The PNC Financial Services Group, Inc. earnings

Management highlights

- Overall Financial Results * PNC reported Q2 2026 net income of $2.1 billion, or $4.81 per diluted share. Adjusted for one-time items, diluted EPS was $4.85, representing 25% year-over-year EPS growth. * Total revenue was $6.9 billion, up 12% linked quarter. Non-interest expense was $4.1 billion, up 9% linked quarter. PNC generated 3% positive operating leverage, with pre-provision net revenue (PPNR) growing 16% linked quarter. * Return on tangible common equity (ROTCE) was 17.9% for the quarter. Tangible book value per share was $111, up 2% linked quarter and 7% year-over-year. * Credit quality remains strong: Non-performing loans fell 10% to $2 billion (0.55% of total loans, down from 0.62% last quarter). Total net loan charge-offs were $226 million, for an NCO ratio of 25 basis points. The allowance for credit losses totaled $5.5 billion, equal to 1.48% of total loans. - Strategic & Operational Milestones * Successfully completed the system integration and conversion of the First Bank acquisition, with no slowdown to ongoing internal projects (including launching a new mobile banking platform during the integration). * The First Bank integration is meeting all financial expectations for price, accretion, and target returns, with results already slightly above projections. * The board of directors approved an 18% increase to the quarterly common stock dividend, raising it to $2 per share. PNC returned $1.3 billion of capital to shareholders in Q2, including $690 million in dividends and $610 million in share repurchases. * PNC maintained best-in-class resiliency in the latest Federal Reserve stress test: for the fourth consecutive year, PNC had the lowest start-to-trough capital depletion among its peer group. * PNC remains on track to hit its 2026 target of $350 million in cost reductions from its standalone continuous improvement program, which funds ongoing business and technology investments. - Balance Sheet & Capital Position * Securities balances increased 2% to $147 billion, with portfolio yield improving 9 basis points to 3.45%. Borrowings increased $16 billion to $79 billion, driven by higher FHLB advances used as low-cost temporary funding for loan growth. * PNC reported an estimated CET1 ratio of 9.9%, near its 10% operating target, with ample capital flexibility for growth and capital return.

Guidance

- Full Year 2026 Guidance (excluding First Bank integration charges and significant items, compared to 2025 results): * Average loan growth is expected to be approximately 12.5%. * Net interest income is projected to increase 15% to 15.5%. * Non-interest income is expected to increase approximately 9%, with full-year capital markets revenue projected to rise 25% to 30% year-over-year. * Total revenue is expected to increase approximately 13%. * Non-interest expense is projected to increase approximately 8.5%. * The effective tax rate is expected to be approximately 19.5%. * PNC confirms it remains on track to hit an 18% annualized ROTCE exit rate by Q4 2026, and is currently tracking to this target. - Q3 2026 Guidance (compared to Q2 2026 results): * Average loans are expected to increase 1% to 2%. * Net interest income is projected to increase 3% to 3.5%. * Fee income is expected to decline 5% to 5.5%, driven primarily by an expected 20% quarter-over-quarter pullback in capital markets revenue after a record elevated Q2, with other fee categories expected to be flattish to up. * Other non-interest income is projected to be between $150 million and $200 million. * Adjusted non-interest expense is expected to decline 2% to 3%, with approximately $50 million of integration expenses expected. * Net charge-offs are projected to be approximately $225 million. * Share repurchases are expected to remain at approximately the same level as Q2 2026. - Macroeconomic Base Case Assumptions: * GDP growth of approximately 2.1% in 2026, with the unemployment rate holding steady and ending the year at approximately 4.3%. * The Federal Reserve is expected to keep interest rates stable throughout 2026. PNC is currently roughly neutral to 25 basis point rate moves in 2026, with minimal net impact to full-year net interest income.

Segment performance

PNC does not break out performance into formal product segments, but provides the following line of business performance details for the second quarter of 2026: - Total average loans: $363 billion, up $12 billion (4%) linked quarter. Almost all loan growth came from C&I (commercial and industrial) loans, driven by strong new production and broad-based higher utilization. Commercial Real Estate (CRE) loans increased by $690 million, with growth concentrated in retail and industrial exposures. Consumer loans declined by $730 million, as credit card balance growth partially offset expected declines in residential real estate and auto loans. The total average loan yield decreased 3 basis points linked quarter to 5.47%. - Average total deposits: $457 billion, flat linked quarter (higher consumer balances offset a seasonal decline in commercial deposits). Average non-interest-bearing deposits grew 4% linked quarter, and represented 23% of total deposits. The average total rate paid on interest-bearing deposits decreased 5 basis points to 1.91%. - Net interest income: $4.1 billion, up 4% linked quarter, driven by commercial loan growth and higher non-interest-bearing deposit balances. Net interest margin (NIM) increased 1 basis point to 2.96%. - Fee income: $2.3 billion, up 10% linked quarter (20% year-over-year). Performance was broad-based across all categories: Asset management and brokerage: up 5% ($20 million); Capital markets and advisory: up 25% ($114 million), driven by record M&A advisory fees; Card and cash management: up 5% ($34 million); Lending and deposit services: up 2% ($6 million); Mortgage revenue: up 22% ($26 million). Excluding integration costs and significant items, total non-interest income grew 21% year-over-year, driven by broad-based organic growth.

Risks & headwinds

- Competitive deposit pricing pressure is disproportionately impacting smaller banks without large retail deposit franchises. While PNC's diversified retail franchise positions it well to manage this pressure, the company expects average deposit costs to drift moderately higher back to Q1 2026 levels over the coming quarters. - Capital markets revenue is inherently volatile quarter-to-quarter, and Q2 2026's record performance is not expected to be sustained in Q3, with some deal activity pulled forward into the second quarter. - Minor execution challenges during the First Bank conversion included underestimated branch traffic from First Bank customers needing in-person support to activate digital banking services, which caused temporary operational strain. PNC noted it will adjust processes for future conversions to address this issue. - Management monitors small pockets of stress in specific niche sectors, including healthcare, distilleries, and transportation (driven by fuel costs), but none of these are large enough to be considered material risks to PNC's overall portfolio. - Current loan growth is concentrated in higher credit quality, lower spread borrowers, which creates mild dilution to overall net interest margin even as it is accretive to total earnings per share.

Analyst Q&A

• Q: What drove the strong Q2 loan growth, what is the cadence for the second half, and how will PNC fund continued loan growth? /

  A: Management expects loan growth to continue in the second half, but at a slower pace more aligned with overall GDP growth, after a strong first half that saw some pulled forward demand. Non-interest-bearing deposit growth was stronger than expected in Q2, driven by commercial treasury management inflows, and is expected to stabilize around the current 23% of total deposits. The increase in FHLB advances in Q2 was just temporary optimal low-cost funding, not a signal of stress; PNC expects deposits to grow in the second half to replace this wholesale funding, and will optimize funding across all available levers as needed.

• Q: What is driving the current mix of loan growth, and how has competitive pressure impacted loan spreads? /

  A: Most current loan growth is from higher credit quality, lower-spread borrowers, which is a slightly higher mix than the historical average but not out of line with normal cycles. Broad-based C&I growth is occurring across all sectors and geographies, not just concentrated in AI-related data center lending, though AI CapEx has a marginal marginal impact. Apples-to-apples spreads for similar loans are largely stable quarter-over-quarter; the modest overall portfolio spread decline is purely from this mix shift, not competitive spread compression. Growth is faster in PNC's new expansion markets than legacy markets, as the bank continues to gain market share.

• Q: What is PNC's outlook for commercial real estate (CRE) after years of working through office sector stress? /

  A: PNC has largely worked through its office CRE exposure, and has started to grow its CRE portfolio for the first time after multiple quarters of decline. Pipeline activity is constructive across all major CRE segments, including multifamily, industrial, and retail, and CRE is expected to be a larger contributor to future loan growth. PNC has only minor, tangential exposure to data center construction lending, with no large concentrated positions in that segment.

• Q: What were the key positives and unexpected challenges from the completed First Bank integration? /

  A: The biggest positive surprise was that PNC was able to complete the large integration without slowing down any ongoing strategic projects, including launching a new mobile banking platform during the conversion. Financially, the acquisition is already meeting or exceeding all projected targets for cost, return, and EPS accretion. The main unexpected challenge was underestimating how much in-person branch support First Bank customers would need to activate digital banking services, which created higher temporary branch traffic and some customer confusion; PNC will adjust its process for future conversions to address this.