PITTSBURGH, Oct. 13, 2017 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported:

"PNC continued to win new clients and grow both loans and deposits in the third quarter on the strength of our relationship-based business model and the quality of our product offering," said William S. Demchak, chairman, president and chief executive officer. "Net interest income increased and our margin expanded as we benefited from higher short-term rates and our well-positioned balance sheet. We continue to focus on disciplined expense management even as we invest in our businesses, and we believe we have additional opportunities to drive further growth and efficiency over the long term."

Income Statement Highlights

Third quarter 2017 compared with second quarter 2017

• Total revenue increased $65 million, or 2 percent, to $4.1 billion. PNC continues to generate positive operating leverage.
• Net interest income grew $87 million, or 4 percent, to $2.3 billion primarily due to higher loan yields and balances.
• Net interest margin increased 7 basis points to 2.91 percent.
• Noninterest income of $1.8 billion decreased $22 million, or 1 percent, driven by a decline in corporate service fees from elevated second quarter levels.
• Noninterest expense of $2.5 billion decreased $23 million, or 1 percent, as expenses were well managed.
• Provision for credit losses increased $32 million to $130 million and included $10 million related to Hurricanes Harvey and Irma. Loan growth and seasonal consumer loan credit trends contributed to the increase.

Balance Sheet Highlights

• Loans grew $3.1 billion, or 1 percent, to $221.1 billion at September 30, 2017 compared with June 30, 2017. 
• Commercial lending balances increased $2.8 billion reflecting growth in PNC's real estate, corporate banking, business credit and equipment finance businesses.
• Consumer lending balances increased $.3 billion as growth in residential mortgage, auto and credit card loans was largely offset by lower home equity and education loans.
• Overall credit quality remained stable.
• Nonperforming assets of $2.1 billion at September 30, 2017 decreased $86 million, or 4 percent, compared with June 30, 2017.
• Net charge-offs declined to $106 million for the third quarter compared with $110 million for the second quarter.
• Deposits increased $1.6 billion, or 1 percent, to $260.7 billion at September 30, 2017 compared with June 30, 2017 due to seasonal growth in commercial deposits.
• Investment securities decreased $1.4 billion, or 2 percent, to $75.0 billion at September 30, 2017 compared with June 30, 2017 as a result of lower reinvestments in part due to relatively less attractive market opportunities during the third quarter.
• PNC returned $.9 billion of capital to shareholders, or 86 percent of third quarter net income attributable to diluted common shares, through repurchases of 4.2 million common shares for $.5 billion and dividends on common shares of $.4 billion.
• The August quarterly cash dividend on common stock reflected a 36 percent increase, or 20 cents, to 75 cents per share.
• PNC maintained strong capital and liquidity positions.
• Transitional Basel III common equity Tier 1 capital ratio was an estimated 10.3 percent at both September 30, 2017 and June 30, 2017, calculated using the regulatory capital methodologies applicable to PNC during 2017.
• Pro forma fully phased-in Basel III common equity Tier 1 capital ratio, a non-GAAP financial measure, was an estimated 9.8 percent at both September 30, 2017 and June 30, 2017, based on the standardized approach rules.
• The Liquidity Coverage Ratio at September 30, 2017 for both PNC and PNC Bank, N.A. continued to exceed the fully phased-in 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 third quarter of 2017 grew $65 million compared with the second quarter and $296 million compared with the third quarter of 2016 driven by higher net interest income. Noninterest income declined compared with the second quarter and increased compared with third quarter 2016.

Net interest income for the third quarter of 2017 increased $87 million compared with the second quarter and $250 million compared with the third quarter of 2016 driven by higher loan yields and balances partially offset by higher deposit and borrowed funds costs. Third quarter 2017 also benefited from an additional day compared with the second quarter.

The net interest margin increased to 2.91 percent for the third quarter of 2017 compared with 2.84 percent for the second quarter and 2.68 percent for the third quarter of 2016. The third quarter 2017 margin reflected the benefit from higher short-term interest rates.

Noninterest income for the third quarter of 2017 decreased $22 million compared with the second quarter. Corporate service fees declined $63 million primarily due to lower loan syndication fees, lower net hedging gains on commercial mortgage servicing rights and lower merger and acquisition advisory fees. Asset management revenue, which includes earnings from PNC's equity investment in BlackRock, grew $23 million. Service charges on deposits increased $11 million primarily as a result of seasonal customer activity. Other noninterest income increased $10 million and included higher gains on asset sales partially offset by lower net securities gains.

Noninterest income for the third quarter of 2017 increased $46 million compared with the third quarter of 2016. Asset management revenue grew $17 million reflecting higher equity markets. Growth in consumer service fees and service charges on deposits resulted from increased customer activity. Corporate service fees decreased $18 million primarily due to lower merger and acquisition advisory fees. Residential mortgage revenue declined $56 million from lower loan sales revenue and lower net hedging gains on mortgage servicing rights. Other noninterest income increased $87 million and included higher revenue from private equity investments, higher underwriting fees and higher operating lease income related to an acquired business.

Noninterest expense for the third quarter of 2017 decreased $23 million compared with the second quarter. Equipment expense declined due to the impact of second quarter asset impairments. Personnel expense increased as a result of higher headcount for business growth and an additional day in the third quarter.

Noninterest expense for the third quarter of 2017 increased $62 million compared with the third quarter of 2016 reflecting the impact of operating expense related to the second quarter 2017 acquisition of a commercial and vendor finance business, as well as ongoing investments in technology and business initiatives.

The effective tax rate was 26.8 percent for the third quarter of 2017, 26.0 percent for the second quarter of 2017 and 25.4 percent for the third quarter of 2016. The increase in the effective tax rate in the third quarter of 2017 was primarily due to higher pretax income and the impact of state tax legislative changes.

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $375.2 billion at September 30, 2017 compared with $372.2 billion at June 30, 2017 and $369.3 billion at September 30, 2016. Assets grew 1 percent compared with June 30, 2017 as growth in loans and higher deposits held with the Federal Reserve Bank were partially offset by lower investment securities. Assets grew 2 percent over September 30, 2016 due to higher loans partially offset by lower investment securities and Federal Reserve Bank deposits.

Total loans grew $3.1 billion as of September 30, 2017 compared with June 30, 2017. Commercial lending balances increased $2.8 billion reflecting growth in PNC's real estate, corporate banking, business credit and equipment finance businesses. Consumer lending balances increased $.3 billion as growth in residential mortgage, auto and credit card loans was largely offset by lower home equity and education loans. Average loans increased $2.9 billion over the second quarter due to growth in commercial lending balances of $2.7 billion and consumer lending balances of $.2 billion.

Third quarter 2017 period end and average loans increased $10.7 billion and $10.4 billion, respectively, compared with third quarter 2016 as higher commercial, residential mortgage and commercial real estate loans were partially offset by a decrease in other consumer loans.

Investment securities balances at September 30, 2017 decreased $1.4 billion compared with June 30, 2017 and average balances for the third quarter declined $.9 billion compared with the second quarter reflecting portfolio runoff and lower reinvestments as a result of relatively less attractive market opportunities during the third quarter. Third quarter 2017 period end investment securities decreased $3.5 billion compared with September 30, 2016 while average investment securities increased $2.8 billion compared with third quarter 2016 reflecting the impact of prior year securities purchases settling late in third quarter 2016. Net unrealized gains on available for sale securities were $.7 billion at September 30, 2017, $.5 billion at June 30, 2017 and $1.3 billion at September 30, 2016.

Balances held with the Federal Reserve Bank were $24.3 billion at September 30, 2017, $22.1 billion at June 30, 2017 and $26.6 billion at September 30, 2016.

Total deposits at September 30, 2017 increased $1.6 billion compared with June 30, 2017 and average deposits grew $3.1 billion in the third quarter over the second quarter due to seasonal growth in commercial deposits. Deposits at September 30, 2017 increased $.8 billion over September 30, 2016 while average deposits increased $6.9 billion in third quarter 2017 compared with third quarter 2016 reflecting overall deposit growth.

Borrowed funds at September 30, 2017 increased $1.2 billion compared with June 30, 2017 primarily due to higher short-term Federal Home Loan Bank borrowings. Average borrowed funds decreased $.5 billion in the third quarter compared with the second quarter. Third quarter 2017 period end borrowed funds increased $6.0 billion compared with September 30, 2016 and average borrowed funds increased $4.0 billion over third quarter 2016 as a result of increases in bank notes and senior debt and Federal Home Loan Bank borrowings partially offset by lower subordinated debt.

PNC maintained a strong capital position. Common shareholders' equity at September 30, 2017 increased $.3 billion compared with June 30, 2017 due to growth in retained earnings substantially 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 2017 and 2016 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 returned $.9 billion of capital to shareholders in the third quarter of 2017 through repurchases of 4.2 million common shares for $.5 billion and dividends on common shares of $.4 billion. Repurchases were made under share repurchase programs of up to $2.7 billion for the four-quarter period beginning in the third quarter of 2017. These programs include repurchases of up to $.3 billion related to stock issuances under employee benefit plans.

On October 3, 2017, the PNC board of directors declared a quarterly cash dividend on common stock of 75 cents per share effective with the November 5, 2017 dividend payment date. The August dividend on common stock was increased 36 percent, or 20 cents, to 75 cents per share.

Overall credit quality for the third quarter of 2017 remained stable with the second quarter. Provision for credit losses for third quarter 2017 increased $32 million compared with the second quarter and included $10 million related to Hurricanes Harvey and Irma. Loan growth and seasonal consumer loan credit trends contributed to the increase.

Nonperforming assets at September 30, 2017 decreased $86 million compared with June 30, 2017 and $308 million compared with September 30, 2016 as both commercial and consumer nonperforming loans declined. Nonperforming assets to total assets were .55 percent at September 30, 2017 compared with .58 percent at June 30, 2017 and .64 percent at September 30, 2016.

Overall delinquencies as of September 30, 2017 increased $93 million, or 7 percent, compared with June 30, 2017. Accruing loans past due 30 to 59 days increased $53 million primarily due to higher delinquencies in the auto, home equity and credit card portfolios in hurricane-affected states, and accruing loans past due 60 to 89 days increased $36 million.

Net charge-offs for the third quarter of 2017 decreased $4 million compared with the second quarter, and declined $48 million compared with third quarter 2016 largely attributable to energy-related loans. Net charge-offs for the third quarter of 2017 were .19 percent of average loans on an annualized basis compared with .20 percent for the second quarter and .29 percent for the third quarter of 2016.

The allowance for loan and lease losses to total loans was 1.18 percent at September 30, 2017, 1.17 percent at June 30, 2017 and 1.24 percent at September 30, 2016. The allowance to nonperforming loans was 139 percent at September 30, 2017, 131 percent at June 30, 2017 and 122 percent at September 30, 2016.

Effective for the first quarter of 2017, as a result of changes to how PNC manages its businesses, it realigned its segments and, accordingly, has changed the basis of presentation of its segments, resulting in four reportable business segments: Retail Banking, Corporate & Institutional Banking, Asset Management Group and BlackRock. For purposes of this news release, BlackRock has been combined with Other. In addition, PNC made certain adjustments to its internal funds transfer pricing methodology primarily relating to weighted average lives of certain non-maturity deposits. These changes in methodology affected business segment results, primarily adversely impacting net interest income for Corporate & Institutional Banking and Retail Banking, offset by increased net interest income in Other. All 2016 periods presented were revised to conform to the new segment alignment and to reflect the change in internal funds transfer pricing methodology.

Retail Banking earnings for the third quarter of 2017 increased in both comparisons. Noninterest income declined compared with the second quarter as a result of higher service charges on deposits more than offset by the change in the negative derivative fair value adjustment related to Visa Class B common shares and lower consumer service fees. Noninterest income decreased compared with the third quarter of 2016 due to lower residential mortgage loan sales revenue and lower net hedging gains on residential mortgage servicing rights partially offset by higher service charges on deposits and consumer service fees, including debit card, credit card and brokerage fees. Provision for credit losses increased compared with the second quarter reflecting growth in auto and credit card portfolios, seasonal credit trends including in the education loan portfolio, and the impact of Hurricanes Harvey and Irma. Noninterest expense increased compared with the third quarter of 2016 and included higher compliance expense and customer transaction-related costs.

• Average loans increased 1 percent compared with the third quarter of 2016 as growth in residential mortgage, auto and credit card loans was partially offset by lower commercial, home equity and education loans.
• Average deposits grew 3 percent over the third quarter of 2016 due to higher demand deposits as well as an increase in savings deposits which was partially offset by lower money market deposits reflecting a shift to relationship-based savings products.
• Approximately 57 percent of third quarter 2017 residential mortgage loan origination volume was for home purchase transactions compared with 61 percent for the second quarter and 41 percent in the third quarter of 2016.
• Residential mortgage loan servicing acquisitions were $2 billion for the third quarter of 2017 compared with $8 billion for the second quarter and $5 billion in the third quarter of 2016.
• Net charge-offs were $85 million for the third quarter of 2017 compared with $87 million in the second quarter and $89 million for the third quarter of 2016.
• Retail Banking continued to focus on the strategic priority of transforming the customer experience through transaction migration, branch network and home lending transformations and multi-channel engagement and service strategies.
• Approximately 62 percent of consumer customers used non-teller channels for the majority of their transactions during the third and second quarters of 2017 compared with 59 percent for the third quarter of 2016.
• Deposit transactions via ATM and mobile channels were 54 percent of total deposit transactions in the third quarter of 2017 compared with 52 percent in the second quarter and 50 percent in the third quarter of 2016.
• PNC had a network of 2,474 branches and 8,987 ATMs at September 30, 2017. Approximately 21 percent of the branch network operates under the universal model.

 

Corporate & Institutional Banking earnings for the third quarter of 2017 increased compared with both the second quarter of 2017 and the third quarter of 2016. Noninterest income declined from the second quarter due to a decrease in corporate service fees including lower loan syndication fees, lower net hedging gains on commercial mortgage servicing rights and lower merger and acquisition advisory fees. Additionally, lower net gains on commercial mortgage loans held for sale were offset by higher gains on asset sales. Noninterest income increased compared with the third quarter of 2016 reflecting higher underwriting fees, increased operating lease income related to a business acquired in the second quarter of 2017 and growth in treasury management product revenue partially offset by lower merger and acquisition advisory fees. Provision for credit losses declined from the second quarter driven by a second quarter initial provision for the loan and lease portfolio obtained through a business acquisition. Compared to third quarter 2016, provision for credit losses increased primarily as a result of loan growth. Noninterest expense increased compared with the third quarter of 2016 due to operating expenses associated with the acquired business and investments in technology and infrastructure.

• Average loans increased 2 percent over the second quarter and 8 percent over the third quarter of 2016 driven by growth in PNC's corporate banking and business credit businesses as well as the equipment finance business, including the acquired loans.
• Average deposits increased 5 percent over the second quarter reflecting seasonal growth. Compared with the third quarter of 2016, deposits increased 2 percent driven by an increase in interest-bearing demand deposits.
• Net charge-offs were $22 million in the third quarter of 2017, $21 million in the second quarter and $65 million in the third quarter of 2016, which reflected energy-related loans.

 

Asset Management Group earnings for the third quarter of 2017 decreased in both comparisons. Noninterest income increased compared with the second quarter reflecting higher average equity markets. Noninterest expense increased over the third quarter of 2016 due to higher personnel and technology-related expense.

• Asset Management Group's strategy is focused on growing investable assets by continually evolving the client experience and products and services. The business offers an open architecture platform with a full array of investment products and banking solutions. 
• Client assets under administration at September 30, 2017 included discretionary client assets under management of $146 billion and nondiscretionary client assets under administration of $129 billion.
• Discretionary client assets under management increased $5 billion compared with June 30, 2017 and increased $8 billion compared with September 30, 2016 primarily attributable to equity market increases.

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, discontinued consumer loan portfolios, 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 9:30 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) 616-4707 and (303) 223-4361 (international) and Internet access to the live audio listen-only webcast of the call is available at www.pnc.com/investorevents. PNC's third quarter 2017 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 21857585 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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