PITTSBURGH, July 15, 2016 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported net income of $989 million, or $1.82 per diluted common share, for the second quarter of 2016 compared with net income of $943 million, or $1.68 per diluted common share, for the first quarter of 2016 and net income of $1.044 billion, or $1.88 per diluted common share, for the second quarter of 2015.

"We had a good second quarter against a backdrop of global uncertainty," said William S. Demchak, chairman, president and chief executive officer. "We grew fee income, along with average loans and deposits, and we announced plans to return additional capital to our shareholders in the coming year. In the wake of the Brexit vote, as lower interest rates weigh on future performance, we remain focused on executing against our strategic priorities to create long-term shareholder value without compromising our risk profile or balance sheet."

Income Statement Highlights

• Second quarter results reflected higher fee income, increased noninterest expense driven by business activity, lower provision for credit losses, and growth in average loans and deposits compared with the first quarter of 2016.
• Net interest income of $2.1 billion for the second quarter decreased $30 million, or 1 percent, compared with the first quarter mainly from a decline in purchase accounting accretion.
• Noninterest income of $1.7 billion for the second quarter increased $159 million, or 10 percent, compared with the first quarter primarily due to strong growth in fee income from higher client activity and seasonality.
• Noninterest expense increased $79 million, or 3 percent, to $2.4 billion for the second quarter compared with the first quarter as a result of higher business activity as PNC remained focused on disciplined expense management.
  •  Provision for credit losses declined to $127 million for the second quarter from $152 million in the first quarter as overall credit quality remained stable.

Balance Sheet Highlights

• Loans grew $1.6 billion, or 1 percent, to $209.1 billion at June 30, 2016 compared with March 31, 2016.
  • Total commercial lending increased $1.9 billion, or 1 percent, primarily to large corporate customers in PNC's corporate banking business and from growth in real estate loans.
  • Total consumer lending decreased $.3 billion due to lower home equity and education loans partially offset by growth in auto and credit card loans.
• Overall credit quality in the second quarter remained stable with the first quarter.
  • Nonperforming assets of $2.5 billion at June 30, 2016 decreased 1 percent compared with March 31, 2016.
  • Net charge-offs were $134 million for the second quarter and $149 million for the first quarter.
  • The energy related loan portfolio weakened slightly, but at a slower pace compared with the first quarter.
• Deposits were $249.8 billion at June 30, 2016, a decrease of $.6 billion from March 31, 2016.
  • Average deposits increased $1.5 billion, or 1 percent, in the second quarter compared with the first quarter reflecting growth in consumer deposits.
• Investment securities decreased $.8 billion, or 1 percent, in the second quarter to $71.8 billion at June 30, 2016 compared with March 31, 2016.
• PNC maintained a strong liquidity position.
  • The Liquidity Coverage Ratio at June 30, 2016 exceeded 100 percent for both PNC and PNC Bank, N.A., above the minimum phased-in requirement of 90 percent in 2016.
• PNC completed common stock repurchase programs for the five quarter period that ended in the second quarter of 2016.
  • PNC returned a total of $4.0 billion of capital to shareholders through repurchases of 29.9 million common shares for $2.7 billion and dividends on common shares of $1.3 billion over the five quarter period.
  • Second quarter 2016 repurchases were 6.1 million common shares for $.5 billion and dividends on common shares were $.3 billion.
  • In June 2016 PNC announced share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2016, including repurchases of up to $.2 billion related to employee benefit plans.
  • PNC's board of directors raised the quarterly dividend on common stock to 55 cents per share, an increase of 4 cents per share, or 8 percent, effective with the August dividend.
• PNC maintained a strong capital position.
  • Transitional Basel III common equity Tier 1 capital ratio was an estimated 10.6 percent at both June 30, 2016 and March 31, 2016, calculated using the regulatory capital methodologies applicable to PNC during 2016.
  • Pro forma fully phased-in Basel III common equity Tier 1 capital ratio was an estimated
    10.2 percent at June 30, 2016 and 10.1 percent at March 31, 2016 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. Reference to core net interest income, a non-GAAP financial measure, 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, 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 second quarter of 2016 increased $129 million compared with the first quarter driven by higher noninterest income attributable to fee income growth. Total revenue declined $72 million compared with the second quarter of 2015 due to lower other noninterest income partially offset by higher fee income and higher net interest income.

Net interest income for the second quarter of 2016 decreased $30 million compared with the first quarter and increased $16 million compared with the second quarter of 2015. The decline from first quarter was primarily due to lower purchase accounting accretion as well as slightly lower core net interest income. The increase over second quarter 2015 resulted from higher core net interest income partially offset by lower purchase accounting accretion. Core net interest income for second quarter 2016 decreased $8 million compared with the first quarter due to lower securities yields and higher borrowing costs partially offset by loan growth, and increased $63 million compared with second quarter 2015 as higher loan and securities balances and higher loan yields were partially offset by higher borrowing costs and lower securities yields.

The net interest margin was 2.70 percent for the second quarter of 2016 compared with 2.75 percent for the first quarter and 2.73 percent for the second quarter of 2015. The decrease in the margin in both comparisons was driven by a lower benefit from purchase accounting accretion, partially offset in the second quarter 2015 comparison by the impact of lower balances on deposit with the Federal Reserve Bank. 

Noninterest income for the second quarter of 2016 increased $159 million compared with the first quarter primarily driven by strong growth in fee income. Asset management revenue increased $36 million reflecting higher earnings from PNC's equity investment in BlackRock and stronger equity markets. Consumer service fees increased $17 million as a result of higher client activity and seasonal increases in payment-related product activity including debit card, credit card and merchant services. Corporate service fees grew $78 million primarily due to higher merger and acquisition advisory fees and higher loan syndication fees. Residential mortgage banking noninterest income increased $65 million driven by net hedging gains on mortgage servicing rights of $35 million compared with net hedging losses of $8 million in the first quarter. Additionally, loan sales revenue grew on higher production volume. Other noninterest income declined $42 million and included negative valuation adjustments of $51 million primarily associated with nonconforming investments under the Volcker Rule provisions of the Dodd-Frank Act. Other income also reflected net gains on sales of Visa Class B common shares of $31 million in second quarter 2016 compared with $32 million in the first quarter. Net gains consist of gains on Visa sales reduced by derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares in connection with all prior sales. The fair value adjustments included the impact of a June 2016 appeals court decision that overturned a previously approved settlement of pending Visa litigation.

Noninterest income for the second quarter of 2016 decreased $88 million compared with the second quarter of 2015 as higher fee income was more than offset by lower other income. Asset management revenue declined $39 million reflecting a second quarter 2015 trust settlement of $30 million. Corporate service fees increased $34 million due to higher merger and acquisition advisory fees and higher loan syndication fees. Fee income growth was also reflected in consumer service fees, service charges on deposits and residential mortgage revenue. Other noninterest income decreased $111 million reflecting valuation adjustments on private equity investments and lower net gains on sales of Visa Class B common shares, which were $79 million in second quarter 2015.

Noninterest expense for the second quarter of 2016 increased $79 million compared with the first quarter reflecting higher variable compensation costs associated with higher business activity and the timing of marketing activities. These increases were partially offset by release of residential mortgage foreclosure-related reserves of $24 million in second quarter 2016. PNC remained focused on disciplined expense management while continuing to invest in technology and business infrastructure.

Noninterest expense for the second quarter of 2016 decreased $6 million compared with the second quarter of 2015 as higher employee benefits expense for medical and pension plans was more than offset by second quarter 2016 release of residential mortgage foreclosure-related reserves and lower legal accruals. Benefits of PNC's effective expense management were reflected in the year-over-year quarter comparison.

The effective tax rate was 24.3 percent for the second quarter of 2016, 23.5 percent for the first quarter of 2016 and 28.2 percent for the second quarter of 2015. The lower effective tax rate in second quarter 2016 compared with second quarter 2015 was primarily attributable to increased tax credit investments.

CONSOLIDATED BALANCE SHEET REVIEW
Total assets were $361.3 billion at June 30, 2016 compared with $361.0 billion at March 31, 2016 and $353.9 billion at June 30, 2015. Assets grew 2 percent compared with June 30, 2015 primarily due to increases in investment securities and loans partially offset by a decrease in deposits maintained with the Federal Reserve Bank.

Total loans grew $1.6 billion as of June 30, 2016 compared with March 31, 2016. Commercial lending increased $1.9 billion in the second quarter primarily to large corporate customers in PNC's corporate banking business and from growth in real estate loans. Consumer lending decreased $.3 billion reflecting lower home equity and education loans partially offset by growth in auto and credit card loans. Runoff in the non-strategic portfolio of residential mortgage and brokered home equity loans contributed to the decrease in consumer lending. 

Average loans increased $1.1 billion in the second quarter of 2016 compared with the first quarter. Average commercial lending balances increased $1.7 billion from growth in commercial and commercial real estate loans, and average consumer lending balances decreased $.6 billion.

Second quarter 2016 period end and average loans increased $3.9 billion and $2.9 billion, respectively, compared with second quarter 2015 driven by commercial real estate and commercial loan growth partially offset by a decrease in consumer loans, including runoff in the non-strategic portfolio.

Investment securities balances at June 30, 2016 decreased $.8 billion compared with March 31, 2016 and average balances for the second quarter declined $.1 billion compared with the first quarter. Second quarter 2016 period end and average investment securities increased $10.4 billion and $10.8 billion, respectively, compared with second quarter 2015 primarily in agency residential mortgage-backed and Treasury securities. The available for sale investment securities balance included a net unrealized pretax gain of $1.3 billion at June 30, 2016 compared with $1.0 billion at March 31, 2016 and $.8 billion at June 30, 2015, representing the difference between fair value and amortized cost. The increase in the unrealized pretax gain in both comparisons was due to lower market interest rates.

Interest-earning deposits with banks, primarily with the Federal Reserve Bank, were $26.8 billion at June 30, 2016, a decrease of $2.7 billion compared with March 31, 2016. Average balances of $26.5 billion for the second quarter increased $.9 billion over the first quarter. Second quarter 2016 period end interest-earning deposits with banks declined $7.2 billion compared with second quarter 2015, and average balances decreased $5.9 billion.

Total deposits at June 30, 2016 decreased $.6 billion compared with March 31, 2016 as growth in consumer deposits was more than offset by seasonally lower commercial deposits. Average deposits grew $1.5 billion in the second quarter of 2016 compared with the first quarter driven by growth in average interest-bearing demand deposits. Additionally, average savings deposits increased reflecting in part a shift from money market deposits to relationship-based savings products. Period end and average second quarter 2016 deposits increased $10.1 billion and $9.8 billion, respectively, compared with second quarter 2015 due to overall strong deposit growth. 

Borrowed funds at June 30, 2016 increased $.4 billion compared with March 31, 2016 and average borrowed funds for the second quarter of 2016 were stable with the first quarter. Higher bank notes and senior debt were substantially offset by lower Federal Home Loan Bank borrowings and lower federal funds purchased and repurchase agreements. Second quarter 2016 period end borrowed funds decreased $3.7 billion and average borrowed funds declined $3.5 billion compared with second quarter 2015 primarily due to lower commercial paper and Federal Home Loan Bank borrowings partially offset by higher bank notes and senior debt.

PNC maintained a strong capital position. Common shareholders' equity increased compared with March 31, 2016 due to growth in retained earnings and higher accumulated other comprehensive income primarily related to net unrealized securities gains. These increases were partially offset by share repurchases. 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 2016 and 2015 using the standardized approach. The pro forma ratios were also calculated based on the standardized approach. See Capital Ratios in the Consolidated Financial Highlights.

PNC completed common stock repurchase programs for the five quarter period that ended in the second quarter of 2016. PNC returned a total of $4.0 billion of capital to shareholders through repurchases of 29.9 million common shares for $2.7 billion and dividends on common shares of $1.3 billion over the five quarter period. Second quarter 2016 repurchases were 6.1 million common shares for $.5 billion and dividends on common shares were $.3 billion.

In June 2016 PNC announced share repurchase programs of up to $2.0 billion for the four-quarter period beginning in the third quarter of 2016. These programs include repurchases of up to $.2 billion during this four-quarter period related to stock issuances under employee benefit plans. On July 7, 2016, the PNC board of directors raised the quarterly cash dividend on common stock to 55 cents per share, an increase of 4 cents per share, or 8 percent, effective with the August 5, 2016 dividend payment. These capital actions are consistent with PNC's capital plan which was accepted by the Board of Governors of the Federal Reserve System in June 2016.

Overall credit quality for the second quarter of 2016 remained stable with the first quarter. Provision for credit losses for second quarter 2016 was $127 million, a decrease of $25 million compared with the first quarter and an increase of $81 million over second quarter 2015. The second quarter 2016 provision included $48 million for loans in the oil, gas and coal sectors compared with $80 million in the first quarter.

Nonperforming assets at June 30, 2016 decreased $37 million compared with March 31, 2016 due to lower home equity and residential real estate nonperforming loans and lower other real estate owned partially offset by an increase in nonperforming commercial loans. Included in total nonperforming loans at June 30, 2016 were $293 million of nonperforming loans in the oil, gas and coal sectors compared with $301 million at March 31, 2016. Nonperforming assets declined $63 million from second quarter 2015 reflecting improvements in the consumer lending and commercial real estate nonperforming loan portfolios offset by higher commercial nonperforming loans reflecting energy related credits. Nonperforming assets to total assets were .70 percent at June 30, 2016 compared with .71 percent at March 31, 2016 and .73 percent at June 30, 2015.

Overall delinquencies improved as of June 30, 2016 compared with March 31, 2016, decreasing $36 million, or 2 percent. Accruing loans past due 90 days or more declined $28 million and the 30 to 59 day category decreased $42 million, or 8 percent. Accruing loans past due 60 to 89 days increased $34 million, or 16 percent, primarily in commercial and commercial real estate loans.

Net charge-offs for the second quarter of 2016 decreased $15 million compared with the first quarter reflecting lower net charge-offs of $28 million for consumer lending and higher net charge-offs of $13 million for commercial lending. Included in commercial lending net charge-offs were $47 million of net charge-offs for loans in the oil, gas and coal sectors in the second quarter of 2016 compared with $25 million in the first quarter. In the comparison with second quarter 2015, net charge-offs increased $67 million due to higher commercial loan net charge-offs. Net charge-offs for the second quarter of 2016 were .26 percent of average loans on an annualized basis compared with .29 percent for the first quarter and .13 percent for the second quarter of 2015.

The allowance for loan and lease losses at June 30, 2016 decreased $26 million compared with March 31, 2016 and $587 million compared with June 30, 2015. The decline in the allowance from second quarter 2015 reflected PNC's derecognition of pooled purchased impaired 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 at December 31, 2015. The allowance to total loans was 1.28 percent at June 30, 2016, 1.31 percent at March 31, 2016 and 1.59 percent at June 30, 2015. The allowance to nonperforming loans was 119 percent at both June 30, 2016 and March 31, 2016 and 145 percent at June 30, 2015.

Retail Banking earnings for the second quarter of 2016 increased in both comparisons. Noninterest income included net gains on sales of Visa Class B common shares of $31 million in the second quarter of 2016 compared with $32 million in the first quarter and $79 million in the second quarter of 2015. Gains on Visa sales were reduced by derivative fair value adjustments related to swap agreements with purchasers of Visa Class B common shares in connection with all prior sales. Noninterest income, excluding the net Visa gains, increased $28 million over the first quarter and $22 million over second quarter 2015 primarily driven by strong growth in consumer service fees. Payment-related products including debit card, credit card, and merchant services increased in both comparisons, with seasonally higher volumes contributing to the increase over the first quarter. Provision for credit losses decreased in both comparisons due to improved credit quality. Noninterest expense increased compared with the first quarter as a result of investments in technology, higher marketing expense and higher sales-related compensation. Noninterest expense declined compared with second quarter 2015 due to lower marketing expense and lower compensation expense associated with the branch network transformation.

• Retail Banking continued to focus on the strategic priority of transforming the customer experience through transaction migration, branch network transformation and multi-channel sales and service strategies.
  • Approximately 57 percent of consumer customers used non-teller channels for the majority of their transactions during the second quarter of 2016 compared with 56 percent and 52 percent for the first quarter of 2016 and second quarter of 2015, respectively.
  • Deposit transactions via ATM and mobile channels were 48 percent of total deposit transactions in the second quarter of 2016 compared with 47 percent in the first quarter and 42 percent in the second quarter of 2015.
  • Integral to PNC's retail branch transformation strategy, approximately 18 percent of the branch network operates under the universal model, including over 100 branches converted in the second quarter of 2016. Universal branches are designed to enhance sales opportunities for branch personnel, in part by driving higher ATM and mobile deposits. PNC had a network of 2,601 branches and 8,993 ATMs at June 30, 2016.
• Average deposits grew 2 percent over the first quarter and 6 percent over the second quarter of 2015 due to higher demand deposits as well as an increase in savings deposits partially offset by lower money market deposits reflecting a shift to relationship-based savings products. Certificates of deposit declined in both comparisons from the net runoff of maturing accounts.
• Average loans decreased 3 percent compared with the second quarter of 2015 as growth in automobile and credit card loans was more than offset by lower home equity, education and commercial loans.
• Net charge-offs for the second quarter of 2016 were $75 million compared with $96 million in the first quarter and $86 million in the second quarter of 2015.

Corporate & Institutional Banking earnings for the second quarter of 2016 increased compared with the first quarter and decreased compared to the second quarter of 2015. Noninterest income increased in both comparisons primarily due to higher merger and acquisition advisory fees, corporate securities underwriting activity and loan syndication fees. Provision for credit losses decreased compared with the first quarter reflecting a lower provision for energy related loans. The provision increased compared with the second quarter of 2015 reflecting relative weakness in energy related loans and continued loan growth. Noninterest expense increased over the first quarter primarily due to higher variable compensation and other costs associated with increased business activity.

• Average loans increased 2 percent over the first quarter primarily driven by increased lending to large corporate customers in PNC's corporate banking business. Average loans increased 5 percent compared with the second quarter of 2015 due to growth in PNC's real estate business, including both commercial real estate and commercial loans.
• Average deposits decreased 2 percent from the first quarter reflecting seasonally lower balances, and declined 1 percent compared with the second quarter of 2015 due to decreases in noninterest-bearing and money market deposits, substantially offset by interest-bearing demand deposit growth.
• Net charge-offs in the second quarter of 2016 were $59 million compared with net charge-offs of $41 million in the first quarter and net recoveries of $19 million in the second quarter of 2015. Higher net charge-offs in second quarter 2016 primarily were on energy related loans.

Asset Management Group earnings for the second quarter of 2016 decreased compared with the first quarter of 2016 and the second quarter of 2015. Noninterest income increased compared with the first quarter reflecting higher average equity markets and new sales production, and decreased compared with the prior year quarter due to a $30 million trust settlement in second quarter 2015. Noninterest expense declined compared with the second quarter of 2015 primarily attributable to lower personnel expense. 

• Asset Management Group growth strategies include increasing sales sourced from other PNC lines of business, maximizing front line productivity and optimizing market presence in high opportunity markets. The business is primarily focused on growing client assets under management, building retirement capabilities and expanding product solutions for all customers.
• Client assets under administration at June 30, 2016 included discretionary client assets under management of $135 billion and nondiscretionary client assets under administration of $126 billion.
  • Discretionary client assets under management were consistent with March 31, 2016 and increased $1 billion compared with June 30, 2015 primarily attributable to equity market increases.

Residential Mortgage Banking earnings for the second quarter of 2016 increased compared with both the first quarter of 2016 and second quarter of 2015. Noninterest income increased over the linked quarter due to net hedging gains on residential mortgage servicing rights compared with net hedging losses in the first quarter, as well as higher loan sales revenue. In the comparison with second quarter 2015, higher servicing revenue was partially offset by lower loan sales revenue. Noninterest expense decreased in both comparisons as a result of release of residential mortgage foreclosure-related reserves of $24 million in second quarter 2016, partially offset in the first quarter comparison by increases in origination and servicing costs as well as higher legal accruals.

• 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 PNC's footprint markets.
• Loan origination volume in the second quarter of 2016 increased 35 percent compared with the first quarter and declined 10 percent compared with the second quarter of 2015. Approximately 48 percent of second quarter 2016 origination volume was for home purchase transactions compared with 40 percent in the first quarter and 50 percent in the second quarter of 2015.
• Loan servicing acquisitions were $6 billion in the second quarter of 2016, $5 billion in the first quarter and $6 billion in the second quarter of 2015.
  

The Non-Strategic Assets Portfolio consists of 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 lending portfolio. The business activity of this segment is to manage the liquidation of the portfolios while maximizing the value and mitigating risk.

• Noninterest income decreased from the first quarter primarily due to a settlement and release of reserves in the first quarter related to home equity repurchase obligations.
• Provision for credit losses increased in both comparisons driven by reduced cash flow expectations on certain purchased impaired loans.
• Net charge-offs were in a net recovery position of $2 million for the second quarter of 2016 compared with net charge-offs of $8 million for the first quarter and net recoveries of $7 million for the second quarter of 2015.

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 (877) 272-3568 and (303) 223-2695 (international) and Internet access to the live audio listen-only webcast of the call is available at www.pnc.com/investorevents. PNC's second quarter 2016 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 21811415 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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