Business context and reporting period
The PNC Financial Services Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. PNC is a diversified U.S. financial services company with Retail Banking, Corporate & Institutional Banking, and Asset Management Group segments. The year was shaped by the COVID-19 recession and response, adoption of CECL, and the sale of PNC’s entire BlackRock investment.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $16.9 billion | $16.8 billion |
| Net interest income | $9.9 billion | $10.0 billion |
| Net interest margin | 2.53% | 2.89% |
| Provision for credit losses | $3.2 billion | $773 million |
| Noninterest expense | $10.3 billion | $10.6 billion |
| Continuing-operations net income | $3.0 billion; diluted EPS $6.36 | $4.6 billion; diluted EPS $9.57 |
| Total net income | $7.6 billion | $5.4 billion |
Total net income includes $4.6 billion of discontinued-operations income, principally the BlackRock sale; continuing-operations income is more representative of ongoing results. The $4.3 billion after-tax sale gain was reported in discontinued operations. PNC reported 3% positive operating leverage. The effective tax rate on continuing operations was 12.4%, down from 16.4%.
Fourth-quarter 2020 continuing-operations net income was $1.456 billion, or $3.26 diluted EPS, versus $1.143 billion and $2.43 diluted EPS in fourth-quarter 2019. Fourth-quarter provision for credit losses was a $254 million recapture, compared with a $221 million provision in the prior-year quarter.
- Balance sheet: Total assets were $466.7 billion, up 14%; loans were $241.9 billion, up 1%; and total deposits were $365.3 billion, up 27%. Deposit growth reflected customer liquidity accumulation, stimulus payments, and lower consumer spending.
- Funding and liquidity: Borrowed funds fell 38% to $37.2 billion. Liquid assets included $95.1 billion of cash and short-term investments and $87.4 billion of available-for-sale securities. Parent-company available liquidity was $14.1 billion. PNC and PNC Bank’s liquidity coverage ratios exceeded the 100% minimum.
- Capital and equity: Total shareholders’ equity was $54.0 billion. The Basel III CET1 ratio was 12.2% (11.8% fully implemented, excluding CECL transition benefits), versus 9.5% in 2019. PNC remained “well capitalized.” The reported ratio benefited in part from the BlackRock gain, regulatory rule changes, and the CECL transition provision.
- Credit: Nonperforming assets rose 33% to $2.3 billion; net charge-offs increased to $832 million, or 0.33% of average loans, from $642 million, or 0.27%. The loan allowance was $5.4 billion, with total loan and unfunded-commitment allowance of $5.9 billion, or 2.46% of loans.
- Cash flows: Continuing-operations operating cash flow was $4.7 billion; investing cash outflow was $51.1 billion and financing cash inflow was $48.4 billion. Investing outflow included a $61.8 billion increase in interest-earning deposits with banks, while financing reflected deposit growth. Cash and due from banks ended at $7.0 billion. Bank cash flows are affected by lending, deposit, and securities activity and should not be read like those of a nonfinancial company.
Material changes versus the prior comparable period
- Continuing-operations net income declined 35%, mainly because credit-loss provision expense increased by $2.4 billion, reflecting CECL adoption and the pandemic’s economic and credit effects.
- Net interest margin fell 36 basis points as the Federal Reserve cut rates; lower funding costs and higher average earning-asset balances largely offset the effect on net interest income.
- Noninterest income rose 1%: corporate services and residential mortgage revenue increased, while service charges, consumer services, and asset management revenue declined.
- Noninterest expense decreased 3%, including lower marketing, equipment, and other costs, partly offset by higher personnel expense.
- Commercial loans grew 4% to $167.2 billion, including $12.0 billion of PPP loans outstanding. Consumer loans declined 6% to $74.7 billion.
- PNC adopted CECL on January 1, 2020; the transition reduced retained earnings by $671 million. The year-end loan allowance increased substantially, and comparisons with 2019 are affected by the accounting change.
Outlook, commentary, risks, and unusual items
For standalone 2021, excluding one-time BBVA costs and compared with 2020 where appropriate, PNC expected average loan growth in the low-single-digit decline range, spot loan growth in the low-single-digit increase range, stable revenue with net interest income down modestly, stable noninterest expense, and an effective tax rate of approximately 17%. For first-quarter 2021, it expected average loans stable to modestly lower, net interest income down about 1% (about 3% excluding PPP), noninterest income down mid-single digits, noninterest expense down mid-single digits, and net charge-offs of $200 million to $250 million. These are management expectations, not guarantees.
PNC agreed to acquire BBVA USA Bancshares for $11.6 billion in cash, with an expected mid-2021 close subject to regulatory approval. The deal was expected to add approximately $102 billion in assets, $86 billion in deposits, and $66 billion in loans; PNC estimated about $600 million of 2021 pre-provision net revenue accretion, excluding one-time integration costs. PNC planned to refrain from discretionary share repurchases before closing. The company paid $3.5 billion in capital returns during 2020 and declared a $1.15 quarterly common dividend in January 2021.
Management described the U.S. economy as recovering but below pre-pandemic activity, with elevated unemployment and substantial uncertainty around the pandemic, vaccination, fiscal support, and recovery. PNC identified credit deterioration, persistently low rates, deposit behavior, regulatory capital and distribution limits, LIBOR transition, cyber and operational threats, and acquisition execution and integration as important risks. COVID-related modifications and reporting rules can affect reported delinquency measures; at year-end, $1.0 billion of consumer loans remained in active hardship programs, and commercial balances in active payment-deferral assistance were $0.1 billion.
Legal matters include ongoing interchange litigation and an appealed pre-need funeral trust judgment totaling approximately $99.5 million, plus a separate appealed $7 million fee award. For disclosed matters where PNC could estimate exposure, it said reasonably possible losses above accrued liabilities were less than $100 million in aggregate; this estimate excludes matters that could not be estimated and is not a maximum exposure. The auditor issued an unqualified opinion on the financial statements and internal controls; the commercial loan allowance was identified as a critical audit matter because of forecast, scenario-weighting, and qualitative-reserve judgments.
Most important facts for investors to verify
- Separate ongoing earnings from discontinued operations and confirm the BlackRock sale gain and related presentation.
- Assess the sustainability of the $5.9 billion total loan and unfunded-commitment allowance, CECL assumptions, and any future reserve releases or increases.
- Monitor credit quality in pandemic-affected commercial sectors, energy, commercial real estate, and consumer borrowers exiting hardship programs.
- Track net interest margin, deposit mix and costs, and the effect of the low-rate environment on earnings.
- Confirm BBVA closing, regulatory approvals, integration costs, realized synergies, and the impact on capital and shareholder distributions.
- Review the full legal-proceedings disclosures, particularly interchange and pre-need trust matters, and note that the disclosed aggregate estimate is not a cap on possible losses.