PNC Reports Third Quarter 2020 Results

10/14/20

The PNC Financial Services Group, Inc. (NYSE: PNC) today reported:

Second Quarter Sale of Equity Investment in BlackRock, Inc. - Discontinued Operations

  • In the second quarter of 2020, PNC divested its entire 22.4% equity investment in BlackRock. Net proceeds from the sale were $14.2 billion. The after-tax gain on the sale of $4.3 billion, and donation expense and BlackRock's historical results for all periods presented, are reported as discontinued operations.

Income Statement Highlights - Continuing Operations

Third quarter 2020 compared with second quarter 2020

  • Net income from continuing operations was $1.5 billion, an increase of $2.3 billion driven by a lower provision for credit losses and higher noninterest income.
  • Total revenue of $4.3 billion increased $205 million, or 5%.
  • Net interest income of $2.5 billion decreased $43 million, or 2%, as lower yields on loans and securities and a decline in loan balances more than offset the benefit of lower rates on deposits and borrowings.
    • Net interest margin decreased 13 basis points to 2.39% reflecting the impact of higher balances held with the Federal Reserve Bank and lower yields on loans and securities partially offset by lower rates on deposits and borrowings.
  • Noninterest income of $1.8 billion increased $248 million, or 16%.
    • Fee income of $1.3 billion increased $62 million, or 5%, as a result of increases in consumer service fees, service charges on deposits and asset management revenue partially offset by lower corporate service fees and residential mortgage revenue.
    • Other noninterest income of $457 million increased $186 million and included positive valuation adjustments of private equity investments partially offset by lower capital markets-related revenue.
  • Noninterest expense of $2.5 billion increased $16 million, or 1%.
  • Provision for credit losses was $52 million, a decrease of $2.4 billion.
    • Provision for commercial loans was $219 million largely related to borrowers in industries adversely impacted by the pandemic, primarily within the commercial real estate portfolio.
    • The consumer loan portfolio had a provision recapture of $215 million primarily due to improvement in macroeconomic factors.
  • The effective tax rate declined to 9.8% for the third quarter compared with 17.5% for the second quarter primarily due to tax credit benefits and the favorable resolution of certain tax matters.

Balance Sheet Highlights

Third quarter 2020 compared with second quarter 2020, or September 30, 2020 compared with June 30, 2020

  • Average loans decreased $15.0 billion, or 6%, to $253.1 billion.
    • Average commercial loans of $175.6 billion decreased $13.7 billion, or 7%, reflecting lower utilization of loan commitments.
    • Average consumer loans of $77.5 billion decreased $1.3 billion, or 2%, due to lower auto, credit card, home equity and student loans partially offset by higher residential mortgage loans.
  • Loans at September 30, 2020 declined $9.0 billion, or 3%, to $249.3 billion. Commercial loans decreased $7.5 billion, or 4%, and consumer loans decreased $1.5 billion, or 2%.
  • Credit quality performance:
    • Overall delinquencies of $1.2 billion at September 30, 2020 decreased $72 million, or 5%.
    • Nonperforming assets of $2.2 billion at September 30, 2020 increased $197 million, or 10%.
    • Net loan charge-offs were $155 million for the third quarter compared with $236 million for the second quarter.
    • The allowance for credit losses to total loans was 2.58% at September 30, 2020 compared with 2.55% at June 30, 2020.
  • Average deposits increased $15.3 billion, or 5%, to $350.5 billion due to growth in both commercial and consumer deposits. Commercial deposits grew as a result of customer liquidity accumulation. Consumer deposits increased driven by government stimulus and lower consumer spending.
    • Deposits at September 30, 2020 increased $9.1 billion, or 3%, to $355.1 billion.
  • Average investment securities increased $2.1 billion, or 2%, to $90.5 billion.
    • Investment securities at September 30, 2020 decreased $7.3 billion, or 7%, to $91.2 billion as portfolio prepayments and maturities exceeded reinvestments.
  • Average balances held with the Federal Reserve Bank of $60.0 billion increased $25.8 billion reflecting higher deposits and proceeds from the sale of the equity investment in BlackRock.
    • Federal Reserve Bank balances at September 30, 2020 increased $20.6 billion to $70.6 billion due to liquidity from deposit growth.
  • PNC maintained strong capital and liquidity positions.
    • On October 1, 2020, the PNC board of directors declared a quarterly cash dividend on common stock of $1.15 per share payable on November 5, 2020.
    • The Basel III common equity Tier 1 capital ratio was an estimated 11.7% at September 30, 2020 and 11.3% at June 30, 2020.
    • The Liquidity Coverage Ratio at September 30, 2020 for both PNC and PNC Bank, N.A. exceeded the regulatory minimum requirement.
3Q202Q203Q19
4264264451.323.211.3611.7630.1111.56
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. 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.
CONSOLIDATED REVENUE REVIEW
ChangeChange
3Q20 vs3Q20 vs
3Q202Q203Q192Q203Q19
1,7971,5491,738
Total revenue for the third quarter of 2020 increased $205 million compared with the second quarter and $39 million compared with the third quarter of 2019 driven by higher noninterest income.Net interest income of $2.5 billion for the third quarter of 2020 decreased $43 million compared to the second quarter as lower yields on loans and securities and a decline in loan balances more than offset the benefits from lower rates on deposits and borrowings, reduced borrowing balances and an additional day in the third quarter. In comparison with the third quarter of 2019, net interest income decreased $20 million due to lower yields on earning assets partially offset by lower rates on deposits and borrowings and higher average earning assets. The net interest margin declined to 2.39% for the third quarter of 2020 from 2.52% in the second quarter and 2.84% in the third quarter of 2019 as a result of lower yields on loans and securities and higher balances held with the Federal Reserve, partially offset by lower rates on deposits and borrowings.
ChangeChange
3Q20 vs3Q20 vs
3Q202Q203Q192Q203Q19
39033040247951246913715813411979178457271342
Noninterest income for the third quarter of 2020 increased $248 million compared with the second quarter. Asset management revenue increased $16 million reflecting the impact of higher average equity markets. Consumer services increased $60 million and service charges on deposits increased $40 million due to higher transaction volumes and a decrease in total fees waived for customers experiencing pandemic-related hardships. Corporate services declined $33 million due to lower asset-backed financing, merger and acquisition advisory and loan syndication fees partially offset by higher treasury management product revenue and loan commitment fees. Residential mortgage revenue declined $21 million driven by lower servicing fees and loan sales revenue. Other noninterest income increased $186 million and included positive valuation adjustments of private equity investments partially offset by lower capital markets-related revenue.Noninterest income for the third quarter of 2020 increased $59 million compared with the third quarter of 2019. Consumer services decreased $12 million and service charges on deposits decreased $59 million reflecting lower transaction volumes, fees waived for customers experiencing pandemic-related hardships and lower revenue related to the elimination of certain checking product fees. Corporate services increased $10 million primarily due to higher revenue from commercial mortgage servicing activities, loan commitment fees and treasury management product revenue partially offset by lower merger and acquisition advisory fees. Other noninterest income increased $115 million reflecting higher revenue from net securities gains, capital markets-related activities and positive valuation adjustments of private equity investments.
CONSOLIDATED EXPENSE REVIEW
ChangeChange
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205199206292301291674776557595650
Noninterest expense for the third quarter of 2020 increased $16 million compared with the second quarter. Personnel expense increased $37 million due to higher benefits expense, primarily medical, and an additional day in the quarter. Marketing expense increased $20 million and included the launch of a new digital checking product. These increases were partially offset by continued progress on cost savings initiatives.Noninterest expense for the third quarter of 2020 decreased $92 million compared with the third quarter of 2019 reflecting a continuous focus on expense management as well as lower business activity related to the economic impact of the pandemic.

The effective tax rate from continuing operations was 9.8% for the third quarter of 2020, 17.5% for the second quarter of 2020 and 17.8% for the third quarter of 2019. The decrease in both comparisons was primarily due to tax credit benefits and the favorable resolution of certain tax matters in the third quarter of 2020.

CONSOLIDATED BALANCE SHEET REVIEW

Average total assets were $462.1 billion in the third quarter of 2020 compared with $457.3 billion in the second quarter of 2020 and $406.7 billion in the third quarter of 2019. Total assets were $461.8 billion at September 30, 2020, $459.0 billion at June 30, 2020 and $408.9 billion at September 30, 2019. Balance sheet growth in the third quarter of 2020 in all comparisons resulted from higher balances maintained with the Federal Reserve Bank driven by increased deposits. Third quarter 2020 average and period-end loans decreased compared with the second quarter of 2020 and increased compared with the third quarter of 2019.

ChangeChange
3Q20 vs3Q20 vs
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77.578.876.2
76.678.177.2
Average loans for the third quarter 2020 decreased $15.0 billion compared with the second quarter. Average commercial loans declined $13.7 billion reflecting lower utilization of loan commitments, including paydowns of loan commitments drawn early in the pandemic. Average consumer loans decreased $1.3 billion as a result of lower auto, credit card, home equity and student loans partially offset by higher residential mortgage loans.Total loans at September 30, 2020 decreased $9.0 billion compared with June 30, 2020 driven by a decline in commercial loans of $7.5 billion. Unfunded commercial loan commitments increased to $145.5 billion at September 30, 2020 compared with $137.2 billion at June 30, 2020 and included growth in new loan commitments. At September 30, 2020 PNC had $12.9 billion of PPP loans outstanding, down from the second quarter funded amount of $13.7 billion. Consumer loans at September 30, 2020 decreased $1.5 billion compared with June 30, 2020.

Average and period-end loans for the third quarter of 2020 increased $15.4 billion and $11.9 billion, respectively, compared with the third quarter of 2019 driven by growth in commercial loans, including PPP lending.

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Average investment securities for the third quarter of 2020 increased $2.1 billion compared with the second quarter as a result of net purchases of short-term U.S. Treasury securities near second quarter end. Investment securities at September 30, 2020 decreased $7.3 billion compared with the second quarter as prepayment of agency residential mortgage-backed securities and maturity of short-term U.S. Treasury securities exceeded purchases. Third quarter 2020 average and period-end investment securities increased $5.3 billion and $3.3 billion, respectively, compared with the third quarter of 2019 primarily due to higher agency residential mortgage-backed securities. Net unrealized gains on available for sale securities were $3.4 billion at both September 30, 2020 and June 30, 2020 and $1.4 billion at September 30, 2019.Average balances held with the Federal Reserve Bank of $60.0 billion in the third quarter of 2020 increased from $34.2 billion in the second quarter of 2020 reflecting deposit growth and proceeds from the sale of the equity investment in BlackRock. Federal Reserve Bank balances at September 30, 2020 of $70.6 billion increased from $50.0 billion at June 30, 2020 due to liquidity from deposit growth. Balances held with the Federal Reserve Bank were $15.3 billion for the third quarter of 2019 and $18.8 billion at September 30, 2019.
ChangeChange
3Q20 vs3Q20 vs
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248.6241.5207.0
247.8246.5211.5
Average deposits for the third quarter of 2020 increased $15.3 billion compared with the second quarter and deposits at September 30, 2020 increased $9.1 billion compared with June 30, 2020 due to growth in commercial deposits as a result of customer liquidity accumulation. Consumer deposits also increased reflecting government stimulus and lower consumer spending. Third quarter 2020 average and period-end deposits increased $71.4 billion and $69.5 billion, respectively, compared with third quarter 2019 as a result of overall growth in commercial and consumer deposits and customers.
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Average borrowed funds for the third quarter of 2020 decreased $9.9 billion compared with the second quarter and borrowed funds at September 30, 2020 decreased $4.9 billion compared with June 30, 2020 due to lower Federal Home Loan Bank borrowings, bank notes and senior debt and repurchase agreements reflecting the use of liquidity from deposit growth. Average borrowed funds for the third quarter of 2020 declined $20.6 billion compared with the third quarter of 2019 and period-end borrowed funds decreased $19.2 billion reflecting the use of liquidity from deposit growth and proceeds from the sale of the equity investment in BlackRock.
9/30/20206/30/20209/30/2019
11.711.39.611.310.9N/A
PNC maintained a strong capital position. Common shareholders' equity at September 30, 2020 increased $.9 billion, or 2%, over June 30, 2020 due to third quarter net income partially offset by dividends.The PNC board of directors declared a quarterly cash dividend on common stock payable on November 5, 2020 of $1.15 per share.

PNC announced on March 16, 2020 a temporary suspension of its common stock repurchase program in conjunction with the Federal Reserve's effort to support the U.S. economy during the pandemic, and will continue the suspension through the fourth quarter of 2020, consistent with the extension of the Federal Reserve's special capital distribution restrictions. PNC repurchased $99 million of common shares in the third quarter to offset the effects of employee benefit plan-related issuances in 2020 as permitted by guidance from the Federal Reserve.

For information regarding PNC's Basel III capital ratios, see Capital Ratios in the Consolidated Financial Highlights. The 2019 Tailoring Rules became effective for PNC as of January 1, 2020. PNC elected a five-year transition provision effective March 31, 2020 to delay for two years the full impact of CECL on regulatory capital, followed by a three-year transition period. The fully implemented ratios reflect the full impact of CECL and exclude the benefits of this transition provision.

ChangeChange
At or for the quarter ended3Q20 vs3Q20 vs
9/30/20206/30/20209/30/20192Q203Q19
(34)—11211017(2)(16)2.582.551.28
Provision for credit losses was $52 million in the third quarter of 2020, a decrease of $2.4 billion from June 30, 2020, reflecting improvement in macroeconomic factors from the second quarter. This benefit was offset by higher expected losses for certain borrowers in industries adversely impacted by the pandemic, primarily within the commercial real estate loan portfolio. Provision for credit losses was $219 million for commercial loans, a provision recapture of $215 million for consumer loans and a provision of $48 million for securities and other assets.Net loan charge-offs for the third quarter of 2020 decreased $81 million compared with the second quarter. Commercial loan net charge-offs declined $69 million from the second quarter reflecting lower charge-offs of commercial and industrial loans and higher recoveries. Consumer loan net charge-offs decreased $12 million from the second quarter primarily due to auto loans. Net loan charge-offs were stable with the third quarter of 2019. Net charge-offs were .24% of average loans on an annualized basis at September 30, 2020, .35% at June 30, 2020 and .26% at September 30, 2019.

Nonperforming assets at September 30, 2020 increased $197 million compared with June 30, 2020. Higher nonperforming commercial loans of $157 million and higher nonperforming consumer loans of $52 million were partially offset by lower other real estate owned and foreclosed assets of $12 million. Higher nonperforming commercial loans reflected an increase in nonperforming commercial real estate loans of $174 million primarily related to industries adversely impacted by the pandemic. Nonperforming assets increased $305 million compared with September 30, 2019 due to higher nonperforming commercial loans of $339 million and higher nonperforming consumer loans of $18 million partially offset by lower other real estate owned and foreclosed assets of $52 million. Nonperforming assets to total assets were .47% at September 30, 2020 compared with .43% at June 30, 2020 and .45% at September 30, 2019.

Overall delinquencies at September 30, 2020 decreased $72 million compared with June 30, 2020. Consumer loan delinquencies decreased $41 million and commercial loan delinquencies declined $31 million. Loans past due 30 to 59 days decreased $51 million, loans past due 60 to 89 days decreased $13 million and loans past due 90 days or more decreased $8 million. Under the CARES Act credit reporting rules and guidance from regulatory agencies, certain loans modified due to pandemic-related hardships were considered current and not reported as past due at September 30, 2020 and June 30, 2020.

The allowance for credit losses was $6.4 billion at September 30, 2020 and $6.6 billion at June 30, 2020. The allowance for credit losses as a percentage of total loans was 2.58% at September 30, 2020 and 2.55% at June 30, 2020.

3Q202Q203Q19
670(358)645912846241(191)143
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Retail Banking earnings for the third quarter of 2020 increased compared with the second quarter of 2020 and the third quarter of 2019. Noninterest income increased over the second quarter driven by higher consumer services fees, including merchant services, debit card and credit card fees primarily attributable to higher transaction volumes, as well as increased service charges on deposits due to a decrease in total fees waived for customers experiencing pandemic-related hardships. These increases were partially offset by lower residential mortgage revenue as a result of lower servicing fees and loan sales revenue. In comparison with the third quarter of 2019, noninterest income decreased due to lower service charges on deposits and consumer services fees, including merchant services and credit card, driven by lower transaction volumes. Service charges on deposits declined largely due to fees waived for customers experiencing pandemic-related hardships and lower revenue related to the elimination of certain checking product fees. Noninterest income in both comparisons benefited from the impact of negative derivative fair value adjustments related to Visa Class B common shares in the second quarter of 2020 and third quarter of 2019. Provision for credit losses decreased in the third quarter of 2020 compared with the second quarter due to improvement in macroeconomic factors. Noninterest expense increased compared with the second quarter reflecting higher marketing, including the launch of a new digital checking product, and ATM expense as a result of higher transaction volumes. Noninterest expense decreased compared with the third quarter of 2019 primarily as a result of lower marketing, ATM expense and costs associated with business travel partially offset by higher branch-related expense due to the impact of the pandemic.
  • Average loans decreased 2% compared with the second quarter of 2020 and increased 5% compared with the third quarter of 2019. The decrease from the second quarter was driven by declines in auto, credit card and unsecured installment loans reflecting consumer behavior. The increase compared with third quarter 2019 primarily resulted from growth in commercial loans driven by PPP lending and residential mortgage loans reflecting higher originations in the low interest rate environment.
  • Average deposits increased 5% compared with the second quarter and 17% compared with third quarter 2019 due to increases in demand deposits and savings as a result of government stimulus and lower consumer spending, partially offset by lower certificates of deposit. Compared to the third quarter of 2019, the increase was also partially offset by lower money market deposits reflecting a shift to relationship-based savings products.
  • Net loan charge-offs were $125 million for the third quarter of 2020 compared with $142 million in the second quarter of 2020 and $128 million in the third quarter of 2019.
  • Residential mortgage loan origination volume was $4.0 billion in the third quarter of 2020 compared with $4.2 billion for the second quarter and $3.4 billion for the third quarter of 2019. Approximately 44% of third quarter 2020 volume was for home purchase transactions compared with 34% and 44% for the second quarter of 2020 and third quarter of 2019, respectively.
  • The third party residential mortgage servicing portfolio was $119 billion at September 30, 2020 compared with $122 billion at June 30, 2020 and $123 billion at September 30, 2019. Residential mortgage loan servicing acquisitions were $8 billion for the third quarter of 2020 compared with $11 billion for the second quarter of 2020 and $3 billion for the third quarter of 2019.
  • Approximately 75% of consumer customers used non-teller channels for the majority of their transactions during the third quarter of 2020 compared with 73% in the second quarter of 2020 and 70% in the third quarter of 2019.
  • Deposit transactions via ATM and mobile channels were 67% of total deposit transactions in the third quarter of 2020 compared with 65% in the second quarter of 2020 and 58% in the third quarter of 2019.
Corporate & Institutional BankingChangeChange
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Corporate & Institutional Banking earnings for the third quarter of 2020 increased compared with both the second quarter of 2020 and third quarter of 2019. Noninterest income decreased slightly compared to the second quarter primarily due to lower capital markets-related revenue partially offset by higher treasury management product revenue, gains on asset sales and loan commitment fees. Noninterest income increased compared with the third quarter of 2019 driven by broad-based growth in revenue from commercial mortgage banking activities, capital markets-related revenue and treasury management product revenue. Provision for credit losses decreased in the third quarter of 2020 compared with the second quarter due to improvement in macroeconomic factors partially offset by higher expected losses for certain borrowers in industries adversely impacted by the pandemic, primarily within the commercial real estate loan portfolio. Noninterest expense decreased in both comparisons largely due to lower variable costs, including lower expense associated with business travel.
  • Average loans decreased 8% compared with the second quarter due to declines across PNC's corporate banking, business credit and real estate businesses, including lower average utilization of loan commitments. Average loans increased 7% over the third quarter of 2019 due to broad growth across PNC's corporate banking, commercial banking and real estate businesses, including PPP loan originations.
  • Average deposits increased 5% from the second quarter and 39% from the third quarter of 2019 reflecting liquidity maintained by customers due to the economic impact of the pandemic.
  • Net charge-offs were $32 million in the third quarter of 2020 compared with $99 million in the second quarter and $30 million in the third quarter of 2019.
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Asset Management Group earnings for the third quarter of 2020 increased in both comparisons reflecting growth in noninterest income as a result of higher average equity markets. Compared with the third quarter of 2019, noninterest income was impacted by gains on 2019 divestiture activity. Provision for credit losses decreased in the third quarter of 2020 compared with the second quarter due to improvement in macroeconomic factors. Noninterest expense declined in both comparisons due to lower variable costs, and the decrease compared with the third quarter of 2019 was also impacted by 2019 divestitures.

Client assets under administration at September 30, 2020 included discretionary client assets under management of $158 billion and nondiscretionary client assets under administration of $142 billion. Discretionary client assets under management increased $7 billion compared with June 30, 2020 primarily driven by higher equity markets. Discretionary client assets under management decreased $5 billion compared with September 30, 2019 driven by the sale of components of the PNC Capital Advisors investment management business, including its PNC family of proprietary mutual funds, in the fourth quarter of 2019 partially offset by higher equity markets.

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 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 (877) 402-9103 and (303) 223-2685 (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 2020 earnings release, related financial supplement, and presentation slides to accompany the conference call remarks will be available at www.pnc.com/investorevents prior to the beginning of the call. A telephone replay of the call will be available for one week at (800) 633-8284 and (402) 977-9140 (international), conference ID 21968576 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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