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PNC reports increased expenses as it invests in digital banking, personnel

Personnel costs and a digital expansion drove an increase in third-quarter expenses at PNC Financial Services Group Inc., executives said on an earnings call. Noninterest expense grew to nearly $2.61 billion, up from $2.58 billion in the second quarter and $2.46 billion in the year-ago quarter.

Personnel expenses increased $57 million quarter-over-quarter largely due to incentives. CFO Robert Reilly sees the bank's increase in incentive compensation as a "good thing," and mentioned that the bank is "already seeing lower attrition rates" since raising the bank's minimum wage to $15 per hour.

According to Reilly, every other expense category decreased on a quarter-over-quarter basis. Equipment, marketing and other expenses were all up year over year with only occupancy decreasing, according to the company's investor presentation.

For the fourth quarter, PNC expects another gradual rise in expenses. Reilly said the most notable item behind that increase is marketing expense, particularly directed toward digital initiatives.

Digital trends in the industry have created new expenses, particularly in marketing. PNC is among several large banks that have rolled out platforms to attract customers across the U.S. "We could choose to simply curtail investments in digital ... and in the short term, that would make our expenses look great; in the long term, it would kill us," CEO William Demchak said.

The bank increased average deposits to $262.5 billion from $259.5 billion one year ago. The bank's cumulative deposit beta was 29% between Dec. 2015 and Sept. 2018, up from 26% at June 30.

Loan growth was "modest" in the third quarter, according to Demchak, with growth in commercial and consumer lending causing rates to rise $4.1 billion year over year to $223.3 billion.

Third-quarter net income was $1.4 billion, or $2.82 per common share. Return on average assets was 1.47%, and return on common equity was 12.32%. Return on tangible common equity was 15.75%, with tangible book value up 5% to $73.11 per common share at Sept. 30.