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PNC Reports Third Quarter Net Income Of $1.0 Billion And $1.79 Diluted EPS
Capital Strengthened, Loan Growth Continued, Expenses Controlled

PITTSBURGH, Oct. 16, 2013 /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 2013 compared with net income of $1.1 billion, or $1.99 per diluted common share, for the second quarter of 2013 and $925 million, or $1.64 per diluted common share, for the third quarter of 2012. The company earned net income of $3.2 billion, or $5.55 per diluted common share, for the first nine months of 2013 compared with $2.3 billion, or $4.06 per diluted common share, for the first nine months of 2012.

"PNC continued to make significant progress on our strategic priorities as we advanced our efforts to deepen relationships with customers in the third quarter," said William S. Demchak, president and chief executive officer. "Even in the face of an environment that is challenging the entire industry, our businesses are successfully growing loans, and we are leveraging our high-quality balance sheet to drive revenue. We continued to strengthen our capital position in the quarter and control expenses as we work to create long-term shareholder value."

Income Statement Highlights

  • Earnings for the third quarter reflected ongoing loan growth, continued improvement in credit quality, fee income growth and disciplined expense management. Results included an after tax gain on the sale of Visa Class B common shares of $55 million, or $.10 per diluted common share.
  • Net interest income of $2.2 billion for the third quarter decreased $24 million, or 1 percent, compared with the second quarter primarily due to further spread compression and a decline in purchase accounting accretion partially offset by continued loan growth.
  • Noninterest income of $1.7 billion included underlying fee income growth.
    • Noninterest income declined $120 million compared with the second quarter primarily due to the impact of higher asset sales and valuations in the second quarter and a decrease in residential mortgage loan sales revenue in the third quarter driven by lower gain on sale margins and lower origination volume.
    • Third quarter benefited from improvement in the provision for residential mortgage repurchase obligations and higher net hedging gains on residential mortgage servicing rights.
    • A pretax gain on sale of Visa Class B common shares of $85 million was realized in the third quarter of 2013 compared with $83 million in the second quarter of 2013 and $137 million in the third quarter of 2012.
  • Noninterest expense of $2.4 billion for the third quarter decreased $11 million compared with the second quarter as PNC continued to focus on expense management.
  • Provision for credit losses declined to $137 million for the third quarter compared with $157 million for the second quarter due to continued improvement in overall credit quality.

Balance Sheet Highlights

  • Loans grew $3.1 billion, or 2 percent, to $193 billion at September 30, 2013 compared with June 30, 2013.
    • Total commercial lending grew $1.2 billion, or 1 percent, over second quarter primarily in real estate and to a lesser extent other specialty lending businesses.
    • Total consumer lending increased $1.9 billion as growth in automobile, home equity and credit card portfolios and purchases of residential real estate loans were partially offset by paydowns of education loans.
  • Overall credit quality continued to improve during the third quarter of 2013 compared with the second quarter, but at a slower pace.
    • Nonperforming assets of $3.6 billion at September 30, 2013 declined $156 million, or 4 percent.
    • Accruing loans past due decreased 5 percent.
    • Gross charge-offs decreased $16 million, or 4 percent. Net charge-offs increased $16 million as third quarter recoveries declined.
  • Deposits increased $3.8 billion, or 2 percent, to $216 billion at September 30, 2013 compared with June 30, 2013 driven by growth in transaction deposits.
  • PNC's well-positioned balance sheet remained core funded with a loans to deposits ratio of 89 percent at September 30, 2013.
  • PNC continued to build its strong capital position.
    • The Basel I Tier 1 common capital ratio increased to an estimated 10.4 percent at September 30, 2013 compared with 10.1 percent at June 30, 2013.
    • The pro forma fully phased-in Basel III Tier 1 common capital ratio increased to an estimated 8.6 percent at September 30, 2013 from 8.2 percent at June 30, 2013.

 


Earnings Summary


In millions, except per share data


3Q13



2Q13



3Q12



Net income


$

1,039



$

1,123



$

925



Diluted earnings per common share


$

1.79



$

1.99



$

1.64



Average diluted common shares outstanding



534




531




529



Return on average assets



1.36

%



1.49

%



1.23

%


Return on average common equity



10.50

%



11.81

%



10.15

%


Book value per common share  Period end


$

69.92



$

68.46



$

66.41



Cash dividends declared per common share


$

.44



$

.44



$

.40



 

The Consolidated Financial Highlights accompanying this news release include additional information regarding selected income statement items and reconciliations to reported amounts of non-GAAP financial measures, including a reconciliation of business segment income to net income. 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. Information in this news release including the financial tables is unaudited. See the notes and other information in the Consolidated Financial Highlights. 

 

CONSOLIDATED REVENUE REVIEW


















Revenue











Change


Change













3Q13 vs


3Q13 vs


In millions



3Q13



2Q13



3Q12


2Q13


3Q12


Net interest income


$

2,234


$

2,258


$

2,399


(1)

%


(7)

%


Noninterest income



1,686



1,806



1,689


(7)

%




Total revenue


$

3,920


$

4,064


$

4,088


(4)

%


(4)

%


 

Total revenue for the third quarter of 2013 decreased $144 million compared with the second quarter of 2013 and $168 million compared with the third quarter of 2012. The linked quarter decline was primarily due to lower noninterest income from the impact of higher asset sales and valuations in the second quarter and a decrease in residential mortgage loan sales revenue in the third quarter. Noninterest income for the third quarter included underlying fee income growth. The decline in total revenue compared with third quarter 2012 was due to lower net interest income.

Net interest income for the third quarter of 2013 declined $24 million compared with the second quarter primarily driven by further spread compression, as well as a decrease in purchase accounting accretion, partially offset by continued loan growth. Overall purchase accounting accretion declined slightly as lower scheduled accretion was substantially offset by higher cash recoveries on purchased impaired loans. Net interest income decreased $165 million compared with third quarter 2012 due to lower core net interest income from lower yields on loans and securities partially offset by lower rates paid on borrowed funds and deposits. Additionally, purchase accounting accretion declined 19 percent from third quarter 2012. The net interest margin decreased to 3.47 percent for the third quarter of 2013 compared with 3.58 percent for the second quarter of 2013 and 3.82 percent for the third quarter of 2012.

 

Noninterest Income






Change


Change















3Q13  vs


3Q13  vs


In millions



3Q13



2Q13



3Q12


2Q13


3Q12


Asset management


$

330


$

340


$

305


(3)

%


8

%


Consumer services



316



314



288


1

%


10

%


Corporate services



306



326



295


(6)

%


4

%


Residential mortgage


















Residential mortgage banking



193



240



264


(20)

%


(27)

%



Benefit / (provision) for residential



















mortgage repurchase obligations



6



(73)



(37)


 NM



 NM



Service charges on deposits



156



147



152


6

%


3

%


Net gains on sales of securities



21



61



40


(66)

%


(48)

%


Net other-than-temporary impairments



(2)



(4)



(24)


50

%


92

%


Other



360



455



406


(21)

%


(11)

%






$

1,686


$

1,806


$

1,689


(7)

%



















 

Noninterest income for the third quarter of 2013 included underlying fee income growth. The decrease in noninterest income of $120 million compared with the second quarter of 2013 was primarily attributable to the impact of higher asset sales and valuations in the second quarter and a decline in residential mortgage loan sales revenue in the third quarter. Improvement in the provision for residential mortgage repurchase obligations and higher net hedging gains on residential mortgage servicing rights contributed to third quarter revenue.

Asset management revenue decreased $10 million compared with the second quarter. Consumer service fees increased $2 million attributable to a higher volume of customer-initiated transactions. Corporate service fees decreased $20 million primarily due to the impact of higher second quarter commercial mortgage servicing rights valuations and reduced client activity in the third quarter partially offset by an increase in merger and acquisition advisory fees. Residential mortgage banking revenue declined as a result of a decrease in loan sales revenue driven by contracting gain on sale margins and lower origination volume partially offset by higher net hedging gains on residential mortgage servicing rights. Residential mortgage revenue benefited from improvement in the provision for residential mortgage repurchase obligations. Service charges on deposits grew $9 million from increased customer activity. Net gains on sales of securities decreased $40 million due to a lower volume of sales as part of portfolio management activities. Other noninterest income declined $95 million from the impact of higher second quarter credit valuations related to customer-initiated hedging activities and lower gains and recoveries on asset dispositions. Other noninterest income included a pretax gain of $85 million on the sale of 2 million Visa Class B common shares compared with a gain of $83 million in the second quarter of 2013. At September 30, 2013, PNC's remaining investment in Visa Class B common shares was approximately 10 million shares with a carrying value of approximately $.2 billion and fair market value of approximately $.8 billion.

Noninterest income for the third quarter of 2013 was relatively unchanged from third quarter 2012. Strong growth in client fee income was reflected in higher asset management revenue, consumer and corporate service fees and service charges on deposits. Residential mortgage banking revenue declined due to lower loan sales revenue driven by lower gain on sale margins partially offset by higher net hedging gains on residential mortgage servicing rights and improvement in the provision for residential mortgage repurchase obligations. Other noninterest income decreased as a result of a lower gain on the sale of Visa Class B common shares of $85 million for third quarter 2013 compared with $137 million in third quarter 2012.

 

CONSOLIDATED EXPENSE REVIEW



























Noninterest Expense







Change


Change














3Q13 vs


3Q13 vs


In millions



3Q13



2Q13



3Q12


2Q13


3Q12


Personnel


$

1,181


$

1,186


$

1,171




1

%


Occupancy



205



206



212




(3)

%


Equipment



194



189



185


3

%


5

%


Marketing



68



67



74


1

%


(8)

%


Other



776



787



1,008


(1)

%


(23)

%





$

2,424


$

2,435


$

2,650




(9)

%
















 

Noninterest expense for the third quarter of 2013 decreased $11 million compared with the second quarter of 2013 as expenses were well controlled. Noninterest expense included a noncash charge for unamortized discounts of $27 million related to redemptions of trust preferred securities compared with a $30 million charge in the second quarter. 

Noninterest expense for the third quarter of 2013 declined $226 million compared with the third quarter of 2012 due to a decrease in noncash charges related to redemptions of trust preferred securities from $95 million in third quarter 2012 and other decreases that resulted from the impact of third quarter 2012 integration costs and lower expenses for residential mortgage foreclosure-related matters, other real estate owned and legal reserves. 

The effective tax rate was 23.5 percent for the third quarter of 2013 compared with 23.7 percent for the second quarter of 2013 and 23.6 percent for the third quarter of 2012. 

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $308.6 billion at September 30, 2013 compared with $304.4 billion at June 30, 2013 and $300.8 billion at September 30, 2012. In both comparisons, the increase in assets was largely attributable to loan growth and higher interest-earning deposits with banks, partially offset by lower investment securities in the comparison with September 30, 2012.

 

Loans









Change


Change














9/30/13 vs


9/30/13 vs


In billions


9/30/2013


6/30/2013


9/30/2012


6/30/13


9/30/12


Commercial lending


$

114.4


$

113.2


$

105.2


1

%


9

%


Consumer lending



78.5



76.6



76.7


2

%


2

%


Total loans


$

192.9


$

189.8


$

181.9


2

%


6

%




















For the quarter ended:

















Average loans


$

190.5


$

188.6


$

180.7


1

%


5

%



















 

Total loans grew $3.1 billion as of September 30, 2013 compared with June 30, 2013. Commercial lending increased $1.2 billion during the third quarter of 2013 primarily in real estate and to a lesser extent other specialty lending businesses. Consumer lending grew $1.9 billion compared with June 30, 2013 due to growth in automobile, home equity and credit card loans and purchases of residential real estate loans partially offset by paydowns of education loans. Average loans for the third quarter of 2013 increased $1.9 billion over second quarter from growth in commercial real estate, consumer and commercial loans. Third quarter 2013 period end and average loans increased $11.0 billion and $9.8 billion, respectively, compared with third quarter 2012 primarily due to commercial, consumer and commercial real estate loan growth.

 

Investment Securities





Change


Change














9/30/13 vs


9/30/13 vs


In billions


9/30/2013


6/30/2013


9/30/2012


6/30/13


9/30/12


At quarter end


$

57.3


$

57.4


$

62.8






(9)

%


Average for the quarter ended


$

56.6


$

56.8


$

60.9






(7)

%


 

Investment securities balances at September 30, 2013 were stable with June 30, 2013 as net purchases were offset by prepayments and maturities. The available for sale investment securities balance included a net unrealized pretax gain of $.7 billion at both September 30, 2013 and June 30, 2013 compared with $1.6 billion at September 30, 2012, representing the difference between fair value and amortized cost. The decrease in the net unrealized pretax gain compared with the prior year quarter end resulted from an increase in market interest rates and widening asset spreads. Third quarter 2013 period end and average investment securities decreased $5.5 billion and $4.3 billion, respectively, compared with third quarter 2012 primarily as a result of a decline in agency residential mortgage-backed securities from principal repayments partially offset by net purchase activity.

Interest-earning deposits with banks were $8.0 billion at September 30, 2013, an increase of $4.3 billion compared with June 30, 2013 and $5.7 billion compared with September 30, 2012 as PNC enhanced its liquidity position in light of anticipated regulatory requirements.

 

Deposits









Change


Change














9/30/13 vs


9/30/13 vs


In billions


9/30/2013


6/30/2013


9/30/2012


6/30/13


9/30/12


Transaction deposits


$

181.8


$

175.6


$

168.4



4

%



8

%


Other deposits



34.3



36.7



37.9



(7)

%



(9)

%


Total deposits


$

216.1


$

212.3


$

206.3



2

%



5

%

















For the quarter ended:


















Average deposits


$

211.9


$

210.0


$

203.8



1

%



4

%

















 

Total deposits at September 30, 2013 increased $3.8 billion compared with June 30, 2013.  Growth in transaction deposits of $6.2 billion was partially offset by a reduction in Eurodollar time deposits and retail certificates of deposit. Average deposits increased $1.9 billion in the third quarter compared with the second quarter driven by growth in transaction deposits somewhat offset by lower retail certificates of deposit. Third quarter 2013 period end and average deposits increased $9.8 billion and $8.1 billion, respectively, compared with third quarter 2012 as growth in transaction deposits was partially offset by lower retail certificates of deposit due to runoff of maturing accounts.

 

Borrowed Funds






Change


Change














9/30/13 vs


9/30/13 vs


In billions


9/30/2013


6/30/2013


9/30/2012


6/30/13


9/30/12


At quarter end


$

40.3


$

39.9


$

43.1



1

%



(6)

%


Average for the quarter ended


$

38.7


$

38.6


$

43.7






(11)

%


 

Borrowed funds at September 30, 2013 increased $.4 billion compared with June 30, 2013. Increases in bank notes and senior debt and subordinated debt were partially offset by a decrease in federal funds purchased and repurchase agreements. Borrowed funds declined $2.8 billion at September 30, 2013 compared with September 30, 2012 primarily due to decreases in commercial paper and Federal Home Loan Bank borrowings partially offset by an increase in bank notes and senior debt. Average borrowed funds decreased $5.0 billion in the third quarter of 2013 compared with third quarter 2012 largely attributable to lower commercial paper and Federal Home Loan Bank borrowings somewhat offset by higher bank notes and senior debt.

 

Capital




9/30/2013*


6/30/2013


9/30/2012


Common shareholders' equity    In billions

$

37.2



$

36.3



$

35.1



Basel I Tier 1 common capital ratio



10.4

%



10.1

%



9.5

%


Basel I Tier 1 risk-based capital ratio



12.3

%



12.0

%



11.7

%


Pro forma Basel III Tier 1 common capital ratio



8.6

%



8.2

%



 **



* Ratios estimated


**Ratio not provided


 

PNC continued to increase its strong capital levels and ratios. Common shareholders' equity and the Tier 1 capital ratios increased in all comparisons primarily due to growth in retained earnings. The pro forma fully phased-in Basel III Tier 1 common capital ratio was calculated using PNC's estimated risk-weighted assets under the Basel III advanced approaches. The Federal Reserve Board announced final rules implementing Basel III on July 2, 2013. The Basel III Tier 1 common capital information is based on PNC's current understanding of the final Basel III rules. See Capital Ratios in the Consolidated Financial Highlights.

On October 3, 2013, the PNC board of directors declared a quarterly common stock cash dividend of 44 cents per share with a payment date of November 5, 2013.

 

CREDIT QUALITY REVIEW





















Credit Quality

Change


Change





At or for the quarter ended


9/30/13 vs


9/30/13 vs


In millions


9/30/2013


6/30/2013


9/30/2012


6/30/13


9/30/12


Nonperforming loans


$

3,206


$

3,321


$

3,414



(3)

%



(6)

%


Nonperforming assets


$

3,622


$

3,778


$

4,021



(4)

%



(10)

%


Accruing loans past due 90 days or more


$

1,633


$

1,762


$

2,456



(7)

%



(34)

%


Net charge-offs


$

224


$

208


$

331



8

%



(32)

%


Provision for credit losses


$

137


$

157


$

228



(13)

%



(40)

%


Allowance for loan and lease losses


$

3,691


$

3,772


$

4,039



(2)

%



(9)

%


 

Overall credit quality continued to improve during the third quarter of 2013. Nonperforming assets at September 30, 2013 decreased $156 million compared with June 30, 2013. Improvement was broad-based as consumer lending nonperforming loans declined $50 million, or 2 percent, due to residential mortgage loans, and commercial real estate and commercial nonperforming loans decreased $41 million and $23 million, respectively. Additionally, other real estate owned and foreclosed assets declined $41 million. Nonperforming assets decreased $399 million from third quarter 2012 as overall credit quality improved. Nonperforming assets to total assets were 1.17 percent at September 30, 2013 compared with 1.24 percent at June 30, 2013 and 1.34 percent at September 30, 2012.

Overall delinquencies decreased $128 million, or 5 percent, as of September 30, 2013 compared with June 30, 2013 driven by accruing loans past due 90 days or more which declined $129 million from lower past due residential real estate loans. A decline in accruing loans past due 60 to 89 days was offset by an increase in accruing loans past due 30 to 59 days.

Net charge-offs for the third quarter of 2013 increased $16 million compared with second quarter 2013. Gross charge-offs declined 4 percent to $340 million in the third quarter of 2013 compared with $356 million in the second quarter driven by lower residential real estate charge-offs. Linked quarter recoveries fell by $32 million led by lower commercial and commercial real estate recoveries. In the comparison with third quarter 2012, net charge-offs decreased $107 million attributable to improving credit quality. Net charge-offs for the third quarter of 2013 were .47 percent of average loans on an annualized basis compared with .44 percent for the second quarter of 2013 and .73 percent for the second quarter of 2012.

Provision for credit losses for third quarter 2013 decreased $20 million compared with second quarter 2013 and $91 million compared with third quarter 2012 due to continued improvement in overall credit quality including the purchased impaired loan portfolio.

The allowance for loan and lease losses to total loans was 1.91 percent at September 30, 2013, 1.99 percent at June 30, 2013 and 2.22 percent at September 30, 2012. The decrease in the allowance compared with second quarter end resulted from overall improvement in credit quality. The allowance to nonperforming loans was 115 percent at September 30, 2013 compared with 114 percent at June 30, 2013, and 118 percent at September 30, 2012.

 

BUSINESS SEGMENT RESULTS
















Business Segment Income (Loss)


In millions



3Q13




2Q13




3Q12



Retail Banking


$

165



$

158



$

192



Corporate & Institutional Banking



542




612




607



Asset Management Group



47




36




37



Residential Mortgage Banking



28




20




36



Non-Strategic Assets Portfolio



121




60




40



Other, including BlackRock



136




237




13



Net income


$

1,039



$

1,123



$

925


















See accompanying notes in Consolidated Financial Highlights


 

Retail Banking

Change



Change


















3Q13 vs



3Q13 vs



In millions



3Q13




2Q13




3Q12



2Q13



3Q12



Net interest income


$

1,006



$

1,012



$

1,076



$

(6)



$

(70)



Noninterest income


$

557



$

542



$

588



$

15



$

(31)



Provision for credit losses


$

152



$

148



$

220



$

4



$

(68)



Noninterest expense


$

1,151



$

1,156



$

1,140



$

(5)



$

11



Earnings


$

165



$

158



$

192



$

7



$

(27)


























In billions






















Average loans


$

66.4



$

65.8



$

64.5



$

.6



$

1.9



Average deposits


$

134.0



$

134.7



$

131.4



$

(.7)



$

2.6



 

Retail Banking earnings for the third quarter of 2013 increased compared with the second quarter and decreased compared with the third quarter of 2012. Noninterest income for third quarter 2013 reflected fee income growth from higher customer-initiated transactions in both comparisons. Noninterest income declined compared with third quarter 2012 due to lower gains on sales of Visa Class B common shares. Sales of 2 million Visa Class B common shares in each of the third and second quarters of 2013 resulted in pretax gains of $85 million and $83 million, respectively. In the third quarter of 2012, the pretax gain was $137 million on the sale of 5 million Visa Class B common shares. Net interest income declined in both comparisons due to spread compression, primarily on deposits. Provision for credit losses decreased from third quarter 2012 due to overall credit quality improvement. The increase in noninterest expense over third quarter 2012 was attributable to elevated marketing activities.

  • Retail Banking continued to grow customers while remaining focused on lowering delivery costs.
    • Checking relationships increased 183,000, or 3 percent, to 6,658,000 at September 30, 2013 from year end 2012.
    • PNC consolidated 62 branches in the third quarter for a total of 170 branches consolidated in the first nine months of the year. Plans are to consolidate an approximate total of 200 branches in 2013. PNC had a branch network of 2,724 branches and 7,441 ATMs at September 30, 2013.
    • Retail Banking is making progress on its strategy to provide cost-effective alternative servicing channels as customer preferences for convenience evolve.
      • Approximately 38 percent of consumer customers used non-branch channels for the majority of their transactions during the third quarter of 2013 compared to 35 percent for the third quarter of 2012.
      • Non-branch deposit transactions via ATM and mobile increased to 27 percent of total deposit transactions in the third quarter of 2013 compared with 16 percent for the third quarter of 2012.
  • Average transaction deposits for the third quarter of 2013 increased $200 million over the second quarter of 2013. Average certificates of deposit declined $773 million in the same comparison due to net runoff of maturing accounts. In the comparison with third quarter 2012, average transaction deposits increased $5.3 billion, or 5 percent, while average certificates of deposit decreased $3.7 billion, or 15 percent.
  • Average loans increased in the third quarter of 2013 by 1 percent over second quarter 2013 and 3 percent over third quarter 2012 as a result of growth in automobile, home equity and credit card loans partially offset by paydowns of education loans.
  • Net charge-offs were $143 million for third quarter 2013 compared with $152 million in the second quarter of 2013 and $219 million in the third quarter of 2012. Nonperforming assets of $1.3 billion at September 30, 2013 were stable with June 30, 2013.

 

Corporate & Institutional Banking

Change



Change















3Q13 vs



3Q13 vs



In millions



3Q13



2Q13



3Q12


2Q13



3Q12



Net interest income


$

945


$

943


$

1,019


$

2



$

(74)



Corporate service fees


$

277


$

297


$

258


$

(20)



$

19



Other noninterest income


$

134


$

180


$

139


$

(46)



$

(5)



Provision for credit losses (benefit)


$

30


$

(40)


$

(61)


$

70



$

91



Noninterest expense


$

495


$

499


$

520


$

(4)



$

(25)



Earnings


$

542


$

612


$

607


$

(70)



$

(65)























In billions



















Average loans


$

98.0


$

96.7


$

89.4


$

1.3



$

8.6



Average deposits


$

67.1


$

63.8


$

60.2


$

3.3



$

6.9



Commercial mortgage servicing portfolio  Quarter end


$

298


$

294


$

265


$

4



$

33



 

Corporate & Institutional Banking earnings decreased in the third quarter of 2013 compared with the second quarter of 2013 and the third quarter of 2012. Net interest income declined compared with third quarter 2012 as a result of spread compression on loans and deposits and lower purchase accounting accretion, which was partially offset by higher average loans and deposits. Corporate service fees decreased compared with the second quarter of 2013 due to the impact of higher second quarter commercial mortgage servicing rights valuations and reduced client activity in the third quarter partially offset by an increase in merger and acquisition advisory fees. The increase in corporate service fees in the prior year third quarter comparison was attributable to higher syndication and merger and acquisition advisory fees. Other noninterest income declined compared with second quarter 2013 due to the impact of higher second quarter credit valuations related to customer-initiated hedging activities. Provision for credit losses increased compared with a benefit in both second quarter 2013 and third quarter 2012 reflecting the slower pace of improving credit quality. 

  • Average loans increased in both comparisons primarily due to growth in real estate and to a lesser extent other specialty lending businesses.
  • Average deposits increased in both comparisons as a result of business growth and inflows into noninterest-bearing and money market deposits.
  • Net charge-offs were $56 million in the third quarter of 2013 compared with a net recovery of $19 million in the second quarter of 2013 and net charge-offs of $35 million in the third quarter of 2012. Net charge-offs in the third quarter of 2013 were primarily in the commercial portfolio. Net recoveries in second quarter 2013 were largely attributable to lower levels of commercial real estate and commercial charge-offs and an increase in commercial real estate recoveries.

 

Asset Management Group

Change



Change


















3Q13 vs



3Q13 vs



In millions



3Q13




2Q13




3Q12



2Q13



3Q12



Net interest income


$

74



$

70



$

73



$

4



$

1



Noninterest income


$

188



$

184



$

170



$

4



$

18



Provision for credit losses (benefit)


$

(4)



$

1



$

4



$

(5)



$

(8)



Noninterest expense


$

192



$

195



$

180



$

(3)



$

12



Earnings


$

47



$

36



$

37



$

11



$

10


























In billions






















Assets under administration     Quarter end


$

237



$

233



$

222



$

4



$

15



Average loans


$

6.9



$

6.8



$

6.2



$

.1



$

.7



Average deposits


$

8.7



$

8.9



$

7.9



$

(.2)



$

.8



 

Asset Management Group earnings for the third quarter of 2013 increased compared with both the second quarter of 2013 and third quarter of 2012. Noninterest income grew in both comparisons from increases in the equity markets and strong sales production resulting in net positive flows. Strategic investments in the business drove the increase in noninterest expense compared with third quarter 2012. 

  • Asset Management Group core growth strategies include investing in higher growth geographies, increasing internal referral sales and adding new front line sales staff, while focusing on client acquisition and asset growth. Sales activities were strong with a 36 percent increase in primary client acquisitions in the first nine months of 2013 compared with the same period in 2012.
  • Assets under administration at September 30, 2013 included discretionary assets under management of $122 billion and nondiscretionary assets under administration of $115 billion. Discretionary assets under management increased $5 billion compared with June 30, 2013 and $10 billion compared with September 30, 2012 driven by stronger equity markets and net positive flows.
  • Average loans increased 11 percent compared with the third quarter of 2012 as new client originations, primarily home equity loans, benefited from an attractive interest rate environment and loan referrals from other lines of business.
  • Average deposits decreased 2 percent compared with second quarter 2013 and increased 9 percent compared with third quarter 2012.

 

Residential Mortgage Banking

Change



Change
















3Q13 vs



3Q13 vs



In millions



3Q13



2Q13



3Q12


2Q13



3Q12



Net interest income


$

46


$

51


$

52


$

(5)



$

(6)



Noninterest income




















Benefit / (provision) for residential mortgage





















repurchase obligations


$

6


$

(73)


$

(37)


$

79



$

43




Other noninterest income


$

202


$

250


$

269


$

(48)



$

(67)



Provision for credit losses


$

-


$

4


$

2


$

(4)



$

(2)



Noninterest expense


$

210


$

192


$

226


$

18



$

(16)



Earnings


$

28


$

20


$

36


$

8



$

(8)
























In billions



















Residential mortgage servicing portfolio   Quarter end


$

115


$

116


$

119


$

(1)



$

(4)



Loan origination volume


$

3.7


$

4.7


$

3.8


$

(1.0)



$

(.1)























 

Residential Mortgage Banking earnings for the third quarter of 2013 increased compared with the second quarter of 2013 and decreased compared with the third quarter of 2012. Loan sales revenue declined in both comparisons driven by an increase in mortgage interest rates, which had the effect of reducing gain on sale margins and loan origination volume. This decrease was more than offset in the linked quarter comparison by a lower provision for residential mortgage repurchase obligations, which was a benefit in third quarter 2013, and higher net hedging gains on residential mortgage servicing rights. In the comparison with third quarter 2012, the decline in loan sales revenue was partially offset by higher net hedging gains on mortgage servicing rights and improvement in the provision for residential mortgage repurchase obligations. Noninterest expense was impacted by residential mortgage foreclosure-related expenses which increased in the third quarter of 2013 compared with the second quarter but declined compared with third quarter 2012.

Loan origination volume in the third quarter of 2013 was down 21 percent from the second quarter and 2 percent from the third quarter of 2012. Home purchase transaction volume included in loan origination volume increased 5 percent in the third quarter of 2013 compared with the second quarter. Home purchase transactions represented approximately 38 percent of third quarter 2013 origination volume compared with 28 percent in second quarter 2013 and 26 percent in third quarter 2012. Originations under the revised Home Affordable Refinance Program remained a significant portion of third quarter volume at approximately 32 percent.

 

Non-Strategic Assets Portfolio

Change



Change















3Q13 vs



3Q13 vs



In millions



3Q13



2Q13



3Q12


2Q13



3Q12



Net interest income


$

161


$

164


$

195


$

(3)



$

(34)



Noninterest income


$

20


$

11


$

9


$

9



$

11



Provision for credit losses (benefit)


$

(43)


$

39


$

61


$

(82)



$

(104)



Noninterest expense


$

33


$

41


$

79


$

(8)



$

(46)



Earnings


$

121


$

60


$

40


$

61



$

81























In billions



















Average loans


$

10.4


$

11.0


$

12.4


$

(.6)



$

(2.0)



 

Non-Strategic Assets Portfolio segment earnings increased in the third quarter of 2013 compared with the second quarter of 2013 and the third quarter of 2012. In both comparisons, the decrease in the provision for credit losses reflected continued improvement in credit quality including purchased impaired loans. Noninterest expense declined compared with third quarter 2012 primarily due to lower other real estate owned expense and lower loan servicing costs. The decrease in net interest income from third quarter 2012 resulted from portfolio runoff.

  • The Non-Strategic Assets Portfolio primarily consists of non-strategic assets obtained through acquisitions of other companies. The business activity of this segment is to manage the wind-down of the portfolio while maximizing its value and mitigating risk.
  • Average loans decreased in both comparisons reflecting customer payment activity and portfolio management activities to reduce underperforming assets.
  • Net charge-offs were $23 million for the third quarter of 2013 compared with $53 million for the second quarter of 2013 and $65 million for the third quarter of 2012. The decreases reflected continued improvement in credit quality.

Other, including BlackRock

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

PNC recorded earnings of $136 million in "Other, including BlackRock" for the third quarter of 2013 compared with $237 million for the second quarter of 2013 and $13 million for the third quarter of 2012. The decrease in earnings from the second quarter was mainly due to the impact of higher asset sales and valuations in the second quarter and lower gains and recoveries on asset dispositions in the third quarter. Earnings increased compared with third quarter 2012 primarily as a result of lower noncash charges related to redemptions of trust preferred securities and the impact of third quarter 2012 integration costs.

CONFERENCE CALL AND SUPPLEMENTAL FINANCIAL INFORMATION

PNC 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 (877) 402-9134 or (303) 223-4377 (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 2013 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 21672543 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 nation's 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.

[TABULAR MATERIAL FOLLOWS]

 


The PNC Financial Services Group, Inc.

Consolidated Financial Highlights (Unaudited)


FINANCIAL RESULTS

Three months ended


Nine months ended

Dollars in millions, except per share data

September 30

June 30

September 30



September 30


September 30



2013

2013

2012



2013


2012

Revenue






Net interest income


$

2,234

$

2,258

$

2,399


$

6,881

$

7,216

Noninterest income



1,686


1,806


1,689



5,058


4,227

Total revenue



3,920


4,064


4,088



11,939


11,443

Noninterest expense


2,424


2,435


2,650



7,254


7,753

Pretax, pre-provision earnings (a)


1,496


1,629


1,438



4,685


3,690

Provision for credit losses


137


157


228



530


669

Income before income taxes and noncontrolling interests

$

1,359

$

1,472

$

1,210


$

4,155

$

3,021

Net income (b)

$

1,039

$

1,123

$

925


$

3,166

$

2,282

Less:












Net income (loss) attributable to noncontrolling interests


2


1


(14)



(6)


(13)

Preferred stock dividends and discount accretion












and redemptions


71


53


63



199


127

Net income attributable to common shareholders

$

966

$

1,069

$

876


$

2,973

$

2,168

Diluted earnings per common share

$

1.79

$

1.99

$

1.64


$

5.55

$

4.06

Cash dividends declared per common share

$

.44

$

.44

$

.40


$

1.28

$

1.15


Certain prior period amounts included in these Consolidated Financial Highlights have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements.


(a)

We believe that pretax, pre-provision earnings, a non-GAAP measure, is useful as a tool to help evaluate the ability to provide for credit costs through operations.
















(b)

See page 17 for a reconciliation of business segment income to net income.





 





















Selected Noninterest Income Information - Increase (Decrease) to Noninterest Income and Impact on Diluted EPS














Three months ended



Nine months ended





September 30

June 30

September 30



September 30


September 30


In millions, except per share data

2013

2013

2012



2013


2012





















Commercial mortgage servicing rights recovery, net of
















economic hedge

















Pretax



$

18

$

44

$

16



$

73


$

15



After-tax



$

11

$

29

$

11



$

47


$

10



Impact on diluted earnings per share (a)



$

.02

$

.05

$

.02



$

.09


$

.02





















Benefit / (provision) for residential mortgage repurchase obligations
















Pretax



$

6

$

(73)

$

(37)



$

(71)


$

(507)



After-tax



$

4

$

(48)

$

(25)



$

(46)


$

(330)



Impact on diluted earnings per share (a)



$

.01

$

(.09)

$

(.05)



$

(.09)


$

(.62)





















Net gains on sales of securities
















Pretax



$

21

$

61

$

40



$

96


$

159



After-tax



$

13

$

40

$

25



$

62


$

103



Impact on diluted earnings per share (a)



$

.02

$

.08

$

.05



$

.12


$

.20





















Gains on sales of Visa Class B common shares
















Pretax



$

85

$

83

$

137



$

168


$

137



After-tax



$

55

$

54

$

89



$

109


$

89



Impact on diluted earnings per share (a)



$

.10

$

.10

$

.17



$

.21


$

.17





















Credit valuations related to customer-initiated hedging activities
















Pretax



$

(1)

$

39

$

18



$

40


$

(10)



After-tax





$

25

$

11



$

26


$

(7)



Impact on diluted earnings per share (a)



$

(.00)

$

.05

$

.02



$

.05


$

(.01)











(a)

In calculating impact on diluted earnings per share in the table above, after-tax amounts for the income statement items were calculated using a statutory federal income tax rate of 35%.

 


The PNC Financial Services Group, Inc.

Consolidated Financial Highlights (Unaudited)






Three months ended




Nine months ended



September 30


June 30


September 30




September 30



September 30





2013


2013


2012




2013


2012


PERFORMANCE RATIOS


















Net interest margin (a)



3.47

%


3.58

%


3.82

%



3.62

%


3.93

%

Noninterest income to total revenue



43



44



41




42



37


Efficiency (b)



62



60



65




61



68


Return on:


















Average common shareholders' equity



10.50



11.81



10.15




11.00



8.61


Average assets



1.36

%


1.49

%


1.23

%



1.40

%


1.04

%





















BUSINESS SEGMENT INCOME (LOSS) (c) (d)


















In millions







































Retail Banking (e)


$

165


$

158


$

192



$

443


$

475


Corporate & Institutional Banking



542



612



607




1,695



1,679


Asset Management Group (f)



47



36



37




126



111


Residential Mortgage Banking (g)



28



20



36




93



(116)


Non-Strategic Assets Portfolio



121



60



40




260



178


Other, including BlackRock (d) (h)      



136



237



13




549



(45)


Total net income



$

1,039


$

1,123


$

925



$

3,166


$

2,282





















(a)

Calculated as annualized taxable-equivalent net interest income divided by average earning assets. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under generally accepted accounting principles (GAAP) in the Consolidated Income Statement. The taxable equivalent adjustments to net interest income for the three months ended September 30, 2013, June 30, 2013 and September 30, 2012 were $43 million, $40 million and $36 million, respectively. The taxable-equivalent adjustments to net interest income for the nine months ended September 30, 2013 and September 30, 2012 were $123 million and $102 million, respectively.



(b)

Calculated as noninterest expense divided by total revenue. 



(c)

Our business information is presented based on our internal management reporting practices. We periodically refine our internal methodologies as management reporting practices are enhanced.



(d)

We consider BlackRock to be a separate reportable business segment but have combined its results with Other for this presentation. Our third quarter 2013 Form 10-Q will include additional information regarding BlackRock.



(e)

Includes gains on sales of a portion of Visa Class B common shares in the second and third quarters of 2013 and the third quarter of 2012. See page 16 for additional information related to this amount.



(f)

We consider a primary client relationship for Asset Management Group to be a client relationship with annual revenue generation of $10,000 or more.



(g)

Includes benefit/provisions for residential mortgage repurchase obligations. See page 16 for additional information related to these amounts.



(h)

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 gains or losses related to BlackRock transactions, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, private equity investments, intercompany eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and differences between business segment performance reporting and financial statement reporting (GAAP), including the presentation of net income attributable to noncontrolling interests as the segments' results exclude their portion of net income attributable to noncontrolling interests.

 



TOTAL AND CORE NET INTEREST INCOME AND NET INTEREST MARGIN



Three months ended


Nine months ended

</