Business context and reporting period
The PNC Financial Services Group, Inc. is a diversified U.S. financial services company spanning retail banking, corporate and institutional banking, asset management, residential mortgage banking, and other businesses. This Form 10-K covers the fiscal year ended December 31, 2013; fourth-quarter figures are also noted below. Amounts are U.S. dollars.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $16.012 billion | $15.512 billion |
| Net interest income | $9.147 billion | $9.640 billion |
| Noninterest income | $6.865 billion | $5.872 billion |
| Provision for credit losses | $643 million | $987 million |
| Noninterest expense | $9.801 billion | $10.582 billion |
| Net income | $4.227 billion | $3.001 billion |
| Diluted earnings per common share | $7.39 | $5.30 |
| Net interest margin | 3.57% | 3.94% |
| Efficiency ratio | 61% | 68% |
| Return on average assets | 1.38% | 1.02% |
| Return on average common equity | 10.88% | 8.31% |
- For fourth-quarter 2013, net income was $1.061 billion, diluted EPS was $1.85, revenue was $4.073 billion, provision for credit losses was $113 million, and noninterest expense was $2.547 billion. Fourth-quarter 2012 net income was $719 million and revenue was $4.069 billion.
- At year-end, total assets were $320.3 billion, loans were $195.6 billion, deposits were $220.9 billion, borrowed funds were $46.1 billion, and shareholders’ equity was $42.4 billion. Loans grew 5% and deposits grew 4% year over year.
- Net cash provided by operating activities was $5.555 billion; investing activities used $18.935 billion and financing activities provided $12.203 billion. Cash and due from banks ended the year at $4.043 billion. These cash-flow figures should be read in the context of a bank’s balance-sheet activity.
- Reported liquid assets were $65.8 billion, including $17.2 billion of short-term investments and $48.6 billion of available-for-sale securities; $18.8 billion of liquid assets were pledged. Management said liquidity was adequate. The loans-to-deposits ratio was 89%.
- PNC’s Basel I Tier 1 common ratio was 10.5%, up from 9.6%; total risk-based capital was 15.8%, up from 14.7%. Estimated fully phased-in Basel III Tier 1 common ratios were 9.4% under the standardized approach and 9.5% under the advanced approaches. These Basel III figures are estimates, not the reported Basel I ratios.
Material changes versus the prior year
- Net income rose 41%, reflecting lower credit-loss provisions and expenses as well as higher revenue. Revenue increased 3%, principally from noninterest income; net interest income fell 5% and net interest margin declined 37 basis points.
- Noninterest income increased 17%. Residential mortgage revenue rose to $871 million from $284 million, chiefly because the mortgage repurchase provision shifted from an expense of $761 million in 2012 to a benefit of $53 million in 2013. PNC cited agreements with Fannie Mae and Freddie Mac; fourth-quarter settlements led to a $124 million reserve release and $191 million of settlement payments.
- Credit quality improved overall: nonperforming assets fell 9% to $3.457 billion, net charge-offs declined 16% to $1.077 billion, and net charge-offs were 0.57% of average loans versus 0.73%. The allowance for loan and lease losses declined to $3.609 billion, or 1.84% of loans, from $4.036 billion, or 2.17%.
- Comparisons of consumer asset-quality measures were affected by 2013 alignment with interagency guidance, which increased nonperforming loans by $426 million and charge-offs by $134 million in the first quarter.
- PNC generated more than $775 million in continuous-improvement savings, exceeding its $700 million goal. Expense comparisons also benefited from lower integration costs and lower noncash charges related to trust preferred security redemptions.
Outlook, management commentary, risks and unusual items
- Management expected first-quarter 2014 net interest income to decline modestly from fourth-quarter 2013. For 2014, it expected purchase-accounting accretion to decrease about $300 million from 2013, total revenue to remain under pressure and likely decline, and noninterest expense to be lower than 2013, excluding potential legal and regulatory contingencies.
- Management expected first-quarter 2014 credit-loss provision of $125 million to $200 million, assuming credit quality continued to improve. The 2014 expense-savings goal was $500 million, alongside planned investments in infrastructure and businesses.
- Capital distributions, including dividends and share repurchases, remained subject to Federal Reserve review through the 2014 CCAR process. PNC expected the Federal Reserve’s response in March 2014. The Board had increased the quarterly common dividend from $0.40 to $0.44 in 2013; annual dividends declared were $1.72 per share.
- Key risks include low interest rates and pressure on net interest income, economic and credit deterioration, mortgage repurchase and servicing exposures, legal and regulatory actions, cybersecurity and operational disruptions, and valuation uncertainty. New Basel III capital and liquidity requirements, the Volcker Rule, and consumer mortgage regulations could raise costs or constrain activity.
- PNC estimated reasonably possible losses of up to approximately $800 million in aggregate for certain disclosed legal matters as of year-end; this estimate excludes matters for which the company could not estimate a loss and is not a maximum exposure. Separately, PNC agreed to a $35 million payment in a fair-lending settlement and, under amended foreclosure consent orders, approximately $70 million for borrower distribution plus approximately $111 million of additional borrower relief or related commitments.
- PNC held approximately $806 million in private equity and hedge fund interests potentially subject to Volcker Rule restrictions, plus approximately $2.4 billion of senior debt interests in CLO funds whose status was under review. The company said it would need to sell, restructure or otherwise conform substantially all affected investments by the applicable compliance date, subject to possible extensions.
- Other notable items: PNC completed the wind-down of Market Street, with no material financial impact; transferred $1.9 billion of securities from available for sale to held to maturity; and reported no goodwill impairment in 2013, following a $45 million residential mortgage goodwill impairment in 2012.
Most important facts for investors to verify
- Whether earnings growth is sustainable as mortgage reserve benefits and purchase-accounting accretion decline, and whether loan growth and fee businesses offset pressure on net interest income.
- How credit quality, charge-offs, nonperforming consumer loans and allowance coverage trend, accounting for the 2013 policy-alignment effects and purchased-impaired-loan treatment.
- The final outcomes and cash costs of mortgage repurchase claims, foreclosure and fair-lending matters, interchange litigation, and other legal or regulatory proceedings.
- Capital and liquidity headroom under fully implemented Basel III and final liquidity rules, and the Federal Reserve’s CCAR decisions on dividends and repurchases.
- Whether management meets its 2014 revenue, credit-provision, and expense expectations, including the $500 million cost-savings goal.