PNC Financial Services Group in Pittsburgh set the tone for midsize banks by detailing how it plans to compete with megabanks and fintech firms for loans and deposits The 381 billion-asset PNC the first major regional to report second-quarter results provided more details on its plan to launch a national digital bank later this year PNC will also continue to expand its middle-market business into new cities with plans to enter Boston and Phoenix in 2019 Halfway through the year we feel good about our execution William Demchak the companys chairman president and CEO said during a quarterly call with analysts A relationship-based business model is working and that is creating growth opportunities for us he added All that said we have a lot of work to do in the back half of the year Despite industry chatter about more bank consolidation Demchak made it clear that PNC is unlikely to pursue acquisitions Rather it is weighing more digital offerings and de novo activity It had already disclosed plans to bring its middle-market business to Denver Houston and Nashville Tenn this year William Demchak PNCs chairman and CEO is determined to find cost-effective ways to compete with megabanks Executives expressed optimism that loan growth will remain healthy throughout the rest of the year especially for middle-market and specialty clients Commercial real estate remains a challenge as PNC sees fewer deals that meet its risk appetite The company which reported strong CRE growth after the financial crisis has tapped the brakes in recent years Demchak noted As for funding loans Demchak said PNCs digital bank could be a way to attract low-cost deposits We want to be able to find a different channel to grow deposits because right now we have national loan growth capability against regional funding he said So long-term we have an imbalance there PNC has boosted its marketing efforts in advance of the digital banks launch The company previously said it would open branches in select markets including Minneapolis Dallas and Kansas City as part of the digital bank roll out Therein lies the challenge for regional banks finding ways to expand and compete while keeping costs in check PNC seemed to manage the balancing act between revenue and expenses during the second quarter Revenue increased by 65 from a year earlier to 43 billion In comparison noninterest expense in rose by 42 to 26 billion with heightened marketing contributing to the increase The total number of full-time employees rose by about 3 to 51 400 at June 30 Executives told analysts that expenses should be stable in the third quarter while revenue should increase slightly PNC also remains on track to hit its goal of cutting 250 million in expenses by the end of this year Doing so will help offset the new investments and increased salary costs tied to the companys decision last year to raise its minimum wage PNCs branch network shrank by 3 from mid-2017 to roughly 2 400 locations Branches remain an important part of the strategy Demchak said because PNC believes most customers still want the option of meeting with a banker to address a problem To support the digital bank the company will add a few new branches in markets where it currently has no retail presence In the handful of branches that we might have in a market its just kind of a tipping stone to give somebody comfort that theyre not dealing with the person behind the curtain Demchak said Theres actually a presence that they can go and talk to somebody if they need to Physical locations could also act as billboards for the digital bank similar to how Capital One Financial operates cafes in markets such as Boston where it lacks full-service branches PNC executives also compared the strategy to the Marcus initiative implemented by Goldman Sachs While a step in the right direction simply launching a digital bank is not enough to distinguish a bank from competitors said Gerard Cassidy an analyst at RBC Capital Markets It is a ticket into the ballpark Cassidy said They still have to execute on the field The opportunity for all of these banks including PNC is having a straightforward way for customers to open checking accounts online If they can achieve that they will be executing quite effectively Demchak is ready to see the experiment through Weve set it up to the best of our ability he said Were going to test and learn My own belief is that over time we will see that succeed I just dont know how long its going to take