PNC Financial Services Group, Inc. — 2018 Form 10-K
Business context and reporting period. PNC is a diversified U.S. financial services company spanning retail banking, corporate and institutional banking, asset management, and an equity-method investment in BlackRock. This annual report covers the fiscal year ended December 31, 2018; quarterly figures below are identified separately.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $17.132 billion | $16.329 billion |
| Net interest income (GAAP) | $9.721 billion | $9.108 billion |
| Noninterest income | $7.411 billion | $7.221 billion |
| Provision for credit losses | $408 million | $441 million |
| Noninterest expense | $10.296 billion | $10.398 billion |
| Net income | $5.346 billion | $5.388 billion |
| Net income attributable to common shareholders | $5.061 billion | $5.076 billion |
| Diluted earnings per common share | $10.71 | $10.36 |
| Net interest margin | 2.97% | 2.87% |
| Efficiency ratio | 60% | 64% |
| Effective tax rate | 16.8% | 1.9% |
- Quarterly context: Fourth-quarter 2018 net income was $1.351 billion and diluted EPS was $2.75, versus $2.091 billion and $4.18 in fourth-quarter 2017. The prior-year quarter included a substantial tax benefit from federal tax legislation.
- Cash flow: Net cash provided by operating activities was $7.840 billion, compared with $5.579 billion in 2017. Investing activities used $3.969 billion; financing activities used $3.512 billion. Cash and due from banks ended the year at $5.608 billion. Bank cash flows reflect balance-sheet and funding movements and should not be read like industrial-company free cash flow.
- Balance sheet: Total assets were $382.315 billion, loans $226.245 billion, deposits $267.839 billion, borrowed funds $57.419 billion, and shareholders’ equity $47.728 billion. Loans-to-deposits were 84%.
- Credit quality: Nonperforming assets declined 11% to $1.808 billion; net charge-offs fell 8% to $420 million. The allowance for loan and lease losses was $2.629 billion, or 1.16% of loans, versus 1.18% in 2017.
- Capital and liquidity: Basel III CET1 was 9.6%, Tier 1 risk-based capital 10.8%, total capital 13.0%, leverage 9.4%, and supplementary leverage 7.8%. PNC and PNC Bank were considered well capitalized. LCR exceeded the 100% fully phased-in minimum. Reported liquid assets totaled $85.5 billion, including $22.1 billion in short-term investments and $63.4 billion in available-for-sale securities. Parent-company available liquidity was $4.6 billion.
Material changes versus the prior year
- Revenue rose 5%, led by 7% growth in net interest income as loan and securities yields increased; higher deposit and borrowing costs partly offset the gains.
- Net income declined slightly despite revenue growth and lower expenses, largely because 2017 included a $1.2 billion tax benefit from revaluing deferred tax liabilities after the federal statutory rate reduction. The effective tax rate was 1.9% in 2017 and 16.8% in 2018.
- Loans grew 3% to $226.2 billion, primarily from commercial lending; deposits increased 1% to $267.8 billion. Interest-earning deposits with banks fell 62% to $10.9 billion, while investment securities increased 9% to $82.7 billion.
- Noninterest expense decreased 1%. The comparison was affected by $502 million of fourth-quarter 2017 items, including a $200 million BlackRock-stock contribution to the PNC Foundation and $197 million of real-estate disposition and exit charges.
- CET1 declined from 9.8% to 9.6%, reflecting capital returns and lower accumulated other comprehensive income, primarily from unrealized securities losses. PNC returned $4.4 billion to shareholders in 2018 through $2.8 billion of share repurchases and $1.6 billion of common dividends.
- BlackRock contributed $781 million of segment earnings in 2018 versus $1.764 billion in 2017; the comparison included significant 2017 tax benefits. PNC’s economic interest was approximately 22%.
Outlook, commentary, risks and unusual items
- 2019 outlook: Management expected average loan growth of 3%–4%, revenue growth at the higher end of low-single digits, noninterest expense growth at the lower end of low-single digits, and an effective tax rate of approximately 17%.
- First-quarter 2019 outlook: Average loans and net interest income were expected to be stable versus fourth-quarter 2018; fee income was expected to decline by low-single digits; other noninterest income was forecast at $275–$325 million excluding securities and Visa activity; expense was expected to remain stable; and provision for credit losses was forecast at $125–$175 million.
- Management’s baseline forecast anticipated slower U.S. growth in 2019 and one further Federal Reserve rate increase, in September, to a 2.50%–2.75% range. Trade restrictions and geopolitical concerns were identified as downside risks. These are forward-looking expectations, not guarantees.
- PNC completed a $250 million continuous-improvement savings goal in 2018 and set a $300 million goal for 2019, intended to help fund ongoing business investments. It continued digital and technology investment, expanded commercial banking into additional markets, and pursued branch-network optimization.
- Key risks include economic deterioration, interest-rate and yield-curve changes, deposit competition and funding costs, credit losses, regulatory and capital/liquidity requirements, cyber and operational events, third-party/vendor failures, legal proceedings, and the performance and valuation of BlackRock. PNC also identified LIBOR transition risk and expects CECL adoption on January 1, 2020 to increase credit-loss reserves; the amount was not quantified clearly in the supplied filing text.
- Legal and contingencies: For disclosed legal matters where estimates were possible, PNC reported reasonably possible losses above accruals of up to approximately $125 million in aggregate, but stated this was not a maximum exposure and excluded matters it could not estimate. The Visa interchange class settlement remained subject to final court approval. A retrial in the pre-need funeral trust litigation concluded in January 2019, with a district court decision pending. PNC was cooperating with a Department of Justice inquiry concerning the Low Income Housing Tax Credit program.
- Subsequent events and accounting: The parent company issued $1.05 billion of senior notes in January and February 2019. PNC transferred its remaining BlackRock Series C preferred shares in January 2019 to satisfy its related incentive-plan obligation. Adoption of the lease standard on January 1, 2019 resulted in $2.1 billion of lease liabilities, $2.0 billion of right-of-use assets, and an $83 million retained-earnings adjustment.
- PricewaterhouseCoopers LLP gave an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2018.
Most important facts for investors to verify
- How much of 2018 earnings and the year-over-year comparison reflects recurring operating performance versus the 2017 tax benefit and other unusual items.
- Whether loan growth, net interest margin, and deposit pricing support the stated 2019 revenue outlook as funding costs rise.
- Credit trends by portfolio—particularly consumer charge-offs, commercial real estate exposure, nonperforming assets, and the adequacy of reserves ahead of CECL adoption.
- Capital and liquidity headroom after repurchases and dividends, including the impact of regulatory changes and the availability of dividends from PNC Bank to the parent.
- Developments in the Visa settlement, pre-need funeral trust retrial, mortgage-related indemnification demands, and the DOJ tax-credit inquiry, including any changes to loss estimates or accruals.
- BlackRock’s contribution to PNC earnings and the market value of the investment, alongside the concentration and capital treatment of that holding.