Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________
FORM 10-Q
______________________________________
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
☐


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to         
    
Commission file number 001-09718
The PNC Financial Services Group, Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________
Pennsylvania
 
25-1435979
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
The Tower at PNC Plaza, 300 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2401
(Address of principal executive offices, including zip code)

(888) 762-2265
(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year, if changed since last report)
___________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
☒
  
Accelerated filer
 
☐
Non-accelerated filer
 
☐
  
Smaller reporting company
 
☐
 
 
 
  
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes  ☐  No  ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
 Name of Each Exchange
    on Which Registered    
Common Stock, par value $5.00
PNC
New York Stock Exchange
Depositary Shares Each Representing a 1/4,000 Interest in a Share of Fixed-to-
    Floating Rate Non-Cumulative Perpetual Preferred Stock, Series P
PNC P
New York Stock Exchange
Depositary Shares Each Representing a 1/4,000 Interest in a Share of 5.375%
    Non-Cumulative Perpetual Preferred Stock, Series Q
PNC Q
New York Stock Exchange
As of April 19, 2019, there were 451,437,916 shares of the registrant’s common stock ($5 par value) outstanding.
 

THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2019 Form 10-Q


 
Pages
PART I – FINANCIAL INFORMATION
 
Item 1.   Financial Statements (Unaudited).
 
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
18-33, 55-61 and 64-69
Item 4. Controls and Procedures.
 

THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2019 Form 10-Q (continued)

 
 
 
MD&A TABLE REFERENCE
 
Table
Description
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32

THE PNC FINANCIAL SERVICES GROUP, INC.
Cross-Reference Index to First Quarter 2019 Form 10-Q (continued)

 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE REFERENCE
 
Table
Description
Page
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
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63
64
65
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69
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71
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78



FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review, including the Consolidated Financial Highlights, should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Quarterly Report on Form 10-Q (the Report or Form 10-Q) and with Items 6, 7, 8 and 9A of our 2018 Annual Report on Form 10-K (2018 Form 10-K). We have reclassified certain prior period amounts to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements. For information regarding certain business, regulatory and legal risks, see the following: the Risk Management section of this Financial Review and of Item 7 in our 2018 Form 10-K; Item 1A Risk Factors included in our 2018 Form 10-K; and the Legal Proceedings and Commitments Notes of the Notes To Consolidated Financial Statements included in Item 1 of this Report and Item 8 of our 2018 Form 10-K. Also, see the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and the Critical Accounting Estimates And Judgments section in this Financial Review and in our 2018 Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this Report. See Note 14 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated net income as reported on a generally accepted accounting principles (GAAP) basis. In this Report, “PNC”, “we” or “us” refers to The PNC Financial Services Group, Inc. and its subsidiaries on a consolidated basis (except when referring to PNC as a public company, its common stock or other securities issued by PNC, which just refer to The PNC Financial Services Group, Inc.). References to The PNC Financial Services Group, Inc. or to any of its subsidiaries are specifically made where applicable.
Table 1: Consolidated Financial Highlights
Dollars in millions, except per share data
Unaudited
Three months ended
March 31
2019
2018
Financial Results (a)
 
 
Revenue
 
 
Net interest income
$
2,475

$
2,361

Noninterest income
1,811

1,750

Total revenue
4,286

4,111

Provision for credit losses
189

92

Noninterest expense
2,578

2,527

Income before income taxes and noncontrolling interests
$
1,519

$
1,492

Net income
$
1,271

$
1,239

Less:
 
 
Net income attributable to noncontrolling interests
10

10

Preferred stock dividends
63

63

Preferred stock discount accretion and redemptions
1

1

Net income attributable to common shareholders
1,197

1,165

Less:
 
 
Dividends and undistributed earnings allocated to participating securities
5

5

Impact of BlackRock earnings per share dilution
3

2

Net income attributable to diluted common shares
$
1,189

$
1,158

Diluted earnings per common share
$
2.61

$
2.43

Cash dividends declared per common share
$
.95

$
.75

Effective tax rate (b)
16.3
%
17.0
%
Performance Ratios
 
 
Net interest margin (c)
2.98
%
2.91
%
Noninterest income to total revenue
42
%
43
%
Efficiency
60
%
61
%
Return on:
 
 
Average common shareholders’ equity
11.13
%
11.04
%
Average assets
1.34
%
1.34
%
(a)
The Executive Summary and Consolidated Income Statement Review portions of this Financial Review section provide information regarding items impacting the comparability of the periods presented.
(b)
The effective income tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax.
(c)
Calculated as annualized taxable-equivalent net interest income divided by average interest-earning assets. To provide more meaningful comparisons of net interest margins, 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 GAAP in the Consolidated Income Statement. For additional information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section in Item 1 of this Report.

The PNC Financial Services Group, Inc. – Form 10-Q    1


Table 1: Consolidated Financial Highlights (Continued) (a)
Unaudited
March 31
2019

December 31
2018

March 31
2018

 
Balance Sheet Data (dollars in millions, except per share data)
 
 
 
 
Assets
$
392,837

$
382,315

$
379,161

 
Loans
$
232,293

$
226,245

$
221,614

 
Allowance for loan and lease losses
$
2,692

$
2,629

$
2,604

 
Interest-earning deposits with banks (b)
$
15,261

$
10,893

$
28,821

 
Investment securities
$
83,869

$
82,701

$
74,562

 
Loans held for sale
$
686

$
994

$
965

 
Equity investments (c)
$
12,567

$
12,894

$
12,008

 
Mortgage servicing rights
$
1,812

$
1,983

$
1,979

 
Goodwill
$
9,218

$
9,218

$
9,218

 
Other assets
$
34,761

$
34,408

$
27,949

 
Noninterest-bearing deposits
$
71,606

$
73,960

$
78,303

 
Interest-bearing deposits
$
199,615

$
193,879

$
186,401

 
Total deposits
$
271,221

$
267,839

$
264,704

 
Borrowed funds
$
59,860

$
57,419

$
58,039

 
Total shareholders’ equity
$
48,536

$
47,728

$
46,969

 
Common shareholders’ equity
$
44,546

$
43,742

$
42,983

 
Accumulated other comprehensive income (loss)
$
(5
)
$
(725
)
$
(699
)
 
Book value per common share
$
98.47

$
95.72

$
91.39

 
Period-end common shares outstanding (in millions)
452

457

470

 
Loans to deposits
86
%
84
%
84
%
 
Common shareholders’ equity to total assets
11.3
%
11.4
%
11.3
%
 
Client Assets (in billions)
 
 
 
 
Discretionary client assets under management
$
158

$
148

$
148

 
Nondiscretionary client assets under administration
130

124

129

 
Total client assets under administration
288

272

277

 
Brokerage account client assets
51

47

49

 
Total client assets
$
339

$
319

$
326

 
Basel III Capital Ratios (d)
 
 
 
 
Common equity Tier 1
9.8
%
9.6
%
9.6
%
 
Tier 1 risk-based
10.9
%
10.8
%
10.8
%
 
Total capital risk-based (e)
13.0
%
13.0
%
12.8
%
 
Leverage
9.6
%
9.4
%
9.4
%
 
Supplementary leverage
8.0
%
7.8
%
7.9
%
 
Asset Quality
 
 
 
 
Nonperforming loans to total loans
.71
%
.75
%
.83
%
 
Nonperforming assets to total loans, OREO and foreclosed assets
.77
%
.80
%
.90
%
 
Nonperforming assets to total assets
.45
%
.47
%
.53
%
 
Net charge-offs to average loans (for the three months ended) (annualized)
.24
%
.19
%
.21
%
 
Allowance for loan and lease losses to total loans
1.16
%
1.16
%
1.18
%
 
Allowance for loan and lease losses to total nonperforming loans
163
%
155
%
141
%
 
Accruing loans past due 90 days or more (in millions)
$
590

$
629

$
628

 
(a)
The Executive Summary and Consolidated Balance Sheet Review portions of this Financial Review provide information regarding items impacting the comparability of the periods presented.
(b)
Amounts include balances held with the Federal Reserve Bank of Cleveland (Federal Reserve Bank) of $15.0 billion, $10.5 billion and $28.6 billion as of March 31, 2019, December 31, 2018 and March 31, 2018, respectively.
(c)
Amounts include our equity interest in BlackRock.
(d)
All ratios are calculated based on the standardized approach. See Basel III Capital discussion in the Capital Management portion of the Risk Management section of this Financial Review and the capital discussion in the Banking Regulation and Supervision section of Item 1 Business and Item 1A Risk Factors in our 2018 Form 10-K.
(e)
The 2019 and 2018 Basel III Total risk-based capital ratios include nonqualifying trust preferred capital securities of $60 million and $80 million, respectively, that are subject to a phase-out period that runs through 2021.


2    The PNC Financial Services Group, Inc. – Form 10-Q


EXECUTIVE SUMMARY
Headquartered in Pittsburgh, Pennsylvania, we are one of the largest diversified financial services companies in the United States. We have businesses engaged in retail banking, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our retail branch network is located in markets across the Mid-Atlantic, Midwest and Southeast. We also have strategic international offices in four countries outside the U.S.

Key Strategic Goals
At PNC we manage our company for the long term. We are focused on the fundamentals of growing customers, loans, deposits and revenue and improving profitability, while investing for the future and managing risk, expenses and capital. We continue to invest in our products, markets and brand, and embrace our commitments to our customers, shareholders, employees and the communities where we do business.

We strive to expand and deepen customer relationships by offering a broad range of deposit, credit and fee-based products and services. We are focused on delivering those products and services to our customers with the goal of addressing their financial objectives and putting customers’ needs first. Our business model is built on customer loyalty and engagement, understanding our customers’ financial goals and offering our diverse products and services to help them achieve financial well-being. Our approach is concentrated on organically growing and deepening client relationships across our businesses that meet our risk/return measures.

We are focused on our strategic priorities, which are designed to enhance value over the long term, and consist of:
•
Expanding our leading banking franchise to new markets and digital platforms;
•
Deepening customer relationships by delivering a superior banking experience and financial solutions; and
•
Leveraging technology to innovate and enhance products, services, security and processes.

Our capital priorities are to support client growth and business investment, maintain appropriate capital in light of economic conditions, the Basel III framework, and other regulatory expectations, and return excess capital to shareholders. For more detail, see the Capital Highlights portion of this Executive Summary and the Liquidity and Capital Management portion of the Risk Management section of this Financial Review and the Supervision and Regulation section in Item 1 Business of our 2018 Form 10-K.

Income Statement Highlights
Net income for the first quarter of 2019 increased 3% to $1.3 billion, or $2.61 per diluted common share, compared to $1.2 billion, or $2.43 per diluted common share, for the first quarter of 2018.
•
Total revenue increased $175 million, or 4%, to $4.3 billion.
•
Net interest income increased $114 million, or 5%, to $2.5 billion.
•
Net interest margin increased to 2.98% compared to 2.91% for the first quarter of 2018.
•
Noninterest income increased $61 million, or 3%, to $1.8 billion.
•
Provision for credit losses was $189 million compared to $92 million for the first quarter of 2018.
•
Noninterest expense increased $51 million, or 2%, to $2.6 billion.

For additional detail, see the Consolidated Income Statement Review section of this Financial Review.

Balance Sheet Highlights
Our balance sheet was strong and well positioned at March 31, 2019 and December 31, 2018. In comparison to December 31, 2018:
•
Total assets increased $10.5 billion to $392.8 billion.
•
Total loans increased $6.0 billion, or 3%, to $232.3 billion.
•
Total commercial lending grew $6.1 billion, or 4%.
•
Total consumer lending decreased $.1 billion.
•
Investment securities increased $1.2 billion, or 1%, to $83.9 billion.
•
Interest-earning deposits with banks, primarily with the Federal Reserve Bank, increased $4.4 billion, or 40%, to $15.3 billion.
•
Total deposits increased $3.4 billion, or 1%, to $271.2 billion.

For additional detail, see the Consolidated Balance Sheet Review section of this Financial Review.






The PNC Financial Services Group, Inc. – Form 10-Q    3


Credit Quality Highlights
Overall credit quality remained strong.
•
At March 31, 2019 compared to December 31, 2018:
•
Nonperforming assets decreased $23 million, or 1%.
•
Overall loan delinquencies decreased $49 million, or 3%, to $1.4 billion.
•
Net charge-offs were $136 million in the first quarter of 2019 compared to $113 million for the first quarter of 2018.
•
The allowance for loan and lease losses to total loans of 1.16% at March 31, 2019 was unchanged compared to December 31, 2018.

For additional detail, see the Credit Risk Management portion of the Risk Management section of this Financial Review.

Capital Highlights
We maintained a strong capital position and continued to return capital to shareholders.
•
The Basel III common equity Tier 1 capital ratio was 9.8% at March 31, 2019, compared with 9.6% at December 31, 2018.
•
In the first quarter of 2019, we returned $1.2 billion of capital to shareholders through repurchases of 5.9 million common shares for $725 million and dividends on common shares of $438 million.
•
Common shareholders' equity increased to $44.5 billion at March 31, 2019 compared to $43.7 billion at December 31, 2018.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for more detail on our 2019 liquidity and capital actions as well as our capital ratios.

Our ability to take certain capital actions, including plans to pay or increase common stock dividends or to repurchase shares under current or future programs, is subject to the results of the supervisory assessment of capital adequacy undertaken by the Board of Governors of the Federal Reserve System (Federal Reserve) as part of the Comprehensive Capital Analysis and Review (CCAR) process. For additional information, see the Supervision and Regulation section in Item 1 Business of our 2018 Form 10-K.

Business Outlook
Our forward-looking financial statements are subject to the risk that economic and financial market conditions will be substantially different than those we are currently expecting and do not take into account potential legal and regulatory contingencies. These statements are based on our view that:
•
U.S. economic growth has accelerated over the past two years to above its long-run trend.
•
Growth is expected to rebound in the second quarter following a soft first quarter 2019, and slow over the remaining course of 2019 and into 2020.
•
Further gradual improvement in the labor market will occur this year, including job gains and rising wages, which would be a positive indicator for consumer spending.
•
Trade restrictions and geopolitical concerns are downside risks to the forecast.
•
Inflation has slowed in early 2019, to below the Federal Open Market Committee's (FOMC) 2% objective, but is expected to rise in the second half of the year.
•
Our baseline forecast is for no change to the federal funds rate in 2019 and 2020, with the rate staying in its current range of 2.25% to 2.50%.

For the second quarter of 2019 compared to the first quarter of 2019, we expect:
•
Average loan growth to be up approximately 1%;
•
Net interest income to increase by low-single digits, on a percentage basis;
•
Fee income to increase by mid-single digits, on a percentage basis. Fee income consists of asset management, consumer services, corporate services, residential mortgage and service charges on deposits;
•
The quarterly run rate of other noninterest income to be in the range of $275 million to $325 million, excluding net securities gains (losses) and Visa activity;
•
Provision for credit losses to be between $125 million and $200 million; and
•
Noninterest expense to increase by low-single digits, on a percentage basis.

For full year 2019 compared to full year 2018, we expect:
•
Average loan growth to be between 3% and 4%;
•
Revenue growth on the higher end of low-single digits, on a percentage basis;
•
Noninterest expense to increase on the lower end of low-single digits, on a percentage basis;
•
The effective tax rate to be approximately 17%; and
•
To generate positive operating leverage.


4    The PNC Financial Services Group, Inc. – Form 10-Q


See the Cautionary Statement Regarding Forward-Looking Information section in this Financial Review and Item 1A Risk Factors in our 2018 Form 10-K for other factors that could cause future events to differ, perhaps materially, from those anticipated in these forward-looking statements.
CONSOLIDATED INCOME STATEMENT REVIEW

Our Consolidated Income Statement is presented in Part I, Item 1 of this Report.

Net income for the first quarter of 2019 was $1.3 billion, or $2.61 per diluted common share, an increase of 3% compared to $1.2 billion, or $2.43 per diluted common share, for the first quarter of 2018. The increase was driven by a 4% increase in revenue, partially offset by a higher provision for credit losses and a 2% increase in noninterest expense. Higher revenue in the comparison reflected a 5% increase in net interest income and a 3% increase in noninterest income.
Net Interest Income
Table 2: Summarized Average Balances and Net Interest Income (a)
 
 
2019

2018
 
Three months ended March 31
Dollars in millions
 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Average
Balances

 
Average
Yields/
Rates

 
Interest
Income/
Expense

 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
82,318

 
3.05
%
 
$
627

 
$
74,656

 
2.78
%
 
$
519

 
Loans
 
228,545

 
4.61
%
 
2,622

 
221,104

 
4.09
%
 
2,250

 
Interest-earning deposits with banks
 
15,017

 
2.43
%
 
91

 
25,667

 
1.52
%
 
98

 
Other
 
11,068

 
4.14
%
 
115

 
7,904

 
4.11
%
 
80

 
Total interest-earning assets/interest income
 
$
336,948

 
4.11
%
 
3,455

 
$
329,331

 
3.59
%
 
2,947

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
195,816

 
.98
%
 
472

 
$
183,438

 
.47
%
 
213

 
Borrowed funds
 
59,783

 
3.21
%
 
481

 
59,638

 
2.31
%
 
344

 
Total interest-bearing liabilities/interest expense
 
$
255,599

 
1.50
%
 
953

 
$
243,076

 
.91
%
 
557

 
Net interest margin/income (Non-GAAP)
 
 
 
2.98
%
 
2,502

 
 
 
2.91
%
 
2,390

 
Taxable-equivalent adjustments
 
 
 
 
 
(27
)
 
 
 
 
 
(29
)
 
Net interest income (GAAP)
 
 
 
 
 
$
2,475

 
 
 
 
 
$
2,361

 
(a)
Interest income calculated as taxable-equivalent interest income. To provide more meaningful comparisons of interest income and yields for all interest-earning assets, as well as net interest margins, we use interest income on a taxable-equivalent basis in calculating average yields and net interest margins 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 GAAP on the Consolidated Income Statement. For more information, see Reconciliation of Taxable-Equivalent Net Interest Income (Non-GAAP) in the Statistical Information (Unaudited) section of this Report.

Changes in net interest income and margin result from the interaction of the volume and composition of interest-earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources of funding. See the Statistical Information (Unaudited) – Average Consolidated Balance Sheet And Net Interest Analysis section of this Report for additional information.

Net interest income increased by $114 million, or 5%, in the first quarter of 2019 compared with the first quarter of 2018. This increase reflected higher loan and securities yields and balances, partially offset by higher deposit and borrowing costs and balances. Net interest margin increased 7 basis points reflecting the impact of higher interest rates.

Average investment securities increased $7.7 billion, or 10%, driven by net purchase activity of agency residential mortgage-backed securities of $4.4 billion and U.S. Treasury and government agency securities of $3.9 billion.

Average investment securities increased to 24% of average interest-earning assets for the first quarter of 2019 compared to 23% for the first quarter of 2018.

Average loans grew $7.4 billion, or 3%, reflecting an increase in average commercial lending of $6.5 billion, or 4%, driven by growth in the Corporate Banking and Business Credit businesses in our Corporate & Institutional Banking segment.

Average consumer lending increased $.9 billion, or 1%. Growth in residential real estate, automobile and credit card was partially offset by declines in home equity and education loans. Lower home equity loans reflected paydowns and payoffs exceeding new originated volume. In addition, runoff of brokered home equity and government guaranteed education loans contributed to the

The PNC Financial Services Group, Inc. – Form 10-Q    5


declines. Average loans represented 68% of average interest-earning assets for the first quarter of 2019 compared to 67% for the first quarter of 2018.

Average interest-earning deposits with banks decreased $10.7 billion, or 41%, reflecting lower average balances held with the Federal Reserve Bank as investment of liquidity continued.

Average interest-bearing deposits grew $12.4 billion, or 7%, reflecting overall deposit and customer growth. Additionally, the increase reflects a shift of commercial deposits to interest-bearing from noninterest-bearing deposits, which declined $5.8 billion to $71.4 billion, as deposit rates have risen. In total, average interest-bearing deposits increased to 77% of average interest-bearing liabilities compared to 75% for the first quarter of 2018.

Further details regarding average loans and deposits are included in the Business Segments Review section of this Financial Review.
Noninterest Income
Table 3: Noninterest Income
 

Three months ended March 31
 
 
 
 
 
 
 
Change
 
Dollars in millions
 
2019

 
2018

 
$

 
%

 
Noninterest income
 
 
 
 
 
 
 
 
 
Asset management
 
$
437

 
$
455

 
$
(18
)
 
(4
)%
 
Consumer services
 
371

 
357

 
14

 
4
 %
 
Corporate services
 
462

 
429

 
33

 
8
 %
 
Residential mortgage
 
65

 
97

 
(32
)
 
(33
)%
 
Service charges on deposits
 
168

 
167

 
1

 
1
 %
 
Other
 
308

 
245

 
63

 
26
 %
 
Total noninterest income
 
$
1,811


$
1,750


$
61

 
3
 %
 
 
Noninterest income as a percentage of total revenue was 42% for the first quarter of 2019 compared to 43% for the same period in 2018.

Asset management revenue declined due to changes in the mix of assets under management and lower earnings from our equity investment in BlackRock. PNC's discretionary client assets under management increased to $158 billion at March 31, 2019 compared to $148 billion at March 31, 2018.

Growth in consumer service fees resulted from increases in debit card, credit card, net of rewards, and brokerage fees reflecting continued momentum in customer activity in both transaction trends and customer growth.

Higher corporate services revenue was primarily driven by growth in merger and acquisition advisory fees of $15 million and treasury management product revenue of $14 million.

Residential mortgage revenue decreased as a result of a negative adjustment for residential mortgage servicing rights valuation, net of economic hedge, compared with a benefit in first quarter 2018, and lower loan sales revenue.

The increase in other noninterest income was largely attributable to higher gains on asset sales and higher revenue from private equity investments, partially offset by negative derivative fair value adjustments related to Visa Class B common shares of $31 million in the first quarter of 2019 compared to $2 million in the first quarter of 2018.

Provision For Credit Losses
The provision for credit losses increased $97 million to $189 million in the first quarter of 2019 compared to $92 million in the first quarter of 2018 reflecting loan growth, including new loans and increased utilization, and reserve increases in the auto loan portfolio.

The Credit Risk Management portion of the Risk Management section of this Financial Review includes additional information regarding factors impacting the provision for credit losses.


6    The PNC Financial Services Group, Inc. – Form 10-Q


Noninterest Expense

Table 4: Noninterest Expense
 
 
Three months ended March 31
 
 
 
 
 
 
 
Change
 
Dollars in millions
 
2019

 
2018

 
$

 
%

 
Noninterest expense
 
 
 
 
 
 
 
 
 
Personnel
 
$
1,414

 
$
1,354

 
$
60

 
4
 %
 
Occupancy
 
215

 
218

 
(3
)
 
(1
)%
 
Equipment
 
273

 
273

 
—

 
—

 
Marketing
 
65

 
55

 
10

 
18
 %
 
Other
 
611

 
627

 
(16
)
 
(3
)%
 
Total noninterest expense
 
$
2,578

 
$
2,527

 
$
51

 
2
 %
 
 
Noninterest expense increased in the comparison as investments in support of business growth were reflected in higher personnel and marketing expense, which included costs for PNC's national retail digital strategy. These increases were offset in part by a decrease in Federal Deposit Insurance Corporation (FDIC) deposit insurance as a result of the elimination of the surcharge assessment.

PNC continued to focus on disciplined expense management, and for full-year 2019 we have a goal of $300 million in cost savings through our continuous improvement program, which we expect will help fund a portion of our strategic investments.

Effective Income Tax Rate

The effective income tax rate was 16.3% in the first quarter of 2019 compared to 17.0% in the first quarter of 2018.
CONSOLIDATED BALANCE SHEET REVIEW
Table 5: Summarized Balance Sheet Data
 
March 31

 
December 31

 
Change
 
Dollars in millions
2019

 
2018

 
$
%
 
Assets
 
 
 
 
 
 
 
Interest-earning deposits with banks
$
15,261

 
$
10,893

 
$
4,368

40
 %
 
Loans held for sale
686

 
994

 
(308
)
(31
)%
 
Investment securities
83,869

 
82,701

 
1,168

1
 %
 
Loans
232,293

 
226,245

 
6,048

3
 %
 
Allowance for loan and lease losses
(2,692
)
 
(2,629
)
 
(63
)
(2
)%
 
Mortgage servicing rights
1,812

 
1,983

 
(171
)
(9
)%
 
Goodwill
9,218

 
9,218

 
—

—

 
Other, net
52,390

 
52,910

 
(520
)
(1
)%
 
Total assets
$
392,837

 
$
382,315

 
$
10,522

3
 %
 
Liabilities
 
 
 
 




 
Deposits
$
271,221

 
$
267,839

 
$
3,382

1
 %
 
Borrowed funds
59,860

 
57,419

 
2,441

4
 %
 
Other
13,181

 
9,287

 
3,894

42
 %
 
Total liabilities
344,262

 
334,545

 
9,717

3
 %
 
Equity
 
 
 
 




 
Total shareholders’ equity
48,536

 
47,728

 
808

2
 %
 
Noncontrolling interests
39

 
42

 
(3
)
(7
)%
 
Total equity
48,575

 
47,770

 
805

2
 %
 
Total liabilities and equity
$
392,837

 
$
382,315

 
$
10,522

3
 %
 

The summarized balance sheet data in Table 5 is based upon our Consolidated Balance Sheet in Part 1, Item 1 of this Report.

Our balance sheet was strong and well positioned at both March 31, 2019 and December 31, 2018.
•
Total assets increased driven by loan growth, higher interest-earning deposits with banks and higher investment securities;
•
Total liabilities increased due to deposit growth, higher federal funds purchased and timing of securities purchases;
•
Total equity increased as higher retained earnings driven by net income and higher accumulated other comprehensive income (AOCI) was partially offset by share repurchases.


The PNC Financial Services Group, Inc. – Form 10-Q    7


The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and regulatory compliance is included in the Liquidity and Capital Management portion of the Risk Management section in this Financial Review and in Note 18 Regulatory Matters in the Notes To Consolidated Financial Statements included in our 2018 Form 10-K.
Loans
Table 6: Loans
 
March 31

 
December 31

 
Change
 
Dollars in millions
2019

 
2018

 
$
%
 
Commercial lending
 
 
 
 
 
 
 
Commercial
$
122,993

 
$
116,834

 
$
6,159

5
 %
 
Commercial real estate
28,101

 
28,140

 
(39
)
—

 
Equipment lease financing
7,348

 
7,308

 
40

1
 %
 
Total commercial lending
158,442

 
152,282

 
6,160

4
 %
 
Consumer lending
 
 
 
 




 
Home equity
25,500

 
26,123

 
(623
)
(2
)%
 
Residential real estate
19,107

 
18,657

 
450

2
 %
 
Automobile
14,707

 
14,419

 
288

2
 %
 
Credit card
6,267

 
6,357

 
(90
)
(1
)%
 
Education
3,707

 
3,822

 
(115
)
(3
)%
 
Other consumer
4,563

 
4,585

 
(22
)
—

 
Total consumer lending
73,851

 
73,963

 
(112
)
—

 
Total loans
$
232,293

 
$
226,245

 
$
6,048

3
 %
 

Commercial loans increased reflecting broad-based growth across our Corporate Banking, Business Credit and Real Estate businesses within our Corporate & Institutional Banking segment. In Corporate Banking, commercial loans increased primarily driven by asset-backed finance securitizations as well as increased lending to large and midsize corporate clients. In Business Credit, commercial loans increased driven by new originations and higher utilization. In the Real Estate business, increased multifamily agency warehouse lending also contributed to the growth in commercial loans.

For commercial loans by industry and commercial real estate loans by geography, see Loan Portfolio Characteristics and Analysis in the Credit Risk Management portion of the Risk Management section in this Financial Review.

Consumer lending balances decreased as lower home equity loans, education loans, and credit card balances were partially offset by growth in residential real estate and automobile loans.

Home equity loans declined as paydowns and payoffs exceeded new originated volume and brokered home equity loans continued to runoff. Education loans declined primarily due to runoff of the guaranteed education loan portfolio. Credit card balances declined due to seasonally lower consumer spending.

Residential real estate loans increased primarily from originations of nonconforming loans, which are loans that do not meet government agency standards as a result of exceeding agency conforming loan limits. The growth in automobile loans was due to higher indirect auto loans as a result of continued new loan growth and expansion into franchised dealers in new markets.

For information on home equity and residential real estate loans, including by geography, and automobile loans, see Loan Portfolio Characteristics and Analysis in the Credit Risk Management portion of the Risk Management section in this Financial Review.

See the Credit Risk Management portion of the Risk Management section of this Financial Review, Note 3 Asset Quality and Note 4 Allowance for Loan and Lease Losses in our Notes To Consolidated Financial Statements included in this Report, and Note 1 Accounting Policies in our 2018 Form 10-K for additional information regarding our loan portfolio.

8    The PNC Financial Services Group, Inc. – Form 10-Q


Investment Securities

Investment securities of $83.9 billion at March 31, 2019 increased $1.2 billion, or 1%, compared to December 31, 2018, driven by net purchases of U.S. Treasury and government agency securities of $.9 billion and asset-backed securities of $.6 billion, partially offset by a decline of other securities of $.5 billion.

The level and composition of the investment securities portfolio fluctuates over time based on many factors including market conditions, loan and deposit growth, and balance sheet management activities. We manage our investment securities portfolio to optimize returns, while providing a reliable source of liquidity for our banking and other activities, considering the Liquidity Coverage Ratio (LCR) and other internal and external guidelines and constraints.
Table 7: Investment Securities
 
March 31, 2019
 
December 31, 2018
 
Ratings (a) as of March 31, 2019
 
Dollars in millions
Amortized
Cost

 
Fair
Value

 
Amortized
Cost

 
Fair
Value

 
AAA/
AA

 
A

 
BBB

 
BB and Lower

 
No
Rating

 
U.S. Treasury and government agencies
$
19,621

 
$
19,778

 
$
18,862

 
$
18,863

 
100
%
 

 

 

 

 
Agency residential mortgage-backed
44,866

 
44,750

 
45,153

 
44,407

 
100
%
 

 

 

 

 
Non-agency residential mortgage-backed
1,983

 
2,278

 
2,076

 
2,365

 
13
%
 
2
%
 
2
%
 
48
%
 
35
%
 
Agency commercial mortgage-backed
2,705

 
2,681

 
2,773

 
2,720

 
100
%
 

 

 

 

 
Non-agency commercial mortgage-backed (b)
3,304

 
3,308

 
3,177

 
3,145

 
88
%
 
5
%
 


 


 
7
%
 
Asset-backed (c)
5,682

 
5,739

 
5,115

 
5,155

 
88
%
 
3
%
 
3
%
 
5
%
 
1
%
 
Other (d)
5,181

 
5,325

 
5,670

 
5,753

 
72
%
 
15
%
 
9
%
 
1
%
 
3
%
 
Total investment securities (e)
$
83,342

 
$
83,859

 
$
82,826

 
$
82,408

 
95
%
 
1
%
 
1
%
 
2
%
 
1
%
 
(a)
Ratings percentages allocated based on amortized cost.
(b)
Collateralized primarily by retail properties, office buildings, lodging properties and multi-family housing.
(c)
Collateralized primarily by corporate debt, government guaranteed education loans and other consumer credit products.
(d)
Includes state and municipal securities.
(e)
Includes available for sale and held to maturity securities, which are recorded on our balance sheet at fair value and amortized cost, respectively.

Table 7 presents the distribution of our total investment securities portfolio by amortized cost and fair value, as well as by credit rating. We have included credit ratings information because we believe that the information is an indicator of the degree of credit risk to which we are exposed, which could affect our risk-weighted assets and, therefore, our risk-based regulatory capital ratios under the current regulatory capital rules. Changes in credit ratings classifications could indicate increased or decreased credit risk and could be accompanied by a reduction or increase in the fair value of our investment securities portfolio.

The duration of investment securities was 3.1 years at March 31, 2019. We estimate that at March 31, 2019 the effective duration of investment securities was 3.3 years for an immediate 50 basis points parallel increase in interest rates and 2.9 years for an immediate 50 basis points parallel decrease in interest rates.

Based on expected prepayment speeds, the weighted-average expected maturity of the investment securities portfolio was 4.9 years at March 31, 2019 compared to 5.3 years at December 31, 2018.

Table 8: Weighted-Average Expected Maturities of Mortgage and Asset-Backed Debt Securities
March 31, 2019
Years

 
Agency residential mortgage-backed
5.6

 
Non-agency residential mortgage-backed
6.2

 
Agency commercial mortgage-backed
4.1

 
Non-agency commercial mortgage-backed
2.7

 
Asset-backed
2.1

 

Additional information regarding our investment securities is included in Note 5 Investment Securities and Note 6 Fair Value in the Notes To Consolidated Financial Statements included in this Report.


The PNC Financial Services Group, Inc. – Form 10-Q    9


Funding Sources
Table 9: Details of Funding Sources
 
March 31

 
December 31

 
Change
 
Dollars in millions
2019

 
2018

 
$
%
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing
$
71,606

 
$
73,960

 
$
(2,354
)
(3
)%
 
Interest-bearing
 
 
 
 




 
Money market
53,037

 
53,368

 
(331
)
(1
)%
 
Demand
65,643

 
65,211

 
432

1
 %
 
Savings
61,315

 
56,793

 
4,522

8
 %
 
Time deposits
19,620

 
18,507

 
1,113

6
 %
 
Total interest-bearing deposits
199,615

 
193,879

 
5,736

3
 %
 
Total deposits
271,221

 
267,839

 
3,382

1
 %
 
Borrowed funds
 
 
 
 




 
Federal Home Loan Bank (FHLB) borrowings
20,501

 
21,501

 
(1,000
)
(5
)%
 
Bank notes and senior debt
25,598

 
25,018

 
580

2
 %
 
Subordinated debt
5,977

 
5,895

 
82

1
 %
 
Other
7,784

 
5,005

 
2,779

56
 %
 
Total borrowed funds
59,860

 
57,419

 
2,441

4
 %
 
Total funding sources
$
331,081

 
$
325,258

 
$
5,823

2
 %
 

Total deposits increased as growth in interest-bearing deposits was partially offset by a decrease in noninterest-bearing deposits. The increase in interest-bearing deposits reflected consumer deposit growth, including from the national retail digital strategy. Noninterest-bearing deposits decreased due to seasonal declines in commercial deposits as well as a shift of commercial deposits to interest-bearing.

Borrowed funds increased due to higher federal funds purchased, included in other borrowed funds, and bank notes and senior debt, which were partially offset by decreases in FHLB borrowings. The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan, investment securities and deposit growth, and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity for our banking and other activities, considering our LCR and other internal and external guidelines and constraints.

See the Liquidity and Capital Management portion of the Risk Management section of this Financial Review for additional information regarding our 2019 liquidity and capital activities.

Shareholders’ Equity
Total shareholders’ equity was $48.5 billion at March 31, 2019, an increase of $.8 billion compared to December 31, 2018. The increase resulted from net income of $1.3 billion and higher AOCI of $.7 billion related to net unrealized securities gains, partially offset by common share repurchases of $725 million and common and preferred dividends of $438 million.

Common shares outstanding were 452 million and 457 million at March 31, 2019 and December 31, 2018, respectively, as repurchases of 5.9 million shares during the period were partially offset by stock-based compensation activity.
BUSINESS SEGMENTS REVIEW

We have four reportable business segments:
•
Retail Banking
•
Corporate & Institutional Banking
•
Asset Management Group
•
BlackRock

Business segment results and a description of each business are included in Note 14 Segment Reporting in the Notes To Consolidated Financial Statements in this Report. Certain amounts included in this Business Segments Review differ from those amounts shown in Note 14, primarily due to the presentation in this Financial Review of business net interest income on a taxable-equivalent basis.

Net interest income in business segment results reflects our internal funds transfer pricing methodology. Assets receive a funding charge and liabilities and capital receive a funding credit based on a transfer pricing methodology that incorporates product repricing characteristics, tenor and other factors.

10    The PNC Financial Services Group, Inc. – Form 10-Q



Total business segment financial results differ from total consolidated net income. The impact of these differences is reflected in the “Other” category as shown in Table 71 in Note 14 Segment Reporting in Item 1 of this Report. “Other” 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, gains or losses related to BlackRock transactions, exited businesses, 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.

Retail Banking

Retail Banking's core strategy is to acquire and retain customers who maintain their primary checking and transaction relationships with us. We seek to deepen relationships by meeting the broad range of our customers’ financial needs with savings, liquidity, lending, investment and retirement solutions. A strategic priority for us is to differentiate the customer experience and drive transformation and automation. A key element of our strategy is to expand the use of lower-cost alternative distribution channels, with an emphasis on digital capabilities, while continuing to optimize the traditional branch network. In addition, we have a disciplined process to continually improve the engagement of both our employees and customers, which is a strong driver of customer growth, retention and relationship expansion. In 2018, we launched our national retail digital strategy designed to grow customers with digitally-led banking and an ultra-thin branch network in markets outside of our existing retail branch network.

Table 10: Retail Banking Table
(Unaudited)
 
 
 
 
 
 
 
Three months ended March 31
  
 
  
 
Change
 
Dollars in millions, except as noted
2019
 
2018
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
1,349

 
$
1,218

 
$
131

11
 %
 
Noninterest income
595

 
635

 
(40
)
(6
)%
 
Total revenue
1,944

 
1,853

 
91

5
 %
 
Provision for credit losses
128

 
69

 
59

86
 %
 
Noninterest expense
1,468

 
1,456

 
12

1
 %
 
Pretax earnings
348

 
328

 
20

6
 %
 
Income taxes
84

 
79

 
5

6
 %
 
Earnings
$
264

 
$
249

 
$
15

6
 %
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
441

 
$
652

 
$
(211
)
(32
)%
 
Loans
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
Home equity
$
22,990

 
$
24,608

 
$
(1,618
)
(7
)%
 
Automobile
14,608

 
13,105

 
1,503

11
 %
 
Education
3,816

 
4,409

 
(593
)
(13
)%
 
Credit cards
6,204

 
5,619

 
585

10
 %
 
Other
2,068

 
1,765

 
303

17
 %
 
Total consumer
49,686

 
49,506

 
180

—

 
Commercial and commercial real estate
10,461

 
10,527

 
(66
)
(1
)%
 
Residential mortgage
15,034

 
13,420

 
1,614

12
 %
 
Total loans
$
75,181

 
$
73,453

 
$
1,728

2
 %
 
Total assets
$
91,255

 
$
88,734

 
$
2,521

3
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
30,389

 
$
29,779

 
$
610

2
 %
 
Interest-bearing demand
42,477

 
41,939

 
538

1
 %
 
Money market
26,773

 
32,330

 
(5,557
)
(17
)%
 
Savings
53,100

 
43,838

 
9,262

21
 %
 
Certificates of deposit
12,381

 
12,082

 
299

2
 %
 
Total deposits
$
165,120

 
$
159,968

 
$
5,152

3
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
1.17
%
 
1.14
%
 
 
 
 
Noninterest income to total revenue
31
%
 
34
%
 
 
 
 
Efficiency
76
%
 
79
%
 
 
 
 

The PNC Financial Services Group, Inc. – Form 10-Q    11



Three months ended March 31
  
 
  
 
Change
 
Dollars in millions, except as noted
2019

 
2018

 
$
%
 
Supplemental Noninterest Income Information
 
 
 
 
 
 
 
Consumer services
$
277

 
$
266

 
$
11

4
 %
 
Brokerage
$
89

 
$
86

 
$
3

3
 %
 
Residential mortgage
$
65

 
$
97

 
$
(32
)
(33
)%
 
Service charges on deposits
$
162

 
$
160

 
$
2

1
 %
 
Residential Mortgage Information
 
 
 
 
 
 
 
Residential mortgage servicing statistics (in billions, except as noted) (a)
 
 
 
 
 
 
 
Serviced portfolio balance (b)
$
123

 
$
125

 
$
(2
)
(2
)%
 
Serviced portfolio acquisitions
$
1

 
$
1

 
—

—

 
MSR asset value (b)
$
1.1

 
$
1.3

 
$
(.2
)
(15
)%
 
MSR capitalization value (in basis points) (b)
92

 
101

 
(9
)
(9
)%
 
Servicing income: (in millions)
 
 
 
 
 
 
 
Servicing fees, net (c)
$
53

 
$
51

 
$
2

4
 %
 
Mortgage servicing rights valuation, net of economic hedge
$
(9
)
 
$
9

 
$
(18
)
(200
)%
 
Residential mortgage loan statistics
 
 
 
 
 
 
 
Loan origination volume (in billions)
$
1.7

 
$
1.7

 
—

—

 
Loan sale margin percentage
2.35
%
 
2.83
%
 
 
 
 
Percentage of originations represented by:
 
 
 
 
 
 
 
Purchase volume (d)
56
%
 
56
%
 
 
 
 
Refinance volume
44
%
 
44
%
 
 
 
 
Other Information (b)
 
 
 
 
 
 
 
Customer-related statistics (average)
 
 
 
 
 
 
 
Non-teller deposit transactions (e)
57
%
 
54
%
 
 
 
 
Digital consumer customers (f)
68
%
 
64
%
 
 
 
 
Credit-related statistics
 
 
 
 
 
 
 
Nonperforming assets (g)
$
1,109

 
$
1,131

 
$
(22
)
(2
)%
 
Net charge-offs
$
132

 
$
100

 
$
32

32
 %
 
Other statistics
 
 
 
 
 
 
 
ATMs
9,112

 
9,047

 
65

1
 %
 
Branches (h)
2,347

 
2,442

 
(95
)
(4
)%
 
Brokerage account client assets (in billions) (i)
$
51

 
$
49

 
$
2

4
 %
 
(a)
Represents mortgage loan servicing balances for third parties and the related income.
(b)
Presented as of March 31, except for customer-related statistics, which are averages for the three months ended, and net charge-offs, which are for the three months ended.
(c)
Servicing fees net of impact of decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan prepayments and loans that were paid down or paid off during the period.
(d)
Mortgages with borrowers as part of residential real estate purchase transactions.
(e)
Percentage of total consumer and business banking deposit transactions processed at an ATM or through our mobile banking application.
(f)
Represents consumer checking relationships that process the majority of their transactions through non-teller channels.
(g)
Includes nonperforming loans of $1.0 billion and $1.1 billion at March 31, 2019 and March 31, 2018, respectively.
(h)
Excludes stand-alone mortgage offices and satellite offices (e.g., drive-ups, electronic branches and retirement centers) that provide limited products and/or services.
(i)
Includes cash and money market balances.

Retail Banking earned $264 million in the first three months of 2019 compared with $249 million for the same period in 2018. The increase in earnings was attributable to higher net interest income partially offset by lower noninterest income and increased noninterest expense and provision for credit losses.

Net interest income increased primarily due to wider interest rate spreads on the value of deposits.

The decrease in noninterest income was largely attributed to lower residential mortgage noninterest income, reflecting a negative adjustment for residential mortgage servicing rights valuation, net of economic hedge, compared with a benefit in first quarter 2018, and a decline in loan sales revenue. The decline in loan sales revenue reflected lower gain on sales margins as a result of increased competition in the marketplace. In addition, the impact of negative derivative fair value adjustments related to Visa Class B common shares of $31 million for the first quarter of 2019 compared with $2 million in the same period in 2018 also contributed to the decrease in noninterest income. These decreases were partially offset by growth in consumer service fees, including higher debit and credit card fees, as well as higher brokerage fees and service charges on deposits.


12    The PNC Financial Services Group, Inc. – Form 10-Q


Provision for credit losses increased in 2019 compared to 2018 primarily due to portfolio growth and reserve increases in the auto portfolio.
Higher noninterest expense primarily resulted from an increase in marketing activity, customer-related transactional costs and investments in equipment and technology.

The deposit strategy of Retail Banking is to remain disciplined on pricing and focused on growing and retaining relationship-based balances, executing on market-specific deposit growth strategies and providing a source of low-cost funding and liquidity to PNC. In the first quarter of 2019, average total deposits increased compared to the same period in 2018, as both interest-bearing and noninterest-bearing demand deposits increased. Savings deposits increased, reflecting, in part, a shift from money market deposits to relationship-based savings products as well as growth in consumer deposits, including from the national retail digital strategy. Certificates of deposit increased slightly due to shifts in consumer preferences to time deposits.

Retail Banking average total loans increased in the first quarter of 2019 compared with the same period in 2018.
•
Average residential mortgages increased as a result of growth in nonconforming residential mortgage loans.
•
Average automobile loans increased primarily due to strong new indirect auto loan volumes, including in our Southeast and new markets, as well as growth in direct auto loans.
•
Average credit card balances increased as we continued to focus on our long-term objective of deepening penetration within our existing customer base.
•
Average home equity loans decreased as paydowns and payoffs on loans exceeded new originated volume.
•
Average education loans decreased driven by a decline in the runoff portfolio of government guaranteed education loans.
•
Average commercial and commercial real estate loans declined as paydowns and payoffs on loans exceeded new volume.

Retail Banking continues to enhance the customer experience with refinements to product and service offerings that drive value for consumers and small businesses. We are focused on meeting the financial needs of our customers by providing a broad range of liquidity, banking and investment products. In 2018, Retail Banking launched its national retail digital strategy by offering a high yield savings account in markets outside of our existing retail branch network and opened a retail location in Kansas City. Deposit balances generated through the national retail digital strategy totaled $1.2 billion as of March 31, 2019.

Retail Banking continued to focus on its strategy of transforming the customer experience through transaction migration, branch network and home lending transformations and multi-channel engagement and service strategies.
•
Approximately 68% of consumer customers used non-teller channels for the majority of their transactions in the first three months of 2019 compared with 64% for the same period in 2018.
•
Deposit transactions via ATM and mobile channels increased to 57% of total deposit transactions versus 54% for the same period in 2018.

Retail Banking continues to make progress on its multi-year initiative to redesign the home lending process. In 2019, the home equity origination cycle will be the focus as we enhance current capabilities in order to improve speed of delivery and convenience for customers.



The PNC Financial Services Group, Inc. – Form 10-Q    13


Corporate & Institutional Banking
 
Corporate & Institutional Banking’s strategy is to be the leading relationship-based provider of traditional banking products and services to its customers through the economic cycles. We aim to grow our market share and drive higher returns by delivering value-added solutions that help our clients better run their organizations, all while maintaining prudent risk and expense management. We continue to focus on building client relationships where the risk-return profile is attractive.

Table 11: Corporate & Institutional Banking Table
(Unaudited)
 
 
 
 
 
 
 
Three months ended March 31
  
 
  
 
Change
 
Dollars in millions
2019
 
2018
 
$
%
 
Income Statement
 
 
 
 
 
 
 
Net interest income
$
898

 
$
882

 
$
16

2
 %
 
Noninterest income
576

 
547

 
29

5
 %
 
Total revenue
1,474

 
1,429

 
45

3
 %
 
Provision for credit losses
71

 
41

 
30

73
 %
 
Noninterest expense
686

 
653

 
33

5
 %
 
Pretax earnings
717

 
735

 
(18
)
(2
)%
 
Income taxes
165

 
172

 
(7
)
(4
)%
 
Earnings
$
552

 
$
563

 
$
(11
)
(2
)%
 
Average Balance Sheet
 
 
 
 
 
 
 
Loans held for sale
$
347

 
$
1,189

 
$
(842
)
(71
)%
 
Loans
 
 
 
 
 
 
 
Commercial
$
108,641

 
$
100,802

 
$
7,839

8
 %
 
Commercial real estate
25,971

 
26,732

 
(761
)
(3
)%
 
Equipment lease financing
7,264

 
7,845

 
(581
)
(7
)%
 
Total commercial lending
141,876

 
135,379

 
6,497

5
 %
 
Consumer
20

 
77

 
(57
)
(74
)%
 
Total loans
$
141,896

 
$
135,456

 
$
6,440

5
 %
 
Total assets
$
157,169

 
$
151,909

 
$
5,260

3
 %
 
Deposits
 
 
 
 
 
 
 
Noninterest-bearing demand
$
39,551

 
$
45,896

 
$
(6,345
)
(14
)%
 
Money market
25,630

 
23,406

 
2,224

10
 %
 
Other
23,374

 
18,592

 
4,782

26
 %
 
Total deposits
$
88,555

 
$
87,894

 
$
661

1
 %
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
1.42
%
 
1.50
%
 
 
 
 
Noninterest income to total revenue
39
%
 
38
%
 
 
 
 
Efficiency
47
%
 
46
%
 
 
 
 
Other Information
 
 
 
 
 
 
 
Consolidated revenue from: (a)
 
 
 
 
 
 
 
Treasury Management (b)
$
445

 
$
419

 
$
26

6
 %
 
Capital Markets (b)
$
246

 
$
258

 
$
(12
)
(5
)%
 
Commercial mortgage banking activities:
 
 
 
 
 
 
 
Commercial mortgage loans held for sale (c)
$
15

 
$
14

 
$
1

7
 %
 
Commercial mortgage loan servicing income (d)
54

 
55

 
(1
)
(2
)%
 
Commercial mortgage servicing rights valuation, net of economic hedge (e)
5

 
4

 
1

25
 %
 
Total
$
74

 
$
73

 
$
1

1
 %
 
Commercial mortgage servicing rights asset value (f)
$
681

 
$
723

 
$
(42
)
(6
)%
 
Average Loans by C&IB business (g)
 
 
 
 
 
 
 
Corporate Banking
$
71,089

 
$
65,548