The PNC Financial Services Group, Inc. (PNC) Earnings Call Transcript & Summary

Greetings, and welcome to the PNC Financial Services Group Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bryan Gill. Thank you, Bryan. You may now begin.

Well, good morning, and welcome to today's conference call for the PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC. And participating on this call are PNC's Chairman and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings and other industry materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of July 15, 2026, and PNC undertakes no obligation to update them. Now I'd like to turn the call over to Bill.

Thank you, Bryan, and good morning, everyone. As you saw, PNC delivered an impressive second quarter. We generated $2.1 billion of net income or $4.81 per diluted share. Our results included FirstBank integration costs and other significant items. Collectively, these items reduced earnings per share by $0.04, resulting in an adjusted diluted EPS of $4.85. Now Rob is going to take you through those details on our financial results in a couple of minutes, but let me just hit a few highlights. Business momentum remains really strong. We continue to win new clients and deepen existing relationships. DDA growth continues at a healthy pace while client acquisition across our corporate and private banking businesses continues to grow meaningfully. Net interest income grew on the back of continued commercial loan growth as well as favorable deposit mix and pricing. And fee income performance was a particular highlight, increasing 10% linked-quarter and 20% year-over-year. Growth has been broad-based across every fee category, underscoring the value of our diversified business model. We also generated positive operating leverage and improved our efficiency ratio. Credit performance remained strong, reflecting the strength of our economy as well as the quality of our portfolio. The consistency of our financial strength was evident in the Fed's latest stress test results. For the fourth year in a row, PNC start-to-trough capital depletion was the lowest in our peer group, further demonstrating our best-in-class resiliency. With this in mind, our Board approved an increase to our quarterly common stock dividend of $0.30 or 18% to $2 per share. Beyond these financial results, we continue to make meaningful progress on the things that will drive our future success. We successfully completed the conversion of FirstBank, opened new branches in high-growth markets, introduced a new mobile banking platform, all the while continuing to advance client and infrastructure technologies. None of these efforts are about the next quarter. They're about making PNC a better bank for our customers and positioning the company for sustained growth over the long term. In summary, we had a great quarter. And importantly, we are well positioned to drive further growth across our company. Before I turn it over to Rob, as always, I just want to thank our employees for everything they do for our company and our customers. And with that, Rob will take you through the quarter. Rob?

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average basis. For the linked-quarter, loans at $363 billion grew $12 billion or 4%. Securities balances increased 2% to $147 billion during the quarter, and the portfolio yield improved 9 basis points to 3.45%. Average deposit balances of $457 billion were stable, consistent with seasonal patterns. And borrowings were $79 billion, an increase of $16 billion, reflecting higher FHLB advances. Our tangible book value was $111 per common share, up 2% linked-quarter and up 7% compared with the same period a year ago, and our return on tangible common equity at 17.9% in the second quarter. We continue to be well positioned with capital flexibility. During the quarter, we returned $1.3 billion of capital to shareholders, which included $690 million of common dividends and $610 million of share repurchases. Going forward, we expect third quarter repurchases to approximate this same level. As Bill just mentioned, our Board recently approved a $0.30 increase to our quarterly cash dividend on common stock, raising the dividend 18% to $2 per share. And we remain well capitalized with an estimated CET1 ratio of 9.9%. Slide 5 shows our loans in more detail. Loan balances averaged $363 billion in the second quarter, an increase of $12 billion or 4% linked-quarter. And the total average loan yield decreased 3 basis points linked-quarter to 5.47%. Virtually all of the loan growth was in C&I, reflecting strong new production and higher utilization across almost every loan category. CRE balances increased $690 million during the quarter, driven primarily by growth in retail and industrial exposures. And consumer loans declined by $730 million as growth in credit card balances partially offset expected declines in residential real estate and auto loans. Slide 6 covers our deposit balances in more detail. Average deposits were stable with the prior quarter as higher consumer balances were offset by a seasonal decline in commercial deposits. Our total rate paid on interest-bearing deposits decreased 5 basis points to 1.91% in the second quarter, reflecting lower rates paid across all deposit categories. Notably, average noninterest-bearing balances grew 4% linked-quarter and represented 23% of total deposits. Turning to the income statement. As Bill mentioned, I want to provide a bit more detail regarding the integration costs and significant items in the quarter. When combined, these items had a minimal impact on our net income and earnings per share. First, we incurred $127 million of integration costs related to the FirstBank acquisition. Beyond these integration costs, we had several significant items. We participated in the Visa exchange program and monetized half of our Visa Class B-2 shares, resulting in a $448 million pretax gain. We also recorded a negative $85 million Visa derivative fair value adjustment associated with our remaining Visa Class B-3 shares, primarily related to the extension of anticipated litigation resolution. In addition, we repositioned a portion of our securities portfolio through the sale of approximately $4 billion of available-for-sale securities, resulting in a $139 million loss. We reinvested the proceeds into securities with yields approximately 120 basis points higher than the securities sold. Finally, we contributed $140 million to the PNC Foundation, which supports our communities' early childhood education initiatives. So all in, the FirstBank integration costs and significant items, when combined, resulted in a nominal reduction to our second quarter EPS of $0.04. Turning to Slide 8, we highlight our income statement trends, comparing the second quarter to the first quarter of 2026. Total revenue was $6.9 billion and grew $710 million or 12%, and included both integration costs and significant items totaling $218 million. Noninterest expense of $4.1 billion increased $330 million or 9% and included $140 million PNC Foundation contribution as well as $121 million of integration expense. We generated 3% positive operating leverage and PPNR grew 16%. Provision was $191 million. Our effective tax rate was 21%. As a result, our second quarter net income was $2.1 billion or $4.81 per common share and $4.85 as adjusted. Comparing the second quarter of 2026 at the same time last year, net income grew by $412 million, resulting in EPS growth of 25%. Turning to Slide 9, we detail our revenue trends. While the quarter included integration costs and significant items within the other noninterest income, our revenue growth was driven primarily by the underlying strength of our franchise. We generated 4% growth in net interest income and 10% growth in fee revenue. Net interest income of $4.1 billion increased $146 million and included the benefit of commercial loan growth and higher noninterest-bearing deposit balances. Our net interest margin was 2.96%, an increase of 1 basis point. Fee income was $2.3 billion and increased $200 million or 10%. Looking at the details, asset management and brokerage increased $20 million or 5%, driven by increased client activity and higher average equity markets. Capital markets and advisory revenue increased $114 million or 25%, reflecting record M&A advisory fees and strong activity across our other capital markets businesses. Card and cash management increased $34 million or 5%, driven by seasonally higher consumer transaction levels and growth in treasury management product revenue. Lending and deposit services increased by $6 million or 2%, primarily due to increased customer activity. Mortgage revenue increased $26 million or 22%, largely attributable to negative residential mortgage servicing rights valuations recognized in the first quarter. And other noninterest income of $489 million increased $364 million, which included the $218 million of integration costs and significant items as well as positive private equity valuation adjustments. Compared with the second quarter of 2025 and excluding integration costs and significant items, total noninterest income increased $444 million or 21%. Importantly, this performance was driven by strong organic growth, with broad-based increases across our businesses. Turning to Slide 10. Second quarter expenses increased $330 million or 9% linked-quarter. Expenses in the second quarter included integration expense and significant items totaling $261 million, while the first quarter of 2026 included $97 million of integration expense. Excluding the impact of integration costs and significant items, noninterest expense increased $166 million or 5% linked-quarter. The growth reflected increased business activity, higher marketing spend as well as continued investments. We remain focused on expense management, and we're on track to our goal to reduce costs by $350 million in 2026 through our continuous improvement program, which, as a reminder, is independent of the FirstBank acquisition. And this program will continue to fund a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 11. Overall, credit quality remains strong with improvements in NPLs, delinquencies and net loan charge-offs. Nonperforming loans of $2 billion decreased $216 million or 10% and represented 0.55% of total loans, down from 0.62% last quarter. Total delinquencies declined $122 million to $1.4 billion and now represent 0.39% of total loans. Total net loan charge-offs were $226 million and our NCO ratio was 25 basis points. At the end of the second quarter, our allowance for credit losses totaled $5.5 billion or 1.48% of total loans. To summarize, PNC reported a strong second quarter of 2026, and we're well positioned for the second half of the year. Regarding our view of the overall economy, our base case assumes GDP growth to be approximately 2.1% in 2026, with the unemployment rate holding steady and ending the year at approximately 4.3%. We expect the Federal Reserve to keep rates stable throughout 2026. For ease of comparability with our prior guidance, our full year outlook excludes the impact of FirstBank integration charges and significant items. Considering our reported first half operating results, third quarter expectations and current economic forecast, our outlook for the full year 2026 compared to 2025 results is as follows. We expect full year average loan growth of approximately 12.5%. We expect full year net interest income to be up 15% to 15.5%. We expect noninterest income to be up approximately 9%. Taking the component pieces of revenue together, we expect total revenue to be up approximately 13%. Noninterest expense to be up approximately 8.5%. And we expect our effective tax rate to be approximately 19.5%. Our outlook for the third quarter of 2026 compared to the second quarter of 2026 is as follows. We expect average loans to be up 1% to 2%. Net interest income to be up between 3% and 3.5%. Fee income to be down 5% to 5.5%. Other noninterest income to be in the range of $150 million to $200 million. We expect adjusted noninterest expense to decline 2% to 3%. And in the third quarter, we anticipate approximately $50 million of integration expenses. And we expect third quarter net charge-offs to be approximately $225 million. And with that, Bill and I are ready to take your questions.

[Operator Instructions] Our first question today is coming from John McDonald of Truist Securities.

Rob, I wanted to ask you guys, some very strong loan growth through the quarter, could you speak a little bit to the cadence of the loan and deposit growth as the quarter progressed? There seems a little bit different dynamics between the period-end and average? And maybe just broadly to how you plan on funding the strong loan growth throughout the year?

Yes, sure. So John, the -- yes, loan growth in the first half and in the second quarter continued to be pretty strong, which is a good thing. When we take a look at the second half, we still see loan growth but not at the same rates. We are pointing to effectively sort of GDP growth in our guidance going through the balance of the year. So loan growth, but not to the same extent. And in terms of funding as we look forward, we do expect deposits to grow through the second half of the year. So that will be a key component to the funding as that replaces some wholesale debt that we picked up in the second quarter.

Okay. Got it. And was that just about the funding that you picked up on the FHLB side this quarter, was that just some temporary dynamics and you expect that -- you also had good NIB growth this quarter. Maybe you can just comment on that and the outlook there.

Yes. So noninterest-bearing, to your second question first, noninterest-bearing deposits were higher than we expected. All of that -- virtually all of that was on the commercial side, related to our treasury management business and some escrow monies that come through. So that's a good thing. And I would expect that to continue not at the same rate. So we're at 23% of our total deposits and we have that pretty steady through the balance of the year.

I think the funding, John, you should just assume we sort of optimize against every lever, whether it's wholesale funding or what we're doing in deposits. The drops this quarter in corporate deposits are pretty easy to turn back on. There's a bit of a seasonal effect, but there's also a rate effect. You saw we grew deposits in retail, which is the most important thing. And the home loan advances this quarter where think of it as the cheapest alternative to fund loans relative to other things, and that changes all the time, I wouldn't read too much into that.

No. it's just flexing to the optimal cost.

Yes.

Our next question is coming from John Pancari of Evercore ISI.

On the loan growth side, I appreciate the trends that you're seeing, some pretty good strengthening. Can you maybe just talk about the areas that are strengthening, what do you see in terms of demand and pipeline, and utilization? And then separately, on the loan spread front, any shift in spreads that's observable here just amid the competitive backdrop?

Yes. So inside that, I would say the loan growth has been strong. Again, we expect loan growth to continue not at the same rate. And that's just a function of maybe some pull forward in terms of borrowings or some pent-up borrowing demand spend, and we'll see. As far as the mix, we don't see a lot of spread compression from competitive standpoint, but we do have some spread compression and continuation of what we saw in the first quarter, which is most of the lending that we're doing is for the high credit quality, lower spread entities. Those are who are borrowing now. It's good business. It's sufficient return, particularly given that those loans often come with treasury management and/or capital markets. So there's a little bit of dilution to the portfolio spreads, but that's more mix than competitive pressures.

The other thing, we continue to have the new markets outpace the legacy markets just in terms of growth as we grow share there. And for the first time, I'm sure this isn't true, but for the first time I can remember, we had strong growth across kind of every category inside of the C&I franchise, and utilization increases. So yes, it's broad-based. We're gaining share kind of all on the back of what feels like a pretty strong economy.

Okay. That's helpful. And then I know you don't really guide on -- more specifically around the margin, but just trying to get an idea, just given some of the pricing dynamics that you're seeing in the backdrop, in the environment, just wanted to get an idea of how you're thinking about this margin could traject through the back half of the year that's kind of baked into your guidance here. I know you saw a modest expansion in the in the quarter by about 1 bp. Just how are you thinking about how that could play out as you look through the back half?

Yes. So let me address that, John, because there's a lot of focus on NIM. So we had said that we expect to go above 3% by the end of the year, and we still are standing next to that. So that's that. The second piece is, if you [ chunk down ] the NIM components, and it sort of gets to your earlier question, the components of our second quarter NIM, what helped our second quarter NIM, which went up a net 1 basis point, was obviously the decline in the rate paid on the interest-bearing as well as the increased noninterest-bearing deposits. So that helped NIM. What constrained NIM was the point that I was making earlier is these commercial loans that are coming in at a pretty good rate, and the majority of those being the higher credit quality, lower spread, that contains NIM. So when you think about it and you look at it, those loans carry the fees along with them. So from an EPS perspective, those loans are hugely accretive. On a stand-alone basis, they're dilutive to NIM. So if we didn't have those loans, just for illustration purposes, if we didn't have that loan growth in the second quarter, our NIM would have easily popped above 3%. So we're given a choice between lower NIM, higher EPS, or higher NIM and lower EPS, we'll take EPS every time.

But having said that, we're still on the...

We're on record for 3% for back half of the year.

Much of that driven through the continual repricing of fixed-rate assets.

Well, that's the longer-term issue. So the longer-term issue is the steepness of the yield curve. We still have a lot of fixed-rate assets to reprice. So that will determine that. But I just mentioned that for illustration purposes because I think a lot of the focus on NIM is on the funding side and the issues there, but there's also the loan dynamic.

Our next question is coming from Ebrahim Poonawala of Bank of America.

I guess, maybe, Bill, Rob, sticking with loan growth. So you mentioned the high credit quality, low spread lending, which is good to hear from a credit quality standpoint. Is this different from history in terms of this kind of loan growth? Or this is kind of what you would expect in a good C&I environment where market spreads are tight? So one, like is there something different about the quality or the type of borrower, the type of borrowing that's happening? And then I have a follow-up to that, maybe if you could start there.

Yes, I'd say -- I wouldn't say anything is like way different. But I would say that the preponderance of the loan growth is in that higher credit quality, lower spread loans, which is probably -- makes life a little bit higher than average run rate, but it's not off the charts.

Got it. And I guess, as a follow-up to that, you had all the big banks report like there's a significant energy around the economy, around AI CapEx spend. We're seeing that in the financing markets. When you sort of bring it back to -- you're the second bank today that talked about broad-based C&I growth. I'm just wondering, one, are you picking up some of that business tied to data center lending, et cetera? And second, when you think about the broad-based growth, are there other engines of the economy at work here, be it reshoring, manufacturing, et cetera? Or are you able to sort of connect the dots between second derivatives of AI CapEx driving that loan demand for PNC?

It's too broad-based to lay it all on AI. At the margin, it's impacting what we're doing. But it's -- as I said before, it's coming from kind of all sectors, which is I've heard the different explanations as to why it's showing up. People are otherwise used to the chaos in the environment and figured out that they need to operate through and grow. The M&A environment is more robust. Look, the economy is strong and people are spending money. But it's not -- while I appreciate the impact AI is having on GDP, that can't be the only driver of the loan growth that we're seeing given the industry dispersion and the geographic dispersion.

Our next question is coming from Erika Najarian of UBS.

Rob, if I could just start with you, to your point, there's a lot of focus on net interest margin trajectory because of the funding dynamic. The Street currently has an exit rate of 3.8% for fourth quarter 2026. As we think about where the loan growth is coming from, does that -- is that too fast of a ramp relative to the other opportunities in terms of fixed asset repricing and, obviously, maybe optimizing some of the wholesale funding that you put on this quarter to core funding?

Yes. So again, we don't give NIM guidance, nor do we manage to it. That said, I always give NIM guidance. So we're above 3, Erika, the precise level at the exit run rate.

Why do you care? It's -- at the end of the day, we'll stick to our guide and we'll get there. But if we grow EPS and NII at 2% higher and have a lower NIM, or what you heard in Rob's earlier point. Why do you focus on it?

So I personally don't care. I think that the NII dollars are more important. And I couldn't quote you what JPMorgan's NIM was for this quarter. So I think you're right. I think just like -- I'm just thinking about why the stock is down despite the beat and raise. So that's why I'm trying to clarify that question.

More sellers than buyers. Look, maybe the simplest thing to say across the space is we have healthy asset growth through loan growth, which is coming from client acquisition and economic activity, and we have a great ability to fund it. We're growing our retail franchise. Retail deposits are increasing. Corporate deposits, we didn't pay up for and they went down in the quarter, but we can make those whatever we want. We're very liquid today. And so it's not a huge focus inside the company, even though the mechanical outcome, as we said since the beginning of the year, will push us over 3% by the end of the year.

To that end, just to take a step back, clearly, the company is doing well. You've talked about organic NII dollar growth of about $1.2 billion this year. And so I guess as we think about sort of what's your plan over the next few years, is that NII dollar growth replicable for a sustainable period of time? And additionally, you printed a pretty nice ROTCE this quarter, I guess I'm wondering about the path to the 20% that you mentioned previously.

Well, maybe I could jump in there a little bit. So we're not going to get into '27 guidance, but we're on record saying that we've got a lot of fixed rate asset repricing that goes well into '27 and beyond. So that's constructive for NII in '27. And as we get closer to the end of the year, we'll sharpen that up for you. As far as the ROTCE goes, we're on record saying that we'd hit 18% annualized exit rate fourth quarter '26. We're sticking to that as well, and we're tracking to that. We pointed out this quarter we're at 17.9%. So arguably, we're in the vicinity.

Our next question is coming from Mike Mayo of Wells Fargo.

Just a little bit more color on loan growth. Certainly, it's growing faster than you had thought. Can you talk about line utilization and the potential for loans to grow even faster and how much you're assuming line utilization will increase as part of your higher guide?

Mike, it's Rob. So as we pointed out in the second quarter, utilization has increased for us, and it's been pretty broad-based. When we look into the second half, we have continued loan growth. We have an expectation that the utilization would at least hold, maybe go up a little bit. But that's all part of our thinking in terms of sort of moderating the loan growth to roughly GDP.

Okay. And do you ever -- like, look, if you -- your stock price has outperformed this year when you look at it and quite a bit. But do you ever wonder about this party that's taken place elsewhere as it relates to AI and this CapEx AI super cycle and all the mega IPOs and mega financings and mega mergers that you're not part of? And it's like, wow, we're not part of that, but we have our own area. What's the counterargument to that whole super cycle? Or is there enough to go around in a trickle-down effect? Bill, if you have thoughts on that because you've been on both sides of that kind of Wall Street mega cycle.

So many ways to answer that. I guess I'd offer the following. The first is you just look at who we are in our growth rate, our EPS just went up 25% year-on-year. We're growing single double digits on every line item on revenue and growing customers, in a space that does not focus heavily on capital markets, yet our capital markets revenue is up 80% year-on-year. So are we in the middle of a deal that pays $100 million in fees? No, we aren't. But are we actually growing the core franchise at a pace, importantly, at a pace that is less cyclical than the boom you're seeing in the super cycle right now? We are. So it's an alternative to something that I think is more volatile yet it's -- we're dropping real dollars to the bottom line in a healthy economy and gaining share as we do it.

Our next question is coming from Manan Gosalia of Morgan Stanley.

Rob, I wanted to check in on the trends on deposit costs. So the 5 basis points improvement this quarter, it's pretty good given the environment. Have you noticed anything in terms of the trajectory as you went through the quarter just given the increased focus on deposit competition? I'm wondering if you're seeing anything -- any online trend in either the overall portfolio or in specific geographies on deposit costs.

Yes. So we track that obviously pretty closely. We declined in terms of rate paid in the first quarter (sic) [ second quarter ]. Our outlook, we do have rate paid drifting back up to first quarter levels. That's all part of our guidance, mostly in terms of back book repricing and some of the things that we want to do with our deposits. So that's the track that we're on.

So I guess in terms of the competitive environment, I guess, what do you think is driving that? Is that just the rate outlook and the fact that rate cuts have come out of the forward curve and maybe we have a rate hike or 2 coming up? Is that the only thing that's driving it? Is there just more competition overall? Can you talk a little bit more about that dynamic?

I think a couple of things. What's happening, let's separate what's going on in wealth and corporate and assume correctly that those are competitive yields and you can kind of dial them up and down with rate. On the retail side, to the extent you are, in effect, a commercial bank without a retail franchise, things are really tight, right? That's where you're seeing CD rates posted, brokered CDs at really high rates. If you're growing and own a good retail franchise, it's less severe. And if you look inside of what we've done in retail, the growth in DDA households, the increase in balance and the actual drop in rate quarter-on-quarter of 1 basis point, right, would kind of lead you to a conclusion that if your company is balanced here between retail and just commercial lending, you actually are in a pretty good spot. And I think we are. I don't think everybody is. And we've talked about it forever, but retail share is moving aggressively to the larger players, and it's making it more difficult to fund if you're smaller and don't focus...

Yes, I think that's right. And I think that's why even though we do expect some increase in our rate base, it's not dramatic.

Our next question is coming from Matt O'Connor of Deutsche Bank.

I was hoping to circle back on the capital market revenues and I guess the fact that a lot of the revenues in the industry are being driven by some of these biggest bigger headline deals and yet your revenues were so strong. Like just remind us a little bit about what the mix is, maybe kind of generally from a product point of view, size of customer. And I guess also any comments on like how well it's integrated with the rest of the firm as a feeder system.

Yes. Sure, Matt. So our capital markets was up overall, but each category was up. Harris Williams, which is about 40% of our capital markets business, had a record quarter. But beyond that loan syndication, Solebury trading all up broad-based.

And inside of there, you have derivatives and FX and our share of investment-grade underwriting has gone way up. It's a healthy market we participate in.