PNC Financial Services Group, Inc. — Second-Quarter 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. PNC is a diversified U.S. financial services company with retail banking, corporate and institutional banking, and asset management businesses. Unless stated otherwise, amounts are in U.S. dollars.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Change / context |
|---|---|---|---|
| Total revenue | $4.076 billion | $4.215 billion | Down 3% |
| Net interest income | $2.527 billion | $2.498 billion | Up 1%; net interest margin fell to 2.52% from 2.91% |
| Noninterest income | $1.549 billion | $1.717 billion | Down 10% |
| Provision for credit losses | $2.463 billion | $180 million | Sharp increase, reflecting CECL adoption and pandemic-related economic deterioration |
| Noninterest expense | $2.515 billion | $2.611 billion | Down 4% |
| Continuing operations | Net loss of $744 million; diluted loss per share of $1.90 | Net income of $1.185 billion; diluted EPS of $2.47 | Loss driven principally by credit-loss provision |
| Discontinued operations | Net income of $4.399 billion | Net income of $189 million | Includes the BlackRock divestiture gain |
| Total net income / diluted EPS | $3.655 billion / $8.40 | $1.374 billion / $2.88 | Reported results are materially affected by BlackRock sale proceeds and gain |
For the first six months of 2020, revenue was $8.412 billion, continuing-operations net income was $15 million, and total net income was $4.570 billion. The filing reports a 60% efficiency ratio for the first half, versus 63% a year earlier. Common dividends declared were $1.15 per share in Q2, up from $0.95 in Q2 2019.
Balance sheet, credit, capital and liquidity
- Balance sheet growth: At June 30, total assets were $458.978 billion, up 12% from December 31, 2019. Loans were $258.236 billion, up 8%; commercial loans rose 12% to $180.195 billion, while consumer loans declined 2% to $78.041 billion.
- Deposits and funding: Deposits increased 20% to $345.997 billion, reflecting customer liquidity accumulation, stimulus payments and lower consumer spending. Borrowed funds declined 22% to $47.026 billion, mainly as deposits and BlackRock-sale proceeds replaced borrowings.
- Credit quality: The allowance for credit losses on loans and unfunded commitments was $6.590 billion, or 2.55% of loans, compared with $3.060 billion, or 1.28%, at year-end. Q2 net charge-offs were $236 million, or 0.35% of average loans on an annualized basis, versus $142 million, or 0.24%, a year earlier. Nonperforming assets were $1.955 billion, up 12% from year-end.
- Capital: The Basel III common equity Tier 1 ratio was 11.3%, including the elected CECL transition benefit; the estimated fully implemented ratio was 10.9%. PNC and PNC Bank were described as well capitalized.
- Liquidity: Cash and short-term investments totaled $61.6 billion and available-for-sale securities totaled $97.1 billion. PNC and PNC Bank’s Liquidity Coverage Ratios exceeded the 100% minimum; exact ratios are not provided in the cited discussion. Parent-company available liquidity was $17.7 billion.
- Cash flow: For the six months ended June 30, operating activities provided $2.331 billion, investing activities used $41.237 billion, and financing activities provided $40.183 billion. Investing cash flows included $14.225 billion of net BlackRock-sale proceeds; financing reflected deposit growth and other funding activity.
Material changes and unusual items
- PNC sold its 22.4% BlackRock investment in May for $14.2 billion net of expenses, recognizing a $4.3 billion after-tax gain. The sale and BlackRock results are presented as discontinued operations; PNC donated its remaining 500,000 shares to the PNC Foundation.
- PNC adopted CECL on January 1, 2020. The transition reduced retained earnings by $671 million and changed credit-loss reserves from an incurred-loss to an expected-loss methodology. The Q2 provision also reflects the sharp deterioration in the economic outlook associated with COVID-19.
- PNC funded $13.7 billion of Paycheck Protection Program loans in Q2; $12.8 billion remained in commercial loans at June 30. COVID-related deferral modifications covered $6.8 billion of commercial loans and $6.1 billion of consumer loans. The filing cautions that relief treatment can affect reported delinquency measures.
- Average loan growth and customer deposits supported balance-sheet expansion, but lower market rates compressed net interest margin. Lower consumer spending and waived customer fees weighed on several fee categories, while residential mortgage revenue increased with origination activity.
- PNC suspended common-stock repurchases through Q3 2020, subject to permitted employee-plan-related repurchases. The Federal Reserve limited capital distributions in Q3 and could extend those limits. The board maintained the $1.15 quarterly common dividend.
Outlook, risks and contingencies
- Management outlook: PNC’s baseline forecast assumed recovery in the second half of 2020 and into 2021, with real GDP returning to its pre-recession level in 2022 and the federal funds rate remaining at 0.00%–0.25% into 2023. Management emphasized substantial uncertainty, including renewed outbreaks, renewed restrictions and expiration of fiscal support.
- Q3 2020 versus Q2: Average loans expected to decline in the low-single-digit percentage range; net interest income down approximately 1%; noninterest income down 3%–5%; noninterest expense flat to down; and net loan charge-offs of $250 million–$350 million.
- Full-year 2020: Total revenue and noninterest expense each expected to decline 2%–5%; effective tax rate expected in the low-teens range.
- Credit risks: Management identified pandemic-sensitive sectors including leisure, travel, nonessential retail, hotels, healthcare facilities and senior housing, as well as energy. High-impact commercial industries represented $19.6 billion of loans and $9.2 billion of unfunded commitments; oil and gas loans were $4.1 billion, with $6.9 billion of additional commitments.
- Reserve uncertainty: CECL estimates rely on economic scenarios, probability weights and management judgment. PNC stated it did not anticipate substantial reserve builds on its current portfolio for the rest of 2020 under its June forecast, while warning that outcomes could differ materially.
- Legal matters: For disclosed matters where losses could be estimated, PNC said reasonably possible losses in excess of accruals were less than $100 million in aggregate. This excludes matters that could not be estimated and is not a maximum-loss estimate.
- Other matters: PNC cited LIBOR transition risks, regulatory and capital-distribution uncertainty, and COVID-related effects on customers, asset values and demand. Fitch downgraded PNC’s senior debt rating on July 10 due to methodology changes; the filing said it did not reflect a change in credit fundamentals and no business impact was expected.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the BlackRock gain and discontinued-operations earnings when assessing Q2 and first-half profitability.
- Review the assumptions and sensitivity of the $6.590 billion credit-loss allowance, including the impact of COVID-related modifications and CECL forecasts.
- Track subsequent performance of modified loans, high-impact commercial sectors, energy exposures, charge-offs and nonperforming assets.
- Monitor whether Q3 guidance is achieved, particularly net interest income, fee income, loan balances and charge-offs under continued low rates and uncertain economic conditions.
- Confirm capital ratios excluding CECL transition benefits and assess the effect of Federal Reserve distribution restrictions on dividends and repurchases.