PNC Financial Services Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, with selected fourth-quarter data included. PNC is a diversified U.S. financial services company spanning retail banking, corporate and institutional banking, asset management, and an equity-method investment in BlackRock.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $17.827 billion | $17.132 billion |
| Net interest income (GAAP) | $9.965 billion | $9.721 billion |
| Net interest margin | 2.89% | 2.97% |
| Noninterest income | $7.862 billion | $7.411 billion |
| Provision for credit losses | $773 million | $408 million |
| Noninterest expense | $10.574 billion | $10.296 billion |
| Net income | $5.418 billion | $5.346 billion |
| Net income attributable to common shareholders | $5.129 billion | $5.061 billion |
| Diluted earnings per common share | $11.39 | $10.71 |
| Efficiency ratio | 59% | 60% |
- Revenue rose 4%; net interest income rose 3% and noninterest income rose 6%. Higher loan and securities balances and yields supported net interest income, while higher funding costs and the 2019 declining-rate environment pressured the margin.
- Net income increased 1%. Diluted EPS increased about 6%, benefiting from higher earnings and fewer average shares following repurchases. PNC reported 1.4% positive operating leverage.
- Noninterest income gains included asset-sale gains, higher securities gains, and growth in several fee businesses. The filing also cites higher BlackRock earnings and equity-market levels; BlackRock contributed 15% of PNC’s 2019 net income.
- Provision expense rose 90%, reflecting commercial loan growth and reserves on certain commercial credits, plus higher auto, credit card, and unsecured installment loan reserves. Net charge-offs rose 53% to $642 million; the allowance for loan and lease losses was $2.742 billion, or 1.14% of loans.
- At year-end, total assets were $410.3 billion, loans $239.8 billion, deposits $288.5 billion, borrowed funds $60.3 billion, and shareholders’ equity $49.3 billion. Loans grew 6% and deposits 8% year over year; loans-to-deposits were 83%.
- Cash-flow statement: operating cash flow was $7.363 billion, investing cash flow was negative $24.990 billion, and financing cash flow was $17.080 billion. Cash and due from banks decreased $547 million to $5.061 billion; interest-earning deposits with banks were $23.413 billion.
- PNC reported $34.1 billion of cash and short-term investments and $69.2 billion of available-for-sale securities as liquid assets, with some securities pledged. Parent-company available liquidity was $6.7 billion. PNC and PNC Bank exceeded the 100% LCR minimum.
- PNC’s Basel III CET1 ratio was 9.5%, versus 9.6% in 2018; total risk-based capital was 12.7%. PNC and PNC Bank were described as well capitalized. Pro forma CET1 under 2020 tailoring rules was estimated at 10.1%.
Material changes and fourth-quarter data
- Year-end assets grew 7%, loans 6%, deposits 8%, and borrowed funds 5%. Savings deposits grew 20%, while noninterest-bearing deposits declined 2%.
- Commercial lending increased 5%; consumer lending increased 7%. Residential real estate, auto, and credit card balances grew, while home equity and education loans declined.
- Nonperforming assets decreased 3% to $1.752 billion, and nonperforming loans were 0.68% of total loans versus 0.75% in 2018. Delinquent loans were broadly stable, but net charge-offs and credit-loss provision rose materially.
- For Q4 2019, revenue was $4.609 billion, net income was $1.381 billion, and diluted EPS was $2.97, compared with $4.340 billion, $1.351 billion, and $2.75 in Q4 2018. Q4 provision was $221 million versus $148 million.
- PNC returned $5.4 billion to shareholders in 2019: $3.5 billion of common-share repurchases and $1.9 billion of common dividends. The quarterly dividend rose to $1.15 per share in August 2019. A further $1.0 billion of repurchases was authorized in January 2020, subject to regulatory and other constraints.
Outlook, risks, contingencies, and unusual items
- For 2020, management expected average loan growth of 4%–5%, revenue growth at the low end of low-single digits (including about 1% net interest income growth), stable noninterest expense, an effective tax rate near 17.5%, and approximately 1% positive operating leverage.
- For Q1 2020 versus Q4 2019, management expected average loans up about 1%, net interest income down about 2%, fee income down about 6%, noninterest expense down in the mid-single-digit range, and provision expense of $225–$300 million. Fee-income outlook included a previously announced BlackRock charitable contribution.
- Management’s baseline assumed slower U.S. growth in 2020 and an unchanged federal funds rate, while identifying downside risks from coronavirus, global weakness, trade tensions, and geopolitical concerns. These were forward-looking estimates, not guarantees.
- PNC adopted CECL on January 1, 2020. The reported opening allowance for credit losses was $3.721 billion, including a $661 million increase in total allowance; the transition reduced retained earnings by $671 million. PNC elected not to phase in the day-one regulatory capital effects.
- Legal matters include the payment-card interchange litigation and a pre-need funeral trust case. The latter had a revised judgment of approximately $99.5 million, with a further $7 million in fees and costs awarded in February 2020; appeals were pending. PNC estimated reasonably possible losses above accruals of less than $100 million for disclosed matters it could estimate, while cautioning that this did not cover every matter or represent a maximum exposure.
- Other notable risks include credit normalization, sensitivity to rates and funding costs, cyber and third-party operational risks, regulatory and capital constraints, and the planned LIBOR transition. The filing notes $1.2 billion of potential additional collateral requirements on derivatives if specified credit-rating triggers were met.
- PwC issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective. Critical audit matters included the commercial loan-loss allowance, Level 3 non-agency mortgage-backed securities, and residential mortgage servicing rights valuation.
Important facts for investors to verify
- Whether 2020 loan growth and revenue guidance are achievable amid lower rates and the economic risks identified by management.
- Whether the sharp increase in provision expense and net charge-offs signals further credit deterioration, particularly in commercial credits, auto, and credit cards.
- How CECL’s opening reserve increase and retained-earnings reduction affect subsequent earnings, capital ratios, and comparability with peers.
- Whether capital distributions and planned repurchases remain consistent with regulatory approval, capital needs, and liquidity.
- The progress and potential financial exposure associated with interchange litigation, the funeral trust appeal, and other legal or regulatory inquiries.
- PNC’s execution of LIBOR transition plans and management of valuation assumptions for mortgage servicing rights and other Level 3 assets.