PNC Financial Services Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. PNC is a diversified U.S. financial services company with Retail Banking, Corporate & Institutional Banking, and Asset Management Group businesses. Comparisons below are year over year unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $4.281 billion | $4.242 billion | $12.693 billion | $12.518 billion |
| Net interest income | $2.484 billion | $2.504 billion | $7.522 billion | $7.477 billion |
| Noninterest income | $1.797 billion | $1.738 billion | $5.171 billion | $5.041 billion |
| Provision for credit losses | $52 million | $183 million | $3.429 billion | $552 million |
| Noninterest expense | $2.531 billion | $2.623 billion | $7.589 billion | $7.812 billion |
| Net income from continuing operations | $1.532 billion | $1.181 billion | $1.547 billion | $3.448 billion |
| Diluted EPS from continuing operations | $3.39 | $2.47 | $3.11 | $7.13 |
Q3 net income attributable to common shareholders was $1.455 billion. Nine-month total net income was $6.102 billion, including $4.555 billion from discontinued operations, principally associated with the BlackRock investment divestiture; continuing-operations earnings are more comparable for assessing ongoing performance.
- Margins and efficiency: Q3 net interest margin was 2.39%, down 45 basis points; the efficiency ratio was 59%, versus 62%. PNC reported positive operating leverage of 4.4% for Q3 and 4.3% year to date.
- Cash flow: For the first nine months, operating cash flow was $2.724 billion, investing cash flow was negative $44.379 billion, and financing cash flow was $43.223 billion. Investing outflows included a $47.546 billion increase in interest-earning deposits with banks; financing inflows reflected deposit growth. Net cash from continuing operations was negative $10.676 billion. BlackRock sale proceeds were $14.225 billion.
- Balance sheet and funding: At September 30, assets were $461.8 billion, loans $249.3 billion, deposits $355.1 billion, borrowed funds $42.1 billion, and shareholders’ equity $53.3 billion. Versus year-end 2019, assets rose 13%, loans 4%, and deposits 23%; borrowed funds fell 30%. Loans-to-deposits was 70%, compared with 83% at year-end 2019.
- Credit and capital: Loan and lease allowance was $5.751 billion; including unfunded commitments, loan-related credit reserves were $6.440 billion, or 2.58% of loans. Nonperforming assets were $2.152 billion, up 23% from year-end 2019; annualized Q3 net charge-offs were 0.24% of average loans. Basel III CET1 was 11.7% (11.3% fully implemented, excluding the CECL transition benefit); PNC reported that it and PNC Bank were well capitalized.
- Liquidity: Cash and short-term investments totaled $80.0 billion, with $89.7 billion of available-for-sale securities. Unused secured borrowing capacity was $79.4 billion; parent-company available liquidity was $13.8 billion. PNC and PNC Bank’s liquidity coverage ratios exceeded the 100% regulatory minimum.
Material changes and drivers
- Q3 continuing-operations income rose 30% year over year, as lower credit-loss provision and expenses more than offset modestly lower net interest income. The lower provision included a consumer-loan reserve recapture, partly offset by expected losses in pandemic-affected commercial real estate and $39 million for investment securities.
- Year-to-date continuing-operations income fell substantially, principally reflecting $3.429 billion of credit-loss provision versus $552 million in 2019. The comparison also reflects adoption of CECL on January 1, 2020; the $671 million transition adjustment reduced retained earnings at adoption.
- Low interest rates reduced asset yields and net interest margin. Lower deposit and borrowing costs partly offset the effect. Deposit growth and BlackRock-sale proceeds drove substantial balances at the Federal Reserve and supported reduced borrowings.
- Commercial loans grew 8% from year-end, including $12.9 billion of PPP loans outstanding at September 30. Consumer loans declined 3%, with lower auto, credit-card, and home-equity balances partly offset by residential mortgage growth.
- Retail Banking and Corporate & Institutional Banking nine-month earnings fell 46% and 62%, respectively, largely because of higher credit-loss provisions. Asset Management Group earnings were broadly stable. BlackRock was fully divested in May 2020; the 22.4% investment’s sale generated $14.2 billion net proceeds and an after-tax gain of $4.3 billion, reported in discontinued operations.
Outlook, risks, and notable items
- Q4 2020 outlook versus Q3: Average loans expected to decline in the low-single-digit percentage range; net interest income and fee income expected to be stable; total noninterest income expected to decline in the high-single-digit percentage range, with other noninterest income of $275–$325 million; expenses expected to rise about 1%; and net loan charge-offs expected at $200–$250 million.
- Full-year outlook: PNC expected positive operating leverage of 3%–4%. Management’s baseline anticipated a gradual recovery, with GDP returning to its pre-pandemic level in late 2021 and employment in 2023; the outlook assumed additional fiscal stimulus and risks were weighted to the downside.
- Key risks: Further COVID-19 outbreaks, renewed restrictions, insufficient fiscal support, prolonged recession, elevated unemployment, and stress in in-person services, travel, hospitality, nonessential retail, commercial real estate, and energy could weaken borrowers and increase losses. Some reported delinquencies may not reflect actual payment behavior because qualifying COVID-19 modifications remained reported as current under applicable guidance.
- At September 30, $18.3 billion of loans and $10.4 billion of unfunded commitments were in identified commercial high-impact industries; oil-and-gas loans were $3.6 billion with $7.1 billion of additional commitments. Management warned that charge-offs in affected industries could rise if economic conditions persist.
- Active hardship programs covered $782 million of commercial loans and $1.824 billion of consumer loans at quarter-end. About 99% of accruing commercial loans and 96% of accruing consumer loans that had exited deferral programs were current or less than 30 days past due; deferral rules and assistance programs affect interpretation of these measures.
- Common dividends were $1.15 per share for Q3, and the board declared the same amount for payment in November. Repurchases remained suspended through Q4 under Federal Reserve restrictions, except limited purchases to offset employee-plan issuances; PNC repurchased $99 million in Q3 for that purpose.
- Legal proceedings included a September 2020 USAA patent-infringement suit concerning mobile check deposit. For disclosed matters where estimates were possible, PNC estimated reasonably possible losses above accruals in aggregate at less than $100 million, while noting that not all matters could be estimated and actual exposure could be higher.
- PNC identified LIBOR transition as a financial, legal, operational, and reputational risk. It also reported new NSFR rules effective July 2021 and expected to comply. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether credit costs and nonperforming commercial exposures continue to rise as pandemic assistance expires, particularly in commercial real estate, high-impact industries, and energy.
- Whether Q4 results meet the stated expectations for loan growth, net interest income, fees, expenses, and charge-offs, and whether full-year positive operating leverage reaches 3%–4%.
- The extent to which reported delinquency and modification metrics reflect borrowers’ underlying ability and willingness to repay after deferrals end.
- How CECL scenario assumptions, reserve adequacy, and capital ratios evolve; the reported 11.7% CET1 ratio included a five-year CECL transition benefit.
- Whether capital-distribution restrictions, regulatory requirements, or litigation and other contingencies affect dividends, repurchases, funding, or earnings.