PITTSBURGH, Jan. 16, 2019 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported:

 

 

 

Income Statement Highlights

• Fourth quarter and full year 2017 net income included a net benefit of $.9 billion from federal tax legislation and significant items.

Fourth quarter 2018 compared with third quarter 2018

• Net income of $1.4 billion for the fourth quarter decreased $49 million, or 4 percent, compared with the third quarter.
• Total revenue for the fourth quarter of $4.3 billion declined $17 million. 
• Net interest income of $2.5 billion increased $15 million, or 1 percent, due to higher loan and securities yields and balances partially offset by increased funding costs.
• Net interest margin decreased 3 basis points to 2.96 percent due to automation of operational processes that refined the calculation of certain average other interest-earning assets and impacted the related average yield.
• Noninterest income of $1.9 billion decreased $32 million, or 2 percent.
• Fee income declined $56 million, or 4 percent, to $1.5 billion due to lower asset management revenue driven by a $47 million decrease in earnings from PNC's equity investment in BlackRock, including a $10 million flow-through impact of BlackRock's recently announced restructuring charge. Additionally, lower residential mortgage revenue was partially offset by seasonally higher consumer activity.
• Other noninterest income increased $24 million, or 8 percent, to $325 million and included positive Visa Class B derivative fair value adjustments of $42 million in the fourth quarter compared with negative adjustments of $32 million in the third quarter. 
• Noninterest expense decreased $31 million, or 1 percent, to $2.6 billion reflecting the fourth quarter elimination of a $36 million quarterly FDIC deposit insurance surcharge assessment. 
• Provision for credit losses was $148 million, an increase of $60 million resulting from a higher commercial loan provision reflecting portfolio growth and a benefit from lower specific reserves in the third quarter.
• The effective tax rate was 16.3 percent for the fourth quarter compared with 15.7 percent for the third quarter, and 16.8 percent for full year 2018. 

Balance Sheet Highlights

• Average loans increased $2.6 billion, or 1 percent, to $225.9 billion in the fourth quarter compared with the third quarter.
• Average commercial lending balances grew $2.3 billion reflecting seasonal growth in PNC's multifamily agency warehouse lending within the real estate business and loan growth across the corporate banking, business credit and equipment finance businesses.
• Average consumer lending balances increased $.3 billion due to growth in residential mortgage, credit card, auto and unsecured installment loans partially offset by lower home equity and education loans.
• Overall credit quality remained strong.
• Nonperforming assets of $1.8 billion at December 31, 2018 decreased $17 million, or 1 percent, compared with September 30, 2018.
• Net charge-offs were $107 million for the fourth quarter compared with $91 million for the third quarter.
• Average deposits increased $4.0 billion, or 2 percent, to $266.5 billion in the fourth quarter compared with the third quarter reflecting seasonal growth in commercial deposits. 
• Average investment securities increased $1.4 billion, or 2 percent, to $82.1 billion in the fourth quarter compared with the third quarter.
• Average balances held with the Federal Reserve decreased $2.4 billion to $16.4 billion compared with the third quarter, and December 31, 2018 balances decreased $9.1 billion to $10.5 billion compared with September 30, 2018 reflecting short-term investments in resale agreements over year end.
• PNC returned $1.2 billion of capital to shareholders in the fourth quarter through repurchases of 6.1 million common shares for $.8 billion and dividends on common shares of $.4 billion.
• For the full year 2018, PNC returned $4.4 billion of capital to shareholders through repurchases of 19.9 million common shares for $2.8 billion and dividends on common shares of $1.6 billion.
• In November 2018, PNC announced an increase to authorized repurchases of up to an additional $900 million in common shares, an addition to previously announced share repurchase programs of up to $2.0 billion through the end of the second quarter of 2019.
• PNC maintained strong capital and liquidity positions.
• The Basel III common equity Tier 1 capital ratio was an estimated 9.6 percent at December 31, 2018 and 9.3 percent at September 30, 2018.
• The Liquidity Coverage Ratio at December 31, 2018 for both PNC and PNC Bank, N.A. continued to exceed the regulatory minimum requirement of 100 percent.

 

 

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 fourth quarter of 2018 decreased $17 million compared with the third quarter and increased $80 million compared with the fourth quarter of 2017. Net interest income grew while noninterest income declined in both comparisons.

Net interest income for the fourth quarter of 2018 increased $15 million compared with the third quarter and $136 million compared with the fourth quarter of 2017. Higher loan and securities yields and balances were partially offset by higher deposit and borrowing costs in both comparisons reflecting the impact of interest rate increases. The net interest margin was 2.96 percent for the fourth quarter of 2018 compared with 2.99 percent for the third quarter and 2.88 percent for the fourth quarter of 2017. The decline in the margin from the third quarter was due to automation of operational processes that refined the calculation of certain average other interest-earning assets and impacted the related average yield.

 

 

Noninterest income for the fourth quarter of 2018 declined $32 million compared with the third quarter as lower fee income was somewhat offset by higher other noninterest income. Asset management revenue decreased $58 million reflecting lower earnings of $47 million from PNC's equity investment in BlackRock, including a $10 million flow-through impact of BlackRock's recently announced restructuring charge, and lower average equity markets. Consumer service fees grew $10 million due to seasonally higher credit card and merchant services activity and higher brokerage revenue. Corporate service fees increased $3 million primarily due to higher loan syndication and other fees substantially offset by lower merger and acquisition advisory fees. Residential mortgage revenue decreased $17 million reflecting a $19 million negative adjustment for residential mortgage servicing rights valuation, net of economic hedge, driven by a decline in long-term interest rates at quarter end. Service charges on deposits grew $6 million as a result of a seasonal increase in consumer spending.

Other noninterest income for the fourth quarter of 2018 increased $24 million primarily due to positive derivative fair value adjustments of $42 million related to Visa Class B common shares in the fourth quarter compared with negative adjustments of $32 million in the third quarter and higher gains on asset sales partially offset by lower revenue from private equity investments.

Noninterest income for the fourth quarter of 2018 decreased $56 million compared with the fourth quarter of 2017. Asset management revenue declined $292 million reflecting a $254 million fourth quarter 2017 flow-through impact of tax legislation on PNC's equity investment in BlackRock. Lower earnings from the equity investment in BlackRock in the fourth quarter of 2018 also contributed to the decline. Consumer service fees grew $21 million driven by higher debit card, brokerage and credit card activity. Corporate service fees increased $10 million reflecting higher treasury management revenue. Residential mortgage revenue increased $30 million as a result of a $71 million fourth quarter 2017 negative adjustment for residential mortgage servicing rights fair value assumption updates compared with a negative valuation adjustment of $19 million in the fourth quarter of 2018 partially offset by lower loan sales revenue. Service charges on deposits increased $9 million due to higher consumer transaction volumes. Other noninterest income increased $166 million due to $248 million of fourth quarter 2017 negative derivative fair value adjustments related to Visa Class B common shares compared with positive adjustments of $42 million in the fourth quarter of 2018 partially offset by a fourth quarter 2017 benefit of $119 million for appreciation in value of BlackRock stock contributed to the PNC Foundation.

 

 

Noninterest expense for the fourth quarter of 2018 decreased $31 million compared with the third quarter. Personnel expense declined $65 million as lower variable compensation was partially offset by an increase in benefits, including medical expense. Equipment expense increased $21 million in part due to technology-related depreciation. Marketing expense increased $13 million driven by the national retail digital strategy. Other noninterest expense declined $7 million reflecting the fourth quarter elimination of a $36 million quarterly FDIC deposit insurance surcharge assessment partially offset by higher expense for business activities.

Noninterest expense for the fourth quarter of 2018 decreased $484 million compared with the fourth quarter of 2017. Fourth quarter 2017 included significant items of $502 million consisting of a $200 million contribution to the PNC Foundation, $197 million of charges for real estate dispositions and exits, and $105 million of personnel expense for employee cash payments and pension account credits. Excluding the impact of these items, noninterest expense increased $18 million, or 1 percent, in support of business growth.

The effective tax rate was 16.3 percent for the fourth quarter of 2018 compared with 15.7 percent for the third quarter, and 16.8 percent for full year 2018. The federal statutory tax rate was lowered to 21.0 percent effective January 1, 2018. Fourth quarter 2017 included an income tax benefit recognized as a result of federal tax legislation and was primarily attributable to revaluation of net deferred tax liabilities at the lower statutory tax rate.

CONSOLIDATED BALANCE SHEET REVIEW

Average total assets were $383.1 billion in the fourth quarter of 2018, an increase of 1 percent compared with $377.9 billion in the third quarter and 2 percent compared with $376.8 billion in the fourth quarter of 2017. Higher average loans, investment securities and short-term investments were partially offset by lower interest-earning deposits with banks in both comparisons. Total assets were $382.3 billion at December 31, 2018, $380.1 billion at September 30, 2018 and $380.8 billion at December 31, 2017.

 

 

Average loans for the fourth quarter of 2018 increased $2.6 billion compared with the third quarter. Average commercial lending balances grew $2.3 billion reflecting seasonal growth in PNC's multifamily agency warehouse lending within the real estate business and loan growth across the corporate banking, business credit and equipment finance businesses. Average consumer lending balances increased $.3 billion due to growth in residential mortgage, credit card, auto and unsecured installment loans partially offset by lower home equity and education loans. Total loans at December 31, 2018 grew $3.2 billion compared with September 30, 2018. Commercial lending balances increased $2.8 billion and consumer lending balances increased $.4 billion.

Fourth quarter 2018 average and period end loans increased $4.8 billion and $5.8 billion, respectively, compared with fourth quarter 2017 driven by growth in both commercial and consumer lending balances.

 

 

Average investment securities for the fourth quarter of 2018 increased $1.4 billion and period end balances increased $1.9 billion compared with the third quarter due to net purchase activity, primarily in US Treasury securities. Fourth quarter 2018 average and period end investment securities increased $7.9 billion and $6.6 billion, respectively, compared with the fourth quarter of 2017. Net unrealized losses on available for sale securities were $.1 billion at December 31, 2018 compared with net unrealized losses of $.7 billion at September 30, 2018 and net unrealized gains of $.4 billion at December 31, 2017.

Average balances held with the Federal Reserve Bank decreased to $16.4 billion for the fourth quarter of 2018 from $18.8 billion in the third quarter and $25.3 billion in the fourth quarter of 2017 as investment of liquidity continued. Balances held with the Federal Reserve at December 31, 2018 were $10.5 billion at December 31, 2018, $19.6 billion at September 30, 2018 and $28.3 billion at December 31, 2017. The lower balance at year end 2018 reflected short-term investments in resale agreements of $6.9 billion at December 31, 2018, included in other assets on the balance sheet.

 

 

Average deposits for the fourth quarter of 2018 increased $4.0 billion compared with the third quarter reflecting seasonal growth in commercial deposits. Noninterest-bearing balances decreased primarily due to the shift of commercial deposits to interest-bearing as deposit rates have risen. Deposits increased $3.0 billion at December 31, 2018 compared with September 30, 2018 as higher consumer interest-bearing deposits reflected a seasonal increase in balances at year end. Fourth quarter 2018 average and period end deposits increased $5.0 billion and $2.8 billion, respectively, compared with fourth quarter 2017 driven by overall deposit and customer growth.

 

 

Average borrowed funds for the fourth quarter of 2018 decreased $1.1 billion compared with the third quarter due to lower bank notes and senior debt and Federal Home Loan Bank borrowings partially offset by higher subordinated debt. Borrowed funds at December 31, 2018 declined $.5 billion compared with September 30, 2018 as lower bank notes and senior debt were partially offset by higher Federal Home Loan Bank borrowings reflecting short-term issuances late in the fourth quarter. Fourth quarter 2018 average borrowed funds increased $.7 billion compared with fourth quarter 2017 due to higher Federal Home Loan Bank borrowings and repurchase agreements partially offset by lower bank notes and senior debt. Borrowed funds at December 31, 2018 declined $1.7 billion compared with December 31, 2017 primarily due to lower bank notes and senior debt.

 

 

PNC maintained a strong capital position. Common shareholders' equity at December 31, 2018 increased $.6 billion compared with September 30, 2018 due to fourth quarter net income partially offset by share repurchases and dividends, and to an improvement in accumulated other comprehensive loss related to lower net unrealized securities losses.

PNC returned $1.2 billion of capital to shareholders in the fourth quarter of 2018 through repurchases of 6.1 million common shares for $.8 billion and dividends on common shares of $.4 billion. In November 2018, PNC announced an increase to authorized repurchases of up to $900 million in common shares through the end of the second quarter of 2019. This was in addition to the share repurchase programs of up to $2.0 billion previously announced for this period. These programs include repurchases of up to $.3 billion related to stock issuances under employee benefit plans. For the full year 2018, PNC returned $4.4 billion of capital to shareholders through repurchases of 19.9 million common shares for $2.8 billion and dividends on common shares of $1.6 billion.

On January 3, 2019, the PNC board of directors declared a quarterly cash dividend on common stock of 95 cents per share effective with the February 5, 2019 dividend payment date.

The Basel III common equity Tier 1 capital ratio, which includes the full phase-in of all Basel III adjustments, became effective for PNC as of January 1, 2018. The ratio for December 31, 2017 was calculated on the same basis. These ratios were 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 fourth quarter of 2018 remained strong. Provision for credit losses for the fourth quarter increased $60 million compared with the third quarter. The provision for commercial loans increased reflecting portfolio growth and a benefit from lower specific reserves in the third quarter. The provision for consumer loans increased modestly compared with the third quarter as a higher provision for auto loans was partially offset by lower home equity and credit card loan provisions.

Nonperforming assets at December 31, 2018 decreased $17 million compared with September 30, 2018 due to lower other real estate owned and foreclosed assets. Nonperforming loans were stable reflecting lower nonperforming home equity and residential mortgage loans offset by higher nonperforming commercial loans. Nonperforming assets decreased $227 million compared with December 31, 2017 as a result of lower nonperforming commercial and commercial real estate loans, lower other real estate owned and foreclosed assets, and lower nonperforming consumer loans. Nonperforming assets to total assets were .47 percent at December 31, 2018, .48 percent at September 30, 2018 and .53 percent at December 31, 2017.

Overall delinquencies at December 31, 2018 increased $57 million, or 4 percent, compared with September 30, 2018. Accruing loans 30 to 59 days past due increased $34 million due to higher equipment lease financing and commercial loan delinquencies partially offset by lower government insured education and home equity loan delinquencies. Accruing loans past due 60 to 89 days increased $13 million and accruing loans past due 90 days or more increased $10 million.

Net charge-offs for the fourth quarter of 2018 increased $16 million compared with the third  quarter primarily attributable to higher auto loan net charge-offs related in part to Hurricane Florence. Net charge-offs for the fourth quarter of 2018 decreased $16 million compared with the fourth quarter of 2017 due to lower commercial lending net charge-offs reflecting fourth quarter 2017 charge-offs of certain commercial purchased impaired loans partially offset by higher consumer loan net charge-offs. Net charge-offs for the fourth quarter of 2018 were .19 percent of average loans on an annualized basis compared with .16 percent for the third quarter and .22 percent for the fourth quarter of 2017.

The allowance for loan and lease losses to total loans was 1.16 percent at both December 31, 2018 and September 30, 2018 and 1.18 percent at December 31, 2017. The allowance to nonperforming loans was 155 percent at December 31, 2018, 153 percent at September 30, 2018 and 140 percent at December 31, 2017.

 

 

In the fourth quarter of 2018, as a result of updating internal management reporting processes relating to segment reporting disclosures, certain noninterest expenses and fourth quarter 2017 net income tax benefits that were previously recorded within "Other, including BlackRock" were reclassified to reportable segments. Fourth quarter 2017 net income tax benefits were reclassified within that period. Noninterest expense reclassifications were retrospectively applied to prior periods presented.

 

 

Retail Banking earnings for the fourth quarter of 2018 increased in both comparisons. Noninterest income increased compared with the third quarter as a result of derivative fair value adjustments related to Visa Class B common shares, higher consumer service fees, including seasonally higher credit card and merchant services fees and brokerage revenue, and higher service charges on deposits. These increases were partially offset by a negative adjustment for residential mortgage servicing rights valuation, net of economic hedge, driven by a decline in long-term interest rates at quarter end. Noninterest income increased compared with fourth quarter 2017 due to $248 million of fourth quarter 2017 negative derivative fair value adjustments related to Visa Class B common shares compared with positive adjustments of $42 million in the fourth quarter of 2018, as well as a $71 million fourth quarter 2017 negative adjustment for residential mortgage servicing rights fair value assumption updates compared with a $19 million negative valuation adjustment in the fourth quarter of 2018. Additionally, the comparison to fourth quarter 2017 reflected growth in consumer service fees and service charges on deposits. Provision for credit losses decreased compared with fourth quarter 2017 primarily due to lower home equity and credit card loan provisions. Noninterest expense decreased in the comparison with the third quarter reflecting timing of technology costs and the fourth quarter elimination of the quarterly FDIC deposit insurance surcharge assessment partially offset by increased marketing related to the national retail digital strategy. Noninterest expense declined compared with fourth quarter 2017 due to lower personnel and branch occupancy costs, lower legal expense and the reduced FDIC assessment partially offset by higher noncredit losses, equipment expense and marketing.

• Average loans increased 1 percent compared with the third quarter and 2 percent compared with fourth quarter 2017 due to growth in residential mortgage, auto, credit card and unsecured installment loans partially offset by lower home equity and education loans.
• Average deposits grew 2 percent compared with fourth quarter 2017 as higher savings and demand deposits were partially offset by lower money market and certificate of deposits.
• Net charge-offs were $112 million for the fourth quarter of 2018 compared with $96 million in the third quarter and $99 million in the fourth quarter of 2017.
• Residential mortgage loan origination volume was $1.6 billion for the fourth quarter of 2018 compared with $2.1 billion for the third quarter and $2.4 billion for the fourth quarter of 2017. Approximately 67 percent of fourth quarter 2018 volume was for home purchase transactions compared with 72 percent for the third quarter and 50 percent for the fourth quarter of 2017.
• The third party residential mortgage servicing portfolio was $125 billion at December 31, 2018 compared with $127 billion at both September 30, 2018 and December 31, 2017. Residential mortgage loan servicing acquisitions were $2 billion for fourth quarter 2018 compared with $6 billion for the third quarter and $1 billion for the fourth quarter of 2017.
• Approximately 67 percent of consumer customers used non-teller channels for the majority of their transactions during the fourth quarter of 2018 compared with 66 percent in the third quarter and 63 percent in the fourth quarter of 2017.
• Deposit transactions via ATM and mobile channels were 55 percent of total deposit transactions in the fourth and third quarters of 2018 compared with 54 percent in the fourth quarter of 2017.

 

 

Corporate & Institutional Banking earnings for the fourth quarter of 2018 increased compared with the third quarter of 2018 and decreased compared with the fourth quarter of 2017. Fourth quarter 2017 earnings included an income tax benefit of $.4 billion as a result of federal tax legislation. Noninterest income increased over the third quarter primarily due to higher gains on asset sales and higher loan syndication and other fees partially offset by lower merger and acquisition advisory fees. Noninterest income increased compared with the fourth quarter of 2017 primarily due to higher gains on asset sales and growth in treasury management product revenue partially offset by lower revenue from commercial mortgage banking activities. Provision for credit losses in the fourth quarter of 2018 reflected portfolio growth and was a benefit in both the third quarter of 2018 and fourth quarter of 2017. Noninterest expense decreased compared with the third quarter primarily due to lower variable compensation.

• Average loans increased 2 percent compared with the third quarter of 2018 and 3 percent over the fourth quarter of 2017 due to growth across PNC's corporate banking, business credit and equipment finance businesses. The comparison with the third quarter also benefited from seasonal growth in multifamily agency warehouse lending within the real estate business.
• Average deposits increased 4 percent compared with the third quarter reflecting seasonal growth, and increased 3 percent compared with the fourth quarter of 2017. In both comparisons, higher interest-bearing deposits were partially offset by lower noninterest-bearing demand deposits.
• Net charge-offs were $2 million in the fourth quarter of 2018 compared with $1 million in the third quarter and $29 million in the fourth quarter of 2017, which included charge-offs of certain commercial purchased impaired loans.

 

 

Asset Management Group earnings for the fourth quarter of 2018 decreased compared with both the third quarter of 2018 and the fourth quarter of 2017. Noninterest income declined compared with the third quarter primarily due to decreases in the average equity markets. Noninterest income decreased compared with the fourth quarter of 2017 as a result of changes in asset mix and valuation losses on certain equity investments partially offset by higher average equity markets. Noninterest expense increased compared with the third quarter of 2018 and decreased compared with the fourth quarter of 2017.

• Client assets under administration at December 31, 2018 include discretionary client assets under management of $148 billion and nondiscretionary client assets under administration of $124 billion.
• Discretionary client assets under management decreased $11 billion compared with September 30, 2018 and $3 billion compared with December 31, 2017 primarily attributable to equity market decreases.

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 and certain trading activities, discontinued consumer loan portfolios, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, exited businesses, integration costs, 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 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 (877) 237-6365 and (303) 223-0113 (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 2018 earnings release, 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 21899468 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 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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