PNC Financial Services Group, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. PNC is a diversified U.S. financial institution with Retail Banking, Corporate & Institutional Banking, and Asset Management Group businesses. This unaudited quarterly report covers the three and nine months ended September 30, 2022. Year-over-year comparisons include BBVA’s acquired operations from June 1, 2021; therefore, some growth reflects the acquisition.
Key financial results
| Metric | Q3 2022 | Comparison |
|---|---|---|
| Net interest income | $3.475 billion | Up 14% from Q2 2022 and 22% from Q3 2021 |
| Noninterest income | $2.074 billion | Up $9 million from Q2; down $267 million from Q3 2021 |
| Total revenue | $5.549 billion | Up 8% from Q2 and 7% from Q3 2021 |
| Provision for credit losses | $241 million | Compared with $36 million in Q2 2022 and a $203 million recapture in Q3 2021 |
| Noninterest expense | $3.280 billion | Up $36 million from Q2; down $307 million from Q3 2021 |
| Net income | $1.640 billion | Up 10% from Q2 and 10% from Q3 2021 |
| Diluted EPS | $3.78 | Compared with $3.39 in Q2 and $3.30 in Q3 2021 |
| Net interest margin | 2.82% | Up 32 basis points from Q2 and 55 basis points from Q3 2021 |
| Efficiency ratio | 59% | Compared with 63% in Q2 and 69% in Q3 2021 |
For the first nine months of 2022, net income was $4.565 billion and diluted EPS was $10.39, up 3% and 6%, respectively, from the comparable 2021 period. Revenue increased 9% to $15.357 billion. Net interest income rose 20%, while noninterest income fell 4% and expenses increased 5%.
Balance sheet and funding at September 30, 2022: Assets were $559.5 billion; loans were $315.4 billion, up 9% from year-end 2021; deposits were $438.2 billion, down 4%; and borrowed funds were $54.6 billion, up 77%. Loans-to-deposits were 72%, versus 63% at year-end 2021. The deposit decline reflected outflows, higher consumer spending, and inflationary pressures; increased FHLB borrowings were a principal source of replacement funding.
Credit, capital, and liquidity: Nonperforming assets fell 16% from year-end to $2.1 billion. The loan-related allowance for credit losses was $5.3 billion, or 1.67% of loans, versus $5.5 billion, or 1.92%, at year-end. Q3 net charge-offs were $119 million, or 0.15% of average loans. Common equity Tier 1 was 9.3%, down from 10.3% at year-end; the estimated fully implemented CET1 ratio was 9.1%. PNC reported that it and PNC Bank exceeded the 100% minimum LCR and NSFR requirements. Liquid assets totaled $51.0 billion, plus $45.8 billion of available-for-sale securities; unused secured borrowing capacity was $63.9 billion.
Cash flow, nine months ended September 30: Operating activities provided $5.0 billion, compared with $3.7 billion in 2021. Investing activities used $10.7 billion, versus providing $6.3 billion; financing activities provided $4.2 billion, versus using $8.2 billion. Cash and due from banks ended at $6.5 billion. These cash flow figures reflect significant balance-sheet activity, including loan growth, securities purchases, deposit changes, and borrowings.
Material changes and notable items
- Q3 net interest income increased from Q2 as asset yields and loan balances rose, partly offset by higher funding costs. Average interest-bearing deposit cost rose to 0.45% from 0.12% in Q2.
- Year-to-date fee income was lower, notably in capital markets and mortgage revenue; card and cash management revenue increased. PNC cited lower private equity, mortgage, and capital markets activity as contributors.
- PNC reclassified $82.7 billion fair value of securities from available for sale to held to maturity during the first nine months. The securities had $5.4 billion of pretax unrealized losses at quarter-end; the transfers were noncash and losses are to be amortized over the securities’ remaining lives.
- Higher interest rates contributed to a $10.9 billion after-tax decline in accumulated other comprehensive income during the first nine months, principally from securities and cash flow hedge losses. Shareholders’ equity fell $9.0 billion from year-end to $46.7 billion.
- PNC repurchased $3.0 billion of common stock and paid $1.8 billion in common dividends during the first nine months. In Q3 it returned $1.7 billion through $1.1 billion of repurchases and approximately $622 million of common dividends. The stated expected quarterly repurchase range was $700 million to $750 million, subject to conditions and capital constraints.
- Hurricane Ian affected a key Florida market in late September. Management said its assessment to date indicated no expected material impact on operating results, including credit losses.
Outlook, risks, and contingencies
For Q4 2022 versus Q3, management expected average loans to rise about 1%; net interest income to increase 6%–8%; fee income to be stable to down 1%; other noninterest income, excluding securities gains and Visa activity, of $200 million–$250 million; revenue to increase about 2%; expenses to be stable to up 1%; net charge-offs of $125 million–$175 million; and an effective tax rate of about 18.5%.
Management expected below-trend near-term economic growth, continued monetary tightening, and elevated recession risks over the following few years, while its base view was that the U.S. would narrowly avoid recession. Its rate outlook at the filing date anticipated federal funds rates of 4.25%–4.50% at year-end 2022 and a peak of 4.50%–4.75% in early 2023. These are forward-looking estimates and could differ materially from actual results.
- PNC identified inflation, rising rates, supply-chain pressures, and weaker growth as risks to borrowers and credit-loss estimates. Its weighted-average CECL scenarios assumed 2023 real GDP growth of 0.1% and unemployment of 4.8%.
- Office commercial real estate remained an area of uncertainty amid remote-work trends. PNC said risk classifications had moved higher but had not observed a notable change in loan performance at quarter-end.
- PNC disclosed that reasonably possible losses on disclosed legal matters could exceed related accruals by an aggregate amount below $300 million for matters it could estimate; this does not include every disclosed matter and is not a maximum exposure estimate. USAA patent litigation included an adverse $4.3 million jury award in one case; other proceedings and post-trial motions remained relevant.
- The Inflation Reduction Act could affect cash taxes through a 15% minimum tax and a 1% excise tax on stock repurchases. Proposed resolution-planning requirements for large non-GSIB banks could increase borrowing costs and operational requirements.
- PNC’s interest-rate sensitivity analysis indicated potential benefit from rising rates in the near term, but sensitivity varied by scenario and forecast horizon. Credit ratings, capital distributions, legal and regulatory developments, market conditions, and operational and cybersecurity risks could affect results and liquidity.
Important facts for investors to verify
- Whether Q4 net interest income and revenue met management’s stated outlook, given rate moves, funding costs, and deposit trends.
- Whether deposit outflows and increased borrowing continued, and the related cost and composition of funding.
- Credit trends, particularly commercial real estate office exposure, charge-offs, delinquency levels, and adequacy of the allowance under changing economic scenarios.
- Capital levels after AOCI effects, repurchases, dividends, and the phase-in of CECL; confirm regulatory constraints on planned capital returns.
- The realized effects of securities reclassification and higher-rate sensitivity on earnings, AOCI, tangible capital, and liquidity.
- Developments in USAA litigation and other legal matters, including potential losses beyond recorded accruals.