PNC Financial Services Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are principally with December 31, 2019 and Q1 2019. PNC is a diversified U.S. financial services company with retail banking, corporate and institutional banking, asset management, and an equity-method investment in BlackRock.
Key financial results
| Metric | Q1 2020 | Comparable period | Change / context |
|---|---|---|---|
| Total revenue | $4.517 billion | $4.286 billion, Q1 2019 | Up 5% |
| Net interest income | $2.511 billion | $2.475 billion, Q1 2019 | Up 1%; net interest margin fell to 2.84% from 2.98% |
| Noninterest income | $2.006 billion | $1.811 billion, Q1 2019 | Up 11%; residential mortgage revenue rose substantially |
| Provision for credit losses | $914 million | $189 million, Q1 2019 | Increase reflects CECL adoption, COVID-19 economic forecasts and loan growth |
| Noninterest expense | $2.543 billion | $2.578 billion, Q1 2019 | Down 1% |
| Net income | $915 million | $1.271 billion, Q1 2019 | Down 28% |
| Diluted EPS | $1.95 | $2.61, Q1 2019 | Lower earnings partly offset by fewer average shares |
| Net cash from operating activities | $(696) million | $1.401 billion, Q1 2019 | Investing cash flow was $(23.379) billion; financing cash flow was $26.507 billion |
Balance sheet, credit, capital and liquidity
- At March 31, assets were $445.5 billion, up $35.2 billion (9%) from year-end. Loans were $264.6 billion, up $24.8 billion (10%), largely from commercial commitment utilization; deposits were $305.2 billion, up $16.7 billion (6%).
- Borrowed funds increased 22% to $73.4 billion, including higher FHLB borrowings and other funding. Loans-to-deposits were 87%, versus 83% at year-end. Shareholders’ equity was $49.3 billion.
- Loan and lease allowance for credit losses was $3.944 billion; the additional allowance for unfunded lending commitments was $450 million. Total allowance to loans was 1.66%, compared with 1.28% at year-end, though adoption of CECL affects comparability. Net charge-offs were $212 million, or 0.35% annualized, versus $136 million and 0.24% in Q1 2019. Nonperforming assets were $1.755 billion, broadly unchanged from year-end.
- Basel III CET1 was 9.4% (9.2% on a fully implemented CECL basis); total risk-based capital was 12.6%. PNC and PNC Bank were described as well capitalized. The reported ratios reflect the elected five-year CECL regulatory transition.
- PNC reported $33.0 billion of cash and short-term investments and $89.1 billion of available-for-sale securities; its liquidity coverage ratio exceeded the 100% minimum. Parent-company available liquidity was $6.5 billion.
- Q1 shareholder returns included $1.4 billion of repurchases and $503 million of common dividends. Repurchases were suspended through June 30, 2020; a $1.15-per-share quarterly dividend was declared for payment May 5.
Material changes and unusual items
- CECL was adopted January 1, 2020. The transition reduced retained earnings by $671 million and changed reserve measurement from incurred to expected lifetime credit losses. Q1 provision and reserve balances are therefore not directly comparable with prior periods.
- COVID-19 drove sharp changes in the operating environment, customer liquidity needs, loan utilization, market valuations and expected credit losses. Commercial loans grew $24.1 billion from year-end; deposits and borrowings also increased as customers and PNC maintained liquidity.
- Residential mortgage servicing-rights valuation, net of economic hedges, was a significant source of Q1 revenue; the residential MSR balance declined to $605 million from $995 million at year-end. Net securities gains were $182 million, versus $13 million in Q1 2019.
- Other comprehensive income was $1.719 billion, largely reflecting market-related securities and cash-flow-hedge gains; this contributed to higher accumulated other comprehensive income.
- Segment earnings declined at Retail Banking ($201 million versus $264 million) and Corporate & Institutional Banking ($370 million versus $552 million), primarily amid higher credit provisions. Asset Management Group earnings rose to $54 million from $45 million; BlackRock-related earnings were $157 million versus $197 million.
Outlook, commentary and risks
PNC’s baseline forecast assumed a severe but short U.S. recession in the first half of 2020, recovery beginning in Q3, and the federal funds rate remaining at 0.00%–0.25% into 2023. The filing cautions that conditions had worsened after quarter-end and that outcomes could differ materially.
- Q2 2020 versus Q1: average loans expected to increase approximately 10%–15%; net interest income expected to be stable; noninterest income expected to decline approximately 15%–20%; noninterest expense expected to be stable to down; and net charge-offs expected to be $250 million–$350 million.
- Full-year 2020: total revenue and noninterest expense each expected to decline 5%–10%.
- After quarter-end, PNC reported more than 70,500 PPP applications registered with the SBA in April and May, totaling $14 billion. Through April 30, it had completed more than 156,000 consumer loan relief requests covering $9.3 billion in loans. These are subsequent-period disclosures, not Q1 results.
- PNC identified elevated credit risks in COVID-19-affected industries and oil and gas, and tightened consumer underwriting. A more severe or prolonged downturn, higher unemployment, loan modifications, lower interest rates, market volatility, funding pressures, operational disruption and regulatory or legal developments could materially affect results and capital.
- PNC’s CECL weighted scenarios estimated GDP contraction of 11.2% annualized in Q2 and a 2.3% decline for full-year 2020. Management said worsening conditions after March 31 could require a material Q2 reserve build. A hypothetical 100% weighting of its most severe Q1 scenario implied approximately $9.4 billion of full-year provision; PNC stated this was not its expectation.
- For disclosed legal matters where losses could be estimated, PNC said reasonably possible losses above related accruals were, in aggregate, less than $100 million. This estimate excluded matters that could not be estimated and is not the maximum possible exposure.
Important facts for investors to verify
- How subsequent economic conditions, loan modifications and borrower performance affected credit provisions, charge-offs, delinquencies and the allowance after Q1.
- Whether the Q2 and full-year outlook was achieved, particularly loan growth, fee income, net charge-offs and expense expectations.
- The sustainability of Q1 mortgage servicing and securities-related revenue, and sensitivity of MSR values to rates and prepayments.
- Liquidity and funding trends, including deposit stability, borrowing costs, capital ratios and regulatory constraints on dividends or repurchases.
- CECL forecast assumptions and the comparability of reported reserves and capital ratios with periods before adoption.