PNC(US:PNC)2024-08-02 14:12PART I – FINANCIAL INFORMATION This section presents PNC's unaudited financial statements, detailed notes, and management's discussion and analysis of financial condition and results Item 1. Financial Statements (Unaudited) This section presents PNC's unaudited consolidated financial statements, including income, comprehensive income, balance sheet, and cash flow statements, with detailed notes on accounting policies and data breakdowns Consolidated Financial Statements PNC's consolidated statements detail financial performance, showing H1 2024 net income of $2.8 billion, total assets of $556.5 billion, and significant cash usage in financing and investing Consolidated Income Statement Highlights (Six Months Ended June 30) | Metric | 2024 (in millions) | 2023 (in millions) | | :--- | :--- | :--- | | Total Revenue | $10,556 | $10,896 | | Net Interest Income | $6,566 | $7,095 | | Noninterest Income | $3,990 | $3,801 | | Provision For Credit Losses | $390 | $381 | | Net Income | $2,821 | $3,194 | | Diluted EPS | $6.48 | $7.34 | Consolidated Balance Sheet Highlights (As of) | Metric | June 30, 2024 (in millions) | Dec 31, 2023 (in millions) | | :--- | :--- | :--- | | Total Assets | $556,519 | $561,580 | | Net Loans | $316,793 | $316,717 | | Total Deposits | $416,391 | $421,418 | | Total Shareholders' Equity | $52,642 | $51,105 | Consolidated Statement of Cash Flows Highlights (Six Months Ended June 30, 2024) | Cash Flow Activity | Amount (in millions) | | :--- | :--- | | Net cash provided by operating activities | $2,793 | | Net cash used by investing activities | $(6,585) | | Net cash used by financing activities | $(7,652) | | Net Decrease In Cash | $(11,444) | Notes To Consolidated Financial Statements Notes detail accounting policies and methodologies, covering estimates for credit losses and fair value, investment securities, loans, leases, and other financial components - PNC's most significant estimates pertain to the Allowance for Credit Losses (ACL) and fair value measurements, with actual results potentially differing materially from these estimates216 - Effective Q2 2024, the company updated its policy to classify Interest-earning deposits with banks as Cash and cash equivalents on the Statement of Cash Flows, reclassifying prior periods for comparability and to better reflect management's view of liquidity213218 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A reviews PNC's Q2 and H1 2024 financial performance, covering key results, balance sheet, income statement, segment performance, risk management, and business outlook Executive Summary PNC reported Q2 2024 net income of $1.5 billion, driven by higher income, maintaining strong capital and stable credit quality, with a positive Q3 outlook Q2 2024 Key Financial Results | Metric | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Net Income | $1,477M | $1,344M | $1,500M | | Diluted EPS | $3.39 | $3.10 | $3.36 | | Total Revenue | $5,411M | $5,145M | $5,293M | | Net Interest Income | $3,302M | $3,264M | $3,510M | | Net Interest Margin | 2.60% | 2.57% | 2.79% | Balance Sheet and Capital Highlights (as of June 30, 2024) | Metric | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $556.5B | $561.6B | | Total Loans | $321.4B | $321.5B | | Total Deposits | $416.4B | $421.4B | | Common Equity Tier 1 (CET1) Ratio | 10.2% | 9.9% | - Key strategic priorities include expanding the banking franchise, deepening customer relationships, and leveraging technology for efficiency10 - Q2 2024 noninterest income was significantly impacted by a $754 million gain from the Visa exchange program and a $497 million loss from repositioning the investment securities portfolio1831 - The company returned $0.7 billion to shareholders in Q2 2024 ($0.6 billion dividends, $0.1 billion buybacks) and the Board of Directors raised the quarterly common stock dividend to $1.60 per share, effective August 5, 20242526 - Q3 2024 Outlook: Average loans to be stable, net interest income to be up 1% to 2%, fee income to be up 1% to 2%, and noninterest expense to be down 1% to stable29 Consolidated Income Statement Review Q2 2024 net interest income rose 1% to $3.3 billion, noninterest income surged 12% to $2.1 billion due to a Visa gain, and provision for credit losses was $235 million - Net interest income increased by $38 million (1%) from Q1 2024, reflecting higher yields on interest-earning assets, with the net interest margin expanding by 3 basis points to 2.60%40 Noninterest Income Breakdown (Q2 2024 vs Q1 2024) | Category | Q2 2024 (in millions) | Q1 2024 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Asset management and brokerage | $364 | $364 | 0% | | Capital markets and advisory | $272 | $259 | +5% | | Card and cash management | $706 | $671 | +5% | | Total other income | $332 | $135 | +146% | | Total noninterest income | $2,109 | $1,881 | +12% | - The significant increase in 'Other noninterest income' was driven by a $754 million gain from the Visa exchange program and a $497 million securities loss from portfolio repositioning, also including a negative $116 million fair value adjustment on Visa Class B derivatives46 - Noninterest expense increased by a modest 1% from Q1 2024, driven by higher marketing and equipment costs, but offset by seasonally lower incentive compensation, and included a $120 million pre-tax expense for a PNC Foundation contribution47 - The provision for credit losses increased to $235 million in Q2 2024 from $155 million in Q1 2024, primarily reflecting the impact of portfolio activity4950 Consolidated Balance Sheet Review PNC's balance sheet as of June 30, 2024, shows total assets of $556.5 billion, stable loans at $321.4 billion, increased investment securities, and a $5.0 billion decrease in deposits Balance Sheet Components (vs. Dec 31, 2023) | Component | June 30, 2024 (in billions) | Change (in billions) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $556.5 | $(5.1) | (1)% | | Total Loans | $321.4 | $(0.1) | 0% | | Investment Securities | $138.6 | $6.1 | +5% | | Total Deposits | $416.4 | $(5.0) | (1)% | | Total Shareholders' Equity | $52.6 | $1.5 | +3% | - Commercial loans increased by $1.3 billion due to new production, while consumer loans declined by $1.4 billion as paydowns outpaced originations5556 - In Q2 2024, PNC repositioned its investment securities portfolio by selling $3.8 billion of securities with a ~1.5% yield (realizing a $497 million loss) and reinvesting the proceeds into securities with a ~5.5% yield57 - Total deposits decreased by $5.0 billion, driven by a $6.7 billion decline in noninterest-bearing deposits, primarily from commercial balances, partially offset by a $1.7 billion increase in interest-bearing deposits6465 Business Segments Review PNC's H1 2024 segment earnings show Retail Banking up 75% to $2.8 billion, Corporate & Institutional Banking up 16% to $2.2 billion, and Asset Management Group up 74% to $200 million - PNC's three reportable business segments are Retail Banking, Corporate & Institutional Banking, and Asset Management Group, with residual activities captured in 'Other'68 Segment Earnings (Six Months Ended June 30) | Segment | 2024 Earnings (in millions) | 2023 Earnings (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Retail Banking | $2,800 | $1,601 | +75% | | Corporate & Institutional Banking | $2,167 | $1,876 | +16% | | Asset Management Group | $200 | $115 | +74% | Risk Management PNC maintains a comprehensive risk management framework, with nonperforming assets rising to $2.5 billion, an ACL of 1.67%, strong liquidity, and a CET1 ratio of 10.2%, managing market risk through sensitivity analysis - Nonperforming assets increased by $321 million (14%) from year-end 2023 to $2.5 billion, primarily due to higher commercial real estate nonperforming loans23120 - The office loan portfolio, totaling $7.5 billion (2.3% of total loans), is an area of focus, with 29.3% criticized and 11.0% nonperforming as of June 30, 2024, and reserves established at 10.3% of the portfolio106 - The Allowance for Credit Losses (ACL) related to loans was $5.4 billion, or 1.67% of total loans, at June 30, 2024, down from 1.70% at year-end 202323129 - PNC maintained a strong capital position with a Common Equity Tier 1 (CET1) ratio of 10.2% at June 30, 2024, up from 9.9% at December 31, 202326155 Net Interest Income (NII) Sensitivity (First Year) | Interest Rate Shock | Q2 2024 Effect on NII | Q2 2023 Effect on NII | | :--- | :--- | :--- | | +200 bps instantaneous increase | (0.6)% | +0.9% | | -200 bps instantaneous decrease | (0.2)% | (1.3)% | Recent Regulatory Developments Recent regulatory developments include the FDIC's revised resolution plan rule for large banks and the OCC's proposed recovery planning guidelines, with PNC's SCB remaining at 2.5% post-CCAR - The FDIC revised its resolution plan rule for large banks, requiring full submissions on a three-year cycle with expanded content requirements182 - Based on the Federal Reserve's 2024 CCAR results, PNC's Stress Capital Buffer (SCB) will remain at the regulatory minimum of 2.5% for the four-quarter period starting October 1, 2024184 Critical Accounting Estimates and Judgments This section details critical accounting estimates, primarily the Allowance for Credit Losses (ACL), based on historical data, current conditions, and a weighted-average economic forecast for U.S. real GDP and unemployment - The determination of the Allowance for Credit Losses (ACL) is a critical accounting estimate, relying on historical data, current conditions, and forecasts of future economic conditions186 Key Macroeconomic Variables in Weighted-Average Scenarios | Variable | 2024 Forecast | 2025 Forecast | 2026 Forecast | | :--- | :--- | :--- | :--- | | U.S. real GDP (as of 6/30/24) | 1.1% | 1.2% | 2.2% | | U.S. real GDP (as of 12/31/23) | 0.1% | 1.5% | 2.0% | | U.S. unemployment rate (as of 6/30/24) | 4.3% | 4.9% | 4.4% | | U.S. unemployment rate (as of 12/31/23) | 4.5% | 4.6% | 4.2% | Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to the Market Risk Management portion of the MD&A for disclosures on market risk, including interest rate, customer-related trading, and equity investment risks - Disclosures about market risk are contained within the Market Risk Management section of the MD&A (pages 50-54)159 Item 4. Controls and Procedures Management concluded PNC's disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting during Q2 - As of June 30, 2024, PNC's management concluded that the company's disclosure controls and procedures were effective196 - There were no changes in internal control over financial reporting during Q2 2024 that have materially affected, or are likely to materially affect, the controls197 PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, other information, and a list of exhibits filed with the report Item 1. Legal Proceedings This section refers to Note 13 for legal proceedings, with PNC estimating a reasonably possible aggregate loss in excess of accrued liabilities of less than $300 million as of June 30, 2024 - For disclosed legal matters where a loss is reasonably possible, PNC estimates the aggregate loss in excess of accruals could be less than $300 million as of June 30, 2024362 Item 1A. Risk Factors No material changes to risk factors were reported since the 2023 Form 10-K - No material changes to risk factors were reported since the 2023 Form 10-K396 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2024, PNC repurchased 719,000 common shares at an average price of $153.95, with approximately 43.4 million shares remaining available under the authorized program Q2 2024 Equity Security Repurchases | Period | Total Shares Purchased (thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | April 1 - 30 | 288 | $153.71 | | May 1 - 31 | 190 | $155.69 | | June 1 - 30 | 241 | $152.85 | | Total | 719 | $153.95 | - The Board of Directors has authorized a repurchase program of up to 100 million common shares, of which approximately 43% were still available for repurchase at June 30, 2024398 Item 5. Other Information No directors or executive officers adopted, terminated, or modified Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q2 2024 - No director or executive officer adopted, terminated, or modified a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q2 2024399 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including award agreements, a preferability letter, subsidiary issuers, and CEO/CFO certifications - Exhibits filed include CEO and CFO certifications under Sections 302 and 1350 of the Sarbanes-Oxley Act, as well as Inline XBRL data files402