5% loan growth; 22 basis point NIM expansion; 7% positive operating leverage

PITTSBURGH, July 15, 2022 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported:

From Bill Demchak, PNC Chairman, President and Chief Executive Officer:

"PNC had a very strong second quarter. Loan growth exceeded our expectations, both net interest income and net interest margin increased meaningfully, fees rebounded and expenses remained well controlled. We're gaining traction across our expanded footprint and are confident that our capital levels and strong credit quality position us for continued success."

Income Statement Highlights

Second quarter 2022 compared with first quarter 2022

• Net income of $1.5 billion increased $67 million, or 5%, driven by growth in pretax, pre-provision earnings of 23%.
• Total revenue of $5.1 billion increased $424 million, or 9%, due to higher net interest income and noninterest income.
• Net interest income of $3.1 billion increased $247 million, or 9%, driven by higher yields on interest earning assets and increased loan balances, partially offset by higher funding costs.
• Net interest margin of 2.50% increased 22 basis points due to higher yields on interest earning assets.
• Noninterest income of $2.1 billion increased $177 million, or 9%.
• Fee income of $1.9 billion increased $211 million, or 13%, reflecting higher capital markets related revenue, increased card and cash management fees and higher lending and deposit services revenue.
• Other noninterest income of $177 million decreased $34 million, or 16%, and included negative Visa Class B fair value adjustments of $16 million related to litigation escrow funding and derivative valuation changes.
• Noninterest expense of $3.2 billion increased $72 million, or 2%, driven by increased business activity, annual employee merit increases and higher marketing spend.
• Provision for credit losses was $36 million in the second quarter. The first quarter of 2022 included a provision recapture of $208 million. 
• The effective tax rate was 18.5% for the second quarter and 17.3% for the first quarter.

Balance Sheet Highlights

Second quarter 2022 compared with first quarter 2022 or June 30, 2022 compared with March 31, 2022

• Average loans of $304.8 billion increased $14.1 billion, or 5%.
• Average commercial loans of $207.6 billion grew $12.0 billion driven primarily by growth in PNC's corporate banking and business credit businesses of $11.1 billion and $1.7 billion, respectively, partially offset by PPP loan forgiveness.
• Average consumer loans of $97.2 billion increased $2.1 billion reflecting higher residential mortgage and home equity loans, partially offset by lower auto loans.
• Credit quality performance:
• Delinquencies of $1.5 billion decreased $188 million, or 11%, due to both lower consumer and commercial delinquencies, which included the resolution of BBVA USA conversion-related administrative and operational delays.
• Total nonperforming loans of $2.0 billion decreased $252 million, or 11%.
• Net loan charge-offs of $83 million decreased $54 million.
• The allowance for credit losses to total loans was 1.65% at June 30, 2022 compared with 1.76% at March 31, 2022.
• Average deposits of $446.5 billion decreased $6.8 billion, driven by lower commercial deposits.
• Deposits at June 30, 2022 of $440.8 billion decreased $9.4 billion as a result of lower consumer and commercial deposits.
• Average investment securities of $134.7 billion grew $0.8 billion, or 1%.
• Average Federal Reserve Bank balances of $39.3 billion decreased $23.0 billion, driven by higher loans outstanding and lower deposits.
• PNC maintained strong capital and liquidity positions.
• On July 1, 2022, the PNC board of directors declared a quarterly cash dividend on common stock of $1.50 per share payable on August 5, 2022.
• PNC returned $1.4 billion of capital to shareholders through $737 million of common share repurchases, representing 4.3 million shares, and $627 million of dividends on common shares.
• The Basel III common equity Tier 1 capital ratio was an estimated 9.6% at June 30, 2022 and 9.9% at March 31, 2022.
• The Liquidity Coverage Ratio at June 30, 2022 for PNC exceeded the regulatory minimum requirement.

 

Second quarter 2022 net income of $1.5 billion, or $3.39 per diluted common share, included integration costs of $14 million pretax resulting from the acquisition of BBVA USA. Excluding the impact of integration costs, adjusted diluted earnings per common share was $3.42. Financial results for the second quarter of 2022 included the full quarter benefit of the June 1, 2021 acquisition of BBVA USA.

The Consolidated Financial Highlights accompanying this news release include additional information regarding reconciliations of non-GAAP financial measures to reported (GAAP) amounts. This information supplements results as reported in accordance with GAAP and should not be viewed in isolation from, or as a substitute for, GAAP results. Effective for the first quarter of 2022, the presentation of noninterest income has been recategorized. Fee income, a non-GAAP financial measure, refers to noninterest income in the following categories: asset management and brokerage, capital markets related, card and cash management, lending and deposit services and residential and commercial mortgage. See a description of each updated noninterest income revenue category in PNC's first quarter 2022 Form 10-Q. All periods presented herein reflect this change. Information in this news release, including the financial tables, is unaudited.

 

Total revenue for the second quarter of 2022 increased $424 million compared with the first quarter of 2022, reflecting higher net interest income and noninterest income. Compared with the second quarter of 2021, total revenue increased $449 million as a result of higher net interest income.

Net interest income of $3.1 billion for the second quarter of 2022 increased $247 million compared to the first quarter of 2022, driven by higher yields on interest earning assets and increased loan balances, partially offset by higher funding costs. In comparison with the second quarter of 2021, net interest income increased $470 million as a result of higher interest earning asset balances and yields, partially offset by higher funding costs.

The net interest margin was 2.50% in the second quarter of 2022, increasing 22 basis points and 21 basis points compared with the first quarter of 2022 and the second quarter of 2021, respectively. In both comparisons the increase was primarily due to higher yields on interest earning assets.

 

Noninterest income for the second quarter of 2022 increased $177 million compared with the first quarter of 2022. The second quarter of 2022 included $5 million of integration costs compared to $16 million in the first quarter of 2022. Asset management and brokerage fees decreased $12 million primarily as a result of lower average equity markets. Capital markets related revenue increased $157 million driven by higher merger and acquisition advisory fees. Card and cash management revenue grew $51 million due to higher consumer spending and increased treasury management product revenue. Lending and deposit services increased $13 million and included lower integration related fee waivers. Residential and commercial mortgage revenue increased $2 million as higher revenue from commercial mortgage banking activities was largely offset by lower residential mortgage loan sales revenue. Other noninterest income decreased $34 million, and included negative Visa Class B fair value adjustments of $16 million related to litigation escrow funding and derivative valuation changes. The first quarter of 2022 included a positive Visa Class B derivative fair value adjustment of $4 million.

Noninterest income for the second quarter of 2022 decreased $21 million compared with the second quarter of 2021, as the benefit of BBVA USA and higher merger and acquisition advisory fees were more than offset by a decline in other noninterest income and lower residential and commercial mortgage banking activities. The decrease in other noninterest income included the impact of lower private equity revenue. Integration costs were $10 million in the second quarter of 2021.

 

Noninterest expense for the second quarter of 2022 increased $72 million compared with the first quarter of 2022, driven by increased business activity, annual employee merit increases and higher marketing spend. These increases were partially offset by seasonally lower occupancy expense and lower other expense as PNC continued to focus on expense management. Integration expenses were $9 million in the second quarter of 2022 and $15 million in the first quarter of 2022.

Noninterest expense increased $194 million in comparison with the second quarter of 2021, primarily due to the addition of operating expenses from BBVA USA and increased business activity, partially offset by lower integration expenses. Integration expenses were $101 million in the second quarter of 2021.

The effective tax rate was 18.5% for the second quarter of 2022, 17.3% for the first quarter of 2022 and 16.1% for the second quarter of 2021.

CONSOLIDATED BALANCE SHEET REVIEW

Average total assets were $544.0 billion in the second quarter of 2022 compared with $550.1 billion in the first quarter of 2022 and $504.4 billion in the second quarter of 2021. In comparison to the second quarter of 2021, the increase was primarily driven by the acquisition of BBVA USA on June 1, 2021.

 

Average loans for the second quarter of 2022 were $304.8 billion, increasing $14.1 billion compared to the first quarter of 2022. Average commercial loans increased $12.0 billion driven primarily by growth in PNC's corporate banking and business credit businesses of $11.1 billion and $1.7 billion, respectively, partially offset by PPP loan forgiveness. Average consumer loans of $97.2 billion increased $2.1 billion reflecting higher residential mortgage and home equity loans, partially offset by lower auto loans.

Average loans for the second quarter of 2022 increased $49.2 billion compared to the second quarter of 2021, reflecting the acquisition of BBVA USA and commercial loan growth, partially offset by PPP loan forgiveness.

Second quarter 2022 average and period-end PPP loans outstanding were $1.3 billion and $1.0 billion, respectively.

 

Average investment securities for the second quarter of 2022 were $134.7 billion, increasing $0.8 billion from the first quarter of 2022 reflecting net purchases, primarily of agency residential mortgage-backed securities. Average investment securities increased $26.2 billion from the second quarter of 2021 due to the addition of BBVA USA and net purchase activity.

Investment securities at June 30, 2022 of $132.7 billion increased $0.3 billion compared to  March 31, 2022, as net purchases during the quarter were mostly offset by net unrealized losses, reflecting the impact of higher interest rates. During the second quarter of 2022, PNC transferred $63.4 billion of available for sale securities, net of $4.3 billion of unrealized losses, to held to maturity securities. Net unrealized losses on available for sale securities were $3.0 billion at June 30, 2022, compared with net unrealized losses of $4.3 billion at March 31, 2022 and net unrealized gains of $2.0 billion at June 30, 2021.

Average Federal Reserve Bank balances for the second quarter of 2022 were $39.3 billion, decreasing $23.0 billion from the first quarter of 2022, driven by higher loans outstanding and lower deposits. Federal Reserve Bank balances at June 30, 2022 were $28.0 billion. Average Federal Reserve Bank balances decreased $39.0 billion from the second quarter of 2021, reflecting higher loan and securities balances, partially offset by higher deposits.

 

Average deposits for the second quarter of 2022 were $446.5 billion, decreasing $6.8 billion compared with the first quarter of 2022, driven by lower commercial deposits reflecting deposit outflows and seasonal declines. Compared with the second quarter of 2021, average deposits increased $44.8 billion primarily due to the acquisition of BBVA USA.

Deposits at June 30, 2022 of $440.8 billion, decreased $9.4 billion from March 31, 2022 as a result of lower consumer and commercial deposits, reflecting seasonal declines, deposit outflows and higher consumer spending. Compared to June 30, 2021, deposits decreased $12.1 billion, as commercial deposit decreases were partially offset by consumer deposit growth.

 

Average borrowed funds of $35.7 billion in the second quarter of 2022 increased $5.4 billion and $1.6 billion compared with the first quarter of 2022 and second quarter of 2021, respectively, driven by increased Federal Home Loan Bank borrowings. In comparison to the second quarter of 2021, the increase was partially offset by lower bank notes and senior debt.

 

PNC maintained a strong capital position. Common shareholders' equity at June 30, 2022 decreased $2.6 billion from March 31, 2022 as the benefit of second quarter net income was more than offset by the decline in accumulated other comprehensive income, as well as share repurchases and dividends paid in the second quarter.

Accumulated other comprehensive income at June 30, 2022 decreased $2.7 billion and $9.9 billion from March 31, 2022 and June 30, 2021, respectively. In both comparisons the decrease reflected the negative impact of higher interest rates on net unrealized losses on securities and swaps.

In the second quarter of 2022, PNC returned $1.4 billion of capital to shareholders through $737 million of common share repurchases, representing 4.3 million shares, and $627 million of dividends on common shares. Consistent with the Stress Capital Buffer (SCB) framework, which allows for capital return in amounts in excess of the SCB minimum levels, our board of directors recently authorized a new repurchase framework under the previously approved repurchase program of up to 100 million common shares, of which approximately 59% were still available for repurchase at June 30, 2022. This framework and our capital flexibility allow for the continuation of our recent quarterly average share repurchase levels in dollars as well as the ability to increase those levels should conditions warrant. PNC's SCB for the four-quarter period beginning October 1, 2022 is 2.9%.

On July 1, 2022, the PNC board of directors declared a quarterly cash dividend on common stock of $1.50 per share payable on August 5, 2022.

For information regarding PNC's Basel III capital ratios, see Capital Ratios in the Consolidated Financial Highlights. PNC elected a five-year transition provision effective March 31, 2020 to delay until December 31, 2021 the full impact of the Current Expected Credit Losses (CECL) standard on regulatory capital, followed by a three-year transition period. Effective for the first quarter of 2022, PNC is now in the three-year transition period, and the full impact of the CECL standard is being phased-in to regulatory capital through December 31, 2024. The fully implemented ratios reflect the full impact of CECL and exclude the benefits of this transition provision.

 

The second quarter of 2022 included a provision for credit losses of $36 million. The first quarter of 2022 included a provision recapture of $208 million.

Net loan charge-offs were $83 million in the second quarter of 2022, decreasing $54 million from the first quarter of 2022, driven by lower consumer net loan charge-offs, largely due to lower auto loan net charge-offs. Compared to the second quarter of 2021, net loan charge-offs decreased $223 million, reflecting lower BBVA USA related net loan charge-offs.

The allowance for credit losses was $5.1 billion at June 30, 2022, $5.2 billion at March 31, 2022 and $6.4 billion at June 30, 2021. The allowance for credit losses as a percentage of total loans was 1.65% at June 30, 2022, 1.76% at March 31, 2022 and 2.16% at June 30, 2021.

Nonperforming loans were $2.0 billion at June 30, 2022, decreasing $252 million compared to March 31, 2022, primarily due to improvements in commercial nonperforming loans, largely related to commercial real estate. Nonperforming loans decreased $733 million compared to June 30, 2021, primarily due to lower BBVA USA related commercial nonperforming loans.

Delinquencies at June 30, 2022 of $1.5 billion decreased $188 million compared to March 31, 2022, due to both lower consumer and commercial delinquencies, which included the resolution of BBVA USA conversion-related administrative and operational delays. Compared to June 30, 2021, total delinquencies increased $136 million as higher commercial loan delinquencies were partially offset by lower consumer loan delinquencies.

 

Retail Banking Highlights

Second quarter 2022 compared with first quarter 2022

• Earnings decreased 5%, as higher net interest income and noninterest income were more than offset by a provision for credit losses and higher noninterest expense.
• Noninterest income increased modestly as higher card and cash management fees were largely offset by lower residential mortgage loan sales revenue and negative Visa Class B fair value adjustments of $16 million. The first quarter of 2022 included a positive Visa Class B derivative fair value adjustment of $4 million.
• Provision for credit losses was $55 million for the second quarter of 2022, and included the impact of changes in portfolio composition, updates to the economic outlook and improvements in credit quality.
• Noninterest expense increased 1% and included higher marketing spend.
• Average loans increased 1%, driven by growth in residential mortgage and home equity loans, partially offset by lower auto loans and PPP loan forgiveness.
• Average deposits increased 1%, driven by growth in demand and savings deposits.

Second quarter 2022 compared with second quarter 2021

• Earnings increased 39%, due to higher net interest income, a lower provision for credit losses and an increase in noninterest income, partially offset by higher noninterest expense.
• Noninterest income increased 6%, primarily driven by the addition of BBVA USA customers and increased business activity.
• Noninterest expense increased 14%, primarily reflecting operating expenses from BBVA USA and increased marketing spend.
• Average loans increased 11%, reflecting the addition of BBVA USA and higher residential mortgage loans, partially offset by PPP loan forgiveness.
• Average deposits increased 15%, and included the addition of BBVA USA.

 

Corporate & Institutional Banking Highlights

Second quarter 2022 compared with first quarter 2022

• Earnings increased 5%, due to higher noninterest income and net interest income, partially offset by a lower provision recapture and higher noninterest expense.
• Noninterest income increased 20%, driven by an increase in capital markets related revenue, including higher merger and acquisition advisory fees.
• Provision recapture of $17 million for the second quarter of 2022 included improvements in credit quality, partially offset by loan growth.
• Noninterest expense increased 12%, primarily due to higher variable costs as a result of increased business activity.
• Average loans increased 7%, driven primarily by growth in PNC's corporate banking and business credit businesses of $11.1 billion and $1.7 billion, respectively, partially offset by PPP loan forgiveness.
• Average deposits decreased 5%, reflecting outflows and seasonal declines in commercial deposits.

Second quarter 2022 compared with second quarter 2021

• Earnings increased 24%, due to higher net interest income, a lower provision for credit losses and increased noninterest income, partially offset by higher noninterest expense.
• Noninterest income increased 12%, and included higher capital markets related revenue, the benefit of BBVA USA, growth in treasury management product revenue and lower commercial mortgage banking activities.
• Noninterest expense increased 15%, due to operating expenses from BBVA USA, higher variable costs as a result of increased business activity and continued investment in strategic  initiatives.
• Average loans increased 22%, driven by the addition of BBVA USA and broad-based organic growth across PNC's lending segments, partially offset by PPP loan forgiveness.
• Average deposits increased 1%, and included the addition of BBVA USA.

 

Asset Management Group Highlights

Second quarter 2022 compared with first quarter 2022

• Earnings decreased 16%, as higher net interest income was more than offset by higher noninterest expense and lower noninterest income.
• Noninterest income decreased 6%, reflecting the impact of lower average equity markets.
• Noninterest expense increased 8%, and included higher personnel expense.
• Discretionary client assets under management decreased 8%, primarily driven by lower spot equity markets.
• Average loans increased 4%, driven by higher residential mortgage loans.
• Average deposits decreased 5%, primarily due to seasonal outflows.

Second quarter 2022 compared with second quarter 2021

• Earnings were relatively stable.
• Noninterest income decreased 4%, and included the impact of lower average equity markets.
• Noninterest expense increased 23%, largely due to the addition of operating expenses from BBVA USA and higher personnel expense.
• Discretionary client assets under management decreased 9%, primarily driven by lower spot equity markets.
• Average loans increased 40%, reflecting the addition of BBVA USA and growth in residential mortgage.
• Average deposits increased 35%, reflecting the addition of BBVA USA and growth in demand and savings deposits.

Other

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

CONFERENCE CALL AND SUPPLEMENTAL FINANCIAL INFORMATION

PNC Chairman, President and Chief Executive Officer William S. Demchak and Executive Vice President and Chief Financial Officer Robert Q. Reilly will hold a conference call for investors today at 8:00 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) 885-9714 and (212) 231-2906 (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 2022, 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 22018925 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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CAPITAL RATIOS

PNC's regulatory risk-based capital ratios in 2022 are calculated using the standardized approach for determining risk-weighted assets. Under the standardized approach for determining credit risk-weighted assets, exposures are generally assigned a pre-defined risk weight. Exposures to high volatility commercial real estate, past due exposures and equity exposures are generally subject to higher risk weights than other types of exposures.

PNC elected a five-year transition provision effective March 31, 2020 to delay until December 31, 2021 the full impact of the CECL standard on regulatory capital, followed by a three-year transition period. Effective for the first quarter 2022, PNC is now in the three-year transition period, and the full impact of the CECL standard is being phased-in to regulatory capital through December 31, 2024. See the table below for the March 31, 2022, June 30, 2021 and estimated June 30, 2022 ratios. For the full impact of PNC's adoption of CECL, which excludes the benefits of the five-year transition provision, see the June 30, 2022 and March 31, 2022 (Fully Implemented) estimates presented in the table below.

Our Basel III capital ratios may be impacted by changes to the regulatory capital rules and additional regulatory guidance or analysis.

 

 

Pretax pre-provision earnings is a non-GAAP measure and is based on adjusting income before income taxes and noncontrolling interests to exclude provision for (recapture of) credit losses. We believe that pretax, pre-provision earnings is a useful tool to help evaluate the ability to provide for credit costs through operations and provides an additional basis to compare results between periods by isolating the impact of provision for (recapture of) credit losses, which can vary significantly between periods.

Pretax pre-provision earnings excluding integration costs is a non-GAAP measure and is based on adjusting pretax pre-provision earnings to exclude integration costs during the period. We believe that pretax, pre-provision earnings excluding integration costs is a useful tool in understanding PNC's results by providing greater comparability between periods, as well as demonstrating the effect of significant items.

 

The adjusted diluted earnings per common share excluding integration costs is a non-GAAP measure and excludes the integration costs related to the BBVA USA acquisition. It is calculated based on adjusting net income attributable to diluted common shareholders by removing post-tax integration costs in the period. We believe this non-GAAP measure serves as a useful tool in understanding PNC's results by providing greater comparability between periods, as well as demonstrating the effect of significant items.