Business context and reporting period
PNC Financial Services Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. PNC is a diversified U.S. financial institution with Retail Banking, Corporate & Institutional Banking, and Asset Management Group businesses.
Results include BBVA USA operations from the June 1, 2021 acquisition; BBVA USA merged into PNC Bank in October. PNC paid $11.5 billion in cash. Comparisons with 2020 are also affected by PNC’s 2020 sale of its BlackRock investment, reported as discontinued operations.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $19.2 billion | $16.9 billion |
| Net interest income | $10.6 billion | $9.9 billion |
| Net interest margin | 2.29% | 2.53% |
| Noninterest income | $8.6 billion | $7.0 billion |
| Provision for (recapture of) credit losses | $(779) million recapture | $3.2 billion provision |
| Noninterest expense | $13.0 billion | $10.3 billion |
| Net income from continuing operations | $5.7 billion | $3.0 billion |
| Diluted EPS from continuing operations | $12.70 | $6.36 |
| Total net income | $5.7 billion | $7.6 billion |
- Continuing-operations earnings improved mainly because of lower credit-loss provision and higher fee income, including BBVA contributions; increased acquisition and business activity expenses partly offset gains.
- Net interest income rose 7%, but margin fell 24 basis points, reflecting lower asset yields and higher balances at the Federal Reserve, partly offset by lower funding costs. Noninterest income grew 23%, including higher merger-advisory revenue.
- The efficiency ratio increased to 68% from 61%. The effective tax rate was 18.1%, versus 12.4% in 2020.
- Operating cash flow was $7.2 billion; investing cash flow was $(2.8) billion and financing cash flow was $(3.4) billion. Investing cash flow included $10.5 billion net cash paid for BBVA.
Balance sheet, credit, capital and liquidity
- Total assets were $557.2 billion, up 19%; loans were $288.4 billion, up 19%; deposits were $457.3 billion, up 25%. Growth primarily reflected BBVA and deposit liquidity. Investment securities reached $133.0 billion, up 50%.
- Borrowed funds declined 17% to $30.8 billion. Total shareholders’ equity was $55.7 billion; common shareholders’ equity was $50.7 billion.
- Loan-related allowance for credit losses was $5.5 billion, or 1.92% of loans, versus $5.9 billion, or 2.46%, a year earlier. Net charge-offs were $657 million, or 0.24% of average loans, down from $832 million, or 0.33%.
- Nonperforming assets were $2.5 billion, up 7%, largely due to BBVA; accruing past-due loans rose 46%, including BBVA conversion-related administrative and operational delays.
- PNC’s CET1 ratio was 10.3%, down from 12.2%, primarily due to BBVA. PNC and PNC Bank exceeded applicable “well-capitalized” thresholds. The ratio reflects the elected CECL transition relief.
- PNC reported $84.8 billion in cash and short-term liquid investments and $131.5 billion in available-for-sale securities. Parent-company available liquidity was $9.0 billion. PNC and PNC Bank’s LCR and NSFR exceeded the 100% minimums.
- PNC returned $3.0 billion to shareholders in 2021 through $2.0 billion of common dividends and $1.0 billion of share repurchases. The reported dividend payout ratio was 37.8%.
Material changes, outlook and management commentary
- BBVA added approximately 2.6 million customers, 9,000 employees and more than 600 branches across seven states. PNC reported $798 million of merger and integration costs for 2021 and approximately $805 million cumulatively through year-end. It expected total integration costs of about $980 million and anticipated $900 million of acquisition savings, substantially implemented by year-end and expected to be fully realized in 2022.
- Management’s 2022 full-year outlook versus 2021: average loan growth of approximately 10%; period-end loans up approximately 5%; revenue growth of 8%–10%, expected toward the higher end; expenses up 4%–6%, excluding integration expense; effective tax rate approximately 18%; and positive operating leverage.
- For Q1 2022 versus Q4 2021, management expected revenue down approximately 3%–5%, net interest income down 1%–2%, fee income down 4%–6%, and net charge-offs of $100–$150 million. These forecasts included twelve months of BBVA operations in 2022 versus seven months in 2021 for the full-year comparison.
- Management anticipated five 25-basis-point Federal Reserve rate increases during 2022, reaching a 1.25%–1.50% range by year-end, followed by further increases in 2023. It also expected inflation to remain above the Fed’s long-run 2% objective at year-end 2022.
- Significant risks include pandemic-related uncertainty, inflation and supply constraints, credit deterioration, interest-rate and securities valuation changes, BBVA integration and realization of projected savings, cyber and third-party risks, climate-related impacts, LIBOR transition, regulatory requirements and litigation.
- Legal matters include payment-card interchange litigation and multiple USAA patent-infringement cases. For disclosed matters where PNC could estimate exposure, it assessed reasonably possible losses in excess of accrued liabilities at less than $300 million in aggregate; this estimate excludes matters PNC could not estimate and is not a maximum exposure.
- PwC issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded internal controls were effective.
Important facts for investors to verify
- Separate recurring earnings from acquisition effects, the $779 million credit-loss recapture, and the prior-year BlackRock discontinued-operation gain.
- Track post-acquisition loan and deposit growth, BBVA integration costs, and whether the expected $900 million of savings is realized in 2022.
- Assess the CET1 decline, capital headroom after CECL transition relief phases out, and capacity for dividends and repurchases under regulatory requirements.
- Monitor margin sensitivity to rate movements, deposit pricing and mix, securities valuation and accumulated other comprehensive income.
- Review credit trends—including BBVA-related delinquencies, commercial real estate and pandemic-affected industries—and the assumptions supporting the allowance and provision recapture.
- Follow the status and potential financial effects of interchange litigation, USAA patent cases, and LIBOR contract conversions.