PITTSBURGH, Oct. 15, 2014 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported net income of $1.0 billion, or $1.79 per diluted common share, for the third quarter of 2014, a decrease of $14 million compared with net income of $1.1 billion, or $1.85 per diluted common share, for the second quarter of 2014. Net income was $1.0 billion, or $1.77 per diluted common share, for the third quarter of 2013.

"In the third quarter, PNC continued to deliver solid performance in a challenging revenue environment by executing on our strategic priorities," said William S. Demchak, chairman, president and chief executive officer. "We added customers, grew deposits, and increased fee income and capital. We also effectively managed expenses even as we made targeted investments in our businesses and technology. Looking ahead, balance sheet discipline should continue to differentiate PNC and help to drive long-term shareholder value."

Income Statement Highlights

• PNC continued to execute on its strategic priorities as reflected in the results for the third quarter which included strong fee income, well-controlled expenses and overall credit quality improvement.
• Net interest income of $2.1 billion in the third quarter decreased $25 million, or 1 percent, compared with the second quarter due to lower earning asset yields, lower investment securities balances and the impact of increasing the company's liquidity position.
• Noninterest income of $1.7 billion increased $56 million, or 3 percent, compared with the second quarter.
  • Growth in fee income was attributable to higher asset management revenue, corporate service fees and service charges on deposits as the businesses remained focused on deepening client relationships and product penetration.
• Noninterest expense of $2.4 billion for the third quarter increased $29 million, or 1 percent, compared with the second quarter in line with expectations as disciplined expense management continued.
  • PNC has completed actions as of September 30, 2014 to achieve its full-year 2014 continuous improvement savings goal of $500 million.
• Provision for credit losses declined to $55 million for the third quarter from $72 million in the second quarter as overall credit quality continued to improve.

Balance Sheet Highlights

• Average loans grew $.6 billion compared with the second quarter. Total loans of $200.9 billion at September 30, 2014 declined slightly by $.1 billion compared with June 30, 2014.
  • Average commercial lending increased $.9 billion primarily in corporate banking and real estate.
  • Average consumer and residential real estate loans declined $.3 billion.
• Overall credit quality continued to improve in the third quarter compared with the second quarter.
  • Nonperforming assets of $3.0 billion at September 30, 2014 declined $193 million, or 6 percent.
  • Net charge-offs decreased to $82 million for the third quarter from $145 million in the second quarter.
• Deposits grew $3.7 billion, or 2 percent, to $226.3 billion at September 30, 2014 compared with June 30, 2014.
• PNC further increased its liquidity position as reflected in higher deposit balances maintained with the Federal Reserve Bank and expects to exceed the phase-in requirement of the short-term liquidity coverage ratio when it becomes effective for PNC as an advanced approaches bank beginning January 1, 2015.
• PNC's well-positioned balance sheet remained core funded with a loans to deposits ratio of
  89 percent at September 30, 2014.
• PNC improved its capital position.
  • Transitional Basel III common equity Tier 1 capital ratio, calculated using the regulatory capital methodology applicable to PNC during 2014, increased to an estimated 11.1 percent at September 30, 2014 from 11.0 percent at June 30, 2014.
  • Pro forma fully phased-in Basel III common equity Tier 1 capital ratio increased to an estimated 10.1 percent at September 30, 2014 from 10.0 percent at June 30, 2014 based on the standardized approach rules.
• PNC returned capital to shareholders through repurchases of 4.2 million common shares for
  $.4 billion during the third quarter compared with 2.6 million common shares for $.2 billion during the second quarter under its existing common stock repurchase authorization.

 

 

The Consolidated Financial Highlights accompanying this news release include additional information regarding reconciliations to reported amounts of non-GAAP financial measures, including reconciliations of tangible book value to book value per common share and business segment income to net income, and regarding the first quarter 2014 adoption of Accounting Standards Update 2014-01 related to investments in low income housing tax credits. Reference to core net interest income is to total net interest income less purchase accounting accretion, which consists of scheduled accretion and excess cash recoveries, as detailed in the Consolidated Financial Highlights. Information in this news release including the financial tables is unaudited. See the notes and other information in the Consolidated Financial Highlights. 

 

 

Total revenue for the third quarter of 2014 increased $31 million compared with the second quarter of 2014 and decreased $79 million compared with the third quarter of 2013. Growth in noninterest income was partially offset by lower net interest income in the linked quarter comparison. Net interest income declined while noninterest income increased compared with third quarter 2013.

Net interest income for the third quarter of 2014 decreased $25 million compared with the second quarter and $130 million compared with the third quarter of 2013. Lower core net interest income drove the linked quarter decline while purchase accounting accretion was unchanged. Both core net interest income and purchase accounting accretion decreased compared with third quarter 2013. Core net interest income declined in both comparisons due to lower earning asset yields, lower investment securities balances and the impact of increasing the company's liquidity position. In the comparison with third quarter 2013, a change in classification to noninterest income of certain commercial facility fees beginning second quarter 2014 contributed to the decrease partially offset by commercial and commercial real estate loan growth. Purchase accounting accretion declined compared with third quarter 2013 as a result of lower scheduled accretion.

The net interest margin was 2.98 percent for the third quarter of 2014 compared with 3.12 percent for the second quarter and 3.47 percent for the third quarter of 2013. The decrease in the margin reflected lower earning asset yields and higher deposit balances maintained with the Federal Reserve Bank in light of regulatory short-term liquidity standards partially offset by commercial loan growth in the third quarter 2013 comparison. Additionally, the impact of the change in classification of certain commercial facility fees contributed to the margin decline compared with third quarter 2013.

 

 

Noninterest income for the third quarter of 2014 increased $56 million compared with the second quarter reflecting growth in fee income. Asset management revenue increased $49 million attributable to PNC's investment in BlackRock. Corporate service fees grew $31 million primarily due to higher merger and acquisition advisory fees. Residential mortgage banking noninterest income decreased $42 million as a result of lower loan sales revenue primarily related to portfolio loans and a higher provision for residential mortgage repurchase obligations. Service charges on deposits grew $23 million reflecting changes in product offerings and an increase in customer-initiated transactions. Other noninterest income included a pretax gain of $57 million on the sale of 1 million Visa Class B common shares in the third quarter compared with a $54 million gain in the second quarter. At September 30, 2014, PNC's remaining investment in Visa Class B common shares was approximately 7 million shares with a carrying value of approximately $.1 billion and fair value of approximately $.7 billion.

Noninterest income for the third quarter of 2014 increased $51 million compared with the third quarter of 2013. Strong growth in client fee income was reflected in higher asset management revenue, consumer and corporate service fees and service charges on deposits. Corporate service fees increased primarily as a result of higher merger and acquisition advisory fees and the change in classification from net interest income of certain commercial facility fees beginning second quarter 2014. Residential mortgage banking noninterest income decreased due to lower net hedging gains on mortgage servicing rights, a provision for residential mortgage repurchase obligations compared with a benefit in third quarter 2013, and reduced loan sales revenue on lower origination volume partially offset by higher servicing fees. Other noninterest income declined primarily from a lower gain on the sale of Visa Class B common shares, which was $85 million pretax in third quarter 2013, and lower net gains on sales of securities. 

 

 

Noninterest expense for the third quarter of 2014 increased $29 million compared with the second quarter in line with expectations and reflecting PNC's commitment to disciplined expense management as targeted technology and business investments continue. The increase primarily resulted from higher variable compensation costs associated with business activity and higher equipment expense largely related to investments in technology and business infrastructure.

Noninterest expense for third quarter 2014 decreased $37 million compared with the prior year quarter reflecting well-controlled expenses and the impact of a third quarter 2013 noncash charge for unamortized discounts of $27 million related to redemptions of trust preferred securities partially offset by higher costs for technology and business infrastructure.

The effective tax rate was 27.4 percent for the third quarter of 2014 compared with 25.4 percent for the second quarter of 2014 and 26.0 percent for the third quarter of 2013.

 

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $334.4 billion at September 30, 2014 compared with $327.1 billion at June 30, 2014 and $308.5 billion at September 30, 2013. The increases were driven by higher deposit balances maintained with the Federal Reserve Bank in part due to regulatory short-term liquidity standards that begin to be phased in starting January 1, 2015, and loan growth in the comparison with third quarter 2013, partially offset by lower investment securities balances in both comparisons.

 

 

Average loans grew $.6 billion in the third quarter of 2014 compared with the second quarter. Average commercial lending increased $.9 billion mainly from growth in corporate banking and real estate, and average consumer and residential real estate loans declined $.3 billion. Total loans at September 30, 2014 declined slightly by $.1 billion compared with June 30, 2014. Commercial lending balances were stable with second quarter end. Consumer lending decreased $.1 billion due to lower home equity, residential mortgage and education loans partially offset by growth in automobile loans. Third quarter 2014 period end and average loans increased $8.0 billion and $9.3 billion, respectively, compared with third quarter 2013 primarily due to commercial and commercial real estate loan growth.

 

 

Investment securities balances at September 30, 2014 decreased $1.6 billion compared with June 30, 2014 due to net payments and maturities and lower reinvestment activity. The available for sale investment securities balance included a net unrealized pretax gain of $1.0 billion at September 30, 2014 compared with $1.1 billion at June 30, 2014 and $.7 billion at September 30, 2013, representing the difference between fair value and amortized cost.

Interest-earning deposits with banks were $26.2 billion at September 30, 2014, an increase of $9.4 billion compared with June 30, 2014 and $18.2 billion compared with September 30, 2013 as PNC maintained higher balances on deposit with the Federal Reserve Bank in part due to regulatory short-term liquidity standards that begin to be phased in starting January 1, 2015.

 

 

Total deposits at September 30, 2014 grew $3.7 billion compared with June 30, 2014 and average deposits increased $3.8 billion in the third quarter compared with the second quarter. Third quarter 2014 period end and average deposits increased $10.2 billion and $11.9 billion, respectively, compared with third quarter 2013. Growth in demand and money market transaction deposits was partially offset by a decrease in retail certificates of deposit due to runoff of maturing accounts in all comparisons.

 

 

Borrowed funds at September 30, 2014 increased $3.3 billion compared with June 30, 2014 and average borrowed funds increased $2.2 billion in the third quarter compared with the second quarter primarily due to higher bank borrowings and bank notes and senior debt issuance to enhance PNC's liquidity position. Borrowed funds increased $12.1 billion at September 30, 2014 compared with September 30, 2013 and average borrowed funds increased $10.7 billion in third quarter 2014 compared with third quarter 2013 mainly as a result of higher bank borrowings, bank notes and senior debt, and subordinated debt partially offset by a decrease in commercial paper reflecting the wind down of Market Street Funding LLC, a consolidated commercial paper conduit, which was finalized in fourth quarter 2013.

 

 

PNC increased its capital levels and ratios. Common shareholders' equity and the Basel III capital ratios increased compared with the second quarter primarily due to growth in retained earnings partially offset by share repurchases. The transitional Basel III common equity Tier 1 capital ratio was calculated using the regulatory capital methodology that became effective for PNC as an advanced approaches bank on January 1, 2014 with 2014 phase-ins. The pro forma ratios for September 30, 2014 and June 30, 2014 were calculated based on the standardized approach, while the ratio for September 30, 2013 was based on the advanced approaches. See Capital Ratios in the Consolidated Financial Highlights.

PNC repurchased 4.2 million common shares for $.4 billion in the third quarter of 2014 and 2.6 million common shares for $.2 billion in the second quarter under its previously announced programs to repurchase up to $1.5 billion for the four quarter period beginning in second quarter 2014 under its existing common stock repurchase authorization.

On October 2, 2014, the PNC board of directors declared a quarterly common stock cash dividend of 48 cents per share payable on November 5, 2014.

 

 

Overall credit quality continued to improve during the third quarter of 2014. Nonperforming assets at September 30, 2014 declined $193 million compared with June 30, 2014. Consumer lending nonperforming loans decreased $74 million, commercial nonperforming loans declined $74 million and commercial real estate nonperforming loans decreased $40 million. Nonperforming assets declined $647 million from third quarter 2013 due to broad improvements in the commercial real estate, commercial and consumer loan portfolios as well as other real estate owned. Nonperforming assets to total assets were .89 percent at September 30, 2014 compared with .97 percent at June 30, 2014 and 1.17 percent at September 30, 2013.

Overall delinquencies decreased $92 million, or 4 percent, as of September 30, 2014 compared with June 30, 2014. Accruing loans past due 90 days or more declined $74 million primarily from lower past due government insured residential real estate loans. Accruing loans past due 60 to 89 days decreased $44 million, or 15 percent, largely in the commercial real estate loan portfolio. The 30 to 59 day category increased $26 million, or 5 percent.

Net charge-offs for the third quarter of 2014 decreased $63 million compared with the second quarter primarily due to lower commercial loan net charge-offs driven by higher recoveries and to lower home equity loan net charge-offs. Additionally, residential real estate net recoveries contributed to the decline. In the comparison with third quarter 2013, net charge-offs decreased $142 million reflecting overall improving credit quality. Net charge-offs for the third quarter of 2014 were .16 percent of average loans on an annualized basis compared with .29 percent for the second quarter and .47 percent for the third quarter of 2013.

Provision for credit losses for third quarter 2014 decreased $17 million compared with second quarter 2014 and $82 million compared with third quarter 2013 as overall credit quality has continued to improve.

The allowance for loan and lease losses at September 30, 2014 declined $47 million compared with June 30, 2014 and $285 million compared with September 30, 2013 reflecting overall improvement in credit quality. The allowance to total loans was 1.70 percent at September 30, 2014, 1.72 percent at June 30, 2014 and 1.91 percent at September 30, 2013. The allowance to nonperforming loans was 130 percent at September 30, 2014 compared with 123 percent at June 30, 2014, and 115 percent at September 30, 2013.

 

 

 

Retail Banking earnings for the third quarter of 2014 decreased compared with the second quarter and increased compared with the third quarter of 2013. Noninterest income included strong customer-related fee income growth in both comparisons primarily resulting from changes in product offerings and increases in customer-initiated transactions. Noninterest income also reflected gains on sales of Visa Class B common shares of $57 million in the third quarter of 2014, $54 million in the second quarter and $85 million in the third quarter of 2013. Provision for credit losses increased compared with the linked quarter as credit quality improved at a slower pace in the third quarter compared with the second quarter. The provision decreased compared with third quarter 2013 driven by improved credit quality in the consumer and commercial loan portfolios as net charge-offs and delinquencies declined.

• Retail Banking continued to focus on serving more customers through cost effective channels that meet their preferences for convenience.
  • Approximately 47 percent of consumer customers used non-teller channels for the majority of their transactions during the third quarter of 2014 compared with 45 percent for the second quarter and 38 percent for the third quarter of 2013.
  • Deposit transactions via ATM and mobile banking application increased to 36 percent of total deposit transactions in third quarter 2014 compared with 33 percent for the second quarter and 27 percent for the third quarter of 2013.
  • As part of PNC's retail branch transformation strategy, 45 branches were converted to universal branches as of September 30, 2014 in a pilot program, and 43 branches were closed or consolidated in the first nine months of 2014. PNC had a network of 2,691 branches and 8,178 ATMs at September 30, 2014.
• Average transaction deposits grew $.2 billion over the second quarter due to higher non-personal demand and money market deposits. In comparison with third quarter 2013, average transaction deposits grew $4.5 billion, or 4 percent, resulting from growth in personal and non-personal demand deposits and personal money market deposits. Average certificates of deposit decreased $.6 billion from the second quarter and $2.3 billion from third quarter 2013 reflecting net runoff of maturing accounts.
• Average loans decreased 1 percent compared with both the second quarter and the third quarter of 2013 as growth in automobile and credit card loans was more than offset by declines in home equity and education loans as well as lower floor plan loans in the comparison with second quarter.
• Net charge-offs declined to $93 million for third quarter 2014 compared with $116 million in the second quarter and $143 million in the third quarter of 2013 driven by improved credit quality in both consumer and commercial portfolios.

 

 

Corporate & Institutional Banking earnings for the third quarter of 2014 increased compared with both second quarter 2014 and third quarter 2013. Corporate service fees increased in both comparisons primarily due to higher merger and acquisition advisory fees. In the comparison with third quarter 2013, the increase also reflected the change in classification from net interest income of certain commercial facility fees. Provision for credit losses was a benefit in the third quarter of 2014 reflecting overall improvement in credit quality. Noninterest expense increased in both comparisons principally due to incentive compensation costs associated with business activity.

• Average loans increased 1 percent over the second quarter and 11 percent over third quarter 2013 primarily due to loan growth in Real Estate, Corporate Banking, Business Credit and Equipment Finance businesses.
• Average deposits increased 6 percent over the second quarter and 11 percent over the prior year third quarter as a result of business growth and inflows into money market and noninterest-bearing deposits.
• Charge-offs were in a net recovery position of $7 million in the third quarter of 2014 compared with net charge-offs of $15 million in the second quarter of 2014 and $56 million in the third quarter of 2013.

 

 

Asset Management Group earnings for the third quarter of 2014 decreased in both comparisons. Noninterest income grew compared with third quarter 2013 driven by stronger equity markets and new sales production. Noninterest expense increased in both comparisons largely reflecting higher compensation costs from focused hiring to drive growth, and higher technology expenses compared with the second quarter.

• Client assets under administration at September 30, 2014 included discretionary client assets under management of $132 billion and nondiscretionary client assets under administration of $127 billion.
  • Discretionary client assets under management increased $1 billion compared with June 30, 2014 and $10 billion compared with September 30, 2013 driven by stronger equity markets and positive net flows net of cyclical client activities.
• Asset Management Group continued to focus on driving growth through sales sourced from other PNC lines of business, maximizing front line productivity and optimizing market presence including additions to staff in high opportunity markets. Its business strategies also focus on increasing share of clients' assets and growing retirement capabilities. 

 

 

Residential Mortgage Banking earnings for the third quarter of 2014 decreased in both comparisons. Other noninterest income declined compared with the second quarter primarily due to lower loan sales revenue related to portfolio loans. Other noninterest income decreased from the third quarter of 2013 driven by lower net hedging gains on residential mortgage servicing rights and reduced loan sales revenue on lower origination volume partially offset by higher servicing fees. Noninterest expense was consistent with the second quarter and declined compared with the third quarter of 2013 as a result of reduced expenses on lower origination volume and lower residential mortgage foreclosure-related expenses.

• Loan origination volume in the third quarter increased 2 percent over the second quarter, and decreased 30 percent from the third quarter of 2013 reflecting a decline in refinancings. Approximately 50 percent of third and second quarter 2014 origination volume was for home purchase transactions, up from 38 percent in the third quarter of 2013.
• 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 and leveraging cross-sell opportunities in the bank footprint markets.

 

 

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

• Charge-offs were in a net recovery position of $6 million for the third quarter of 2014 compared with net charge-offs of $10 million for the second quarter and $23 million for the third quarter of 2013. The decline compared with the second quarter was driven by higher recovery activity. The decrease compared with third quarter 2013 was primarily attributable to credit quality improvement.

 

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, noncash charges for unamortized discounts related to redemptions of trust preferred securities, 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 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 (800) 381-7839 or (212) 231-2913 (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 2014 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 or (402) 977-9140 (international), conference ID 21733701 and a replay of the audio webcast will be available on PNC's website for 30 days.

The PNC Financial Services Group, Inc. (www.pnc.com) is one of the United States' largest diversified financial services organizations providing 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.

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