary client assets under administration of $125 billion.
  • Discretionary client assets under management increased $2 billion compared with September 30, 2015 primarily attributable to stronger equity markets and decreased $1 billion compared with December 31, 2014.

 

 

Residential Mortgage Banking loss for the fourth quarter of 2015 was higher compared with third quarter 2015 and fourth quarter 2014 losses. Noninterest income decreased in both comparisons due to lower loan sales revenue and, in the comparison with the third quarter, lower net hedging gains on mortgage servicing rights partially offset by higher servicing revenue. Noninterest expense increased compared with the third quarter reflecting higher legal accruals and decreased from fourth quarter 2014 primarily as a result of lower residential mortgage compliance costs.

• The strategic focus of Residential Mortgage Banking is the acquisition of new customers through a retail loan officer sales force with an emphasis on home purchase transactions, competing on the basis of superior service, and leveraging cross-sell opportunities, especially in the bank footprint markets.
• Loan origination volume in the fourth quarter of 2015 decreased 17 percent compared with the third quarter and 8 percent compared with the fourth quarter of 2014 in part reflecting the impact of longer loan closing periods driven by implementation of new regulations. Approximately 45 percent of fourth quarter 2015 origination volume was for home purchase transactions compared with 55 percent in the third quarter and 42 percent in the fourth quarter of 2014.
• Loan servicing acquisitions were $5 billion in the fourth quarter of 2015 and $10 billion in the third quarter. There were no servicing acquisitions in the fourth quarter of 2014.

 

 

The Non-Strategic Assets Portfolio consists of non-strategic assets primarily obtained through acquisitions of other companies and includes a consumer portfolio of mainly residential mortgage and brokered home equity loans and lines of credit, and a small commercial/commercial real estate loan and lease portfolio. The business activity of this segment is to manage the liquidation of the portfolios while maximizing the value and mitigating risk.

• Net interest income decreased compared with the fourth quarter of 2014 reflecting declining loan balances and lower purchased impaired loan accretion.
• Provision for credit losses for the fourth quarter of 2015 was a higher benefit in both comparisons driven by improved actual and projected cash flows on consumer impaired loans.
• Noninterest expense for the fourth quarter of 2015 decreased in both comparisons primarily due to lower legal costs, as well as lower volume-related expenses compared with fourth quarter 2014. 
• Net charge-offs were $4 million for the fourth quarter of 2015 compared with a net recovery position of $1 million for the third quarter and net charge-offs of $12 million for the fourth quarter of 2014.
• Effective December 31, 2015, PNC implemented its planned change in the derecognition policy for purchased impaired pooled consumer and residential real estate loans, resulting in a reduction of the recorded investment balance included in total loans and the associated allowance for loan losses balance each by $468 million, most of which was recorded in the Non-Strategic Assets Portfolio. Accordingly, loans that were paid off, sold, foreclosed upon, or that had nominal collateral value/expected cash flows were removed from these loan pools.

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.

CONFERENCE CALL AND SUPPLEMENTAL FINANCIAL INFORMATION

PNC Chairman, President and Chief Executive Officer William S. Demchak and Chief Financial Officer Robert Q. Reilly will hold a conference call for investors today at 11:00 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) 926-7535 and (212) 231-2930 (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 2015 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 and (402) 977-9140 (international), conference ID 21783852 and a replay of the audio webcast will be available on PNC's website for 30 days.

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; 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. For information about PNC, visit www.pnc.com.

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