PNC Financial Services Group, Inc. — First-Quarter 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. PNC is a diversified U.S. financial services company operating in retail banking, corporate and institutional banking, asset management, and through its equity interest in BlackRock. Financial comparisons below are against the first quarter of 2018 unless otherwise noted.
Financial performance and condition
| Metric | Q1 2019 | Comparison |
|---|---|---|
| Total revenue | $4.286 billion | Up 4% |
| Net interest income (GAAP) | $2.475 billion | Up 5% |
| Net interest margin | 2.98% | 2.91%, up 7 basis points |
| Noninterest income | $1.811 billion | Up 3% |
| Provision for credit losses | $189 million | Compared with $92 million |
| Noninterest expense | $2.578 billion | Up 2% |
| Net income | $1.271 billion | Up 3% |
| Diluted earnings per common share | $2.61 | Compared with $2.43 |
| Efficiency ratio | 60% | Compared with 61% |
| Return on average assets / common equity | 1.34% / 11.13% | ROA unchanged; common-equity return was 11.04% |
Revenue growth reflected higher loan and securities balances and yields, partially offset by rising deposit and borrowing costs. Fee income benefited from corporate services and other income; asset management and residential mortgage income declined. Expense growth primarily reflected personnel, marketing, and investment in strategic initiatives, partly offset by lower FDIC insurance expense. The effective tax rate was 16.3%, compared with 17.0%.
Cash flow: Operating activities provided $1.401 billion, versus $2.922 billion in Q1 2018; investing activities used $6.023 billion, versus $1.250 billion; and financing activities provided $4.076 billion, versus using $2.272 billion. Cash and due from banks ended the quarter at $5.062 billion. The filing’s cash-flow statement reflects significant balance-sheet and securities activity.
Balance sheet at March 31, 2019: Assets were $392.8 billion, up $10.5 billion from year-end 2018. Loans were $232.3 billion, up $6.0 billion (3%), driven by commercial lending growth; deposits were $271.2 billion, up $3.4 billion. Investment securities were $83.9 billion. Borrowed funds totaled $59.9 billion, including $20.5 billion of FHLB borrowings, $25.6 billion of bank notes and senior debt, and $6.0 billion of subordinated debt. The filing reports $31.6 billion of consolidated senior and subordinated debt at quarter-end.
Liquidity and capital: Short-term investments were $21.3 billion and available-for-sale securities were $65.1 billion. PNC and PNC Bank’s liquidity coverage ratios exceeded the 100% minimum; the filing does not provide the exact ratios. Parent-company available liquidity was $5.2 billion. Common equity Tier 1 capital was 9.8%, up from 9.6% at year-end; total risk-based capital was 13.0%. PNC and PNC Bank were considered well capitalized.
Credit quality: Nonperforming assets were $1.785 billion, down $23 million from year-end; nonperforming loans were 0.71% of loans, down from 0.75%. Allowance for loan and lease losses was $2.692 billion, or 1.16% of loans. Net charge-offs were $136 million, compared with $113 million a year earlier; annualized net charge-offs were 0.24% of average loans, versus 0.21%. Management cited loan growth and auto-portfolio reserve increases as drivers of the higher provision.
Material changes and business developments
- Commercial lending increased $6.2 billion, or 4%, from year-end; consumer lending was nearly flat, with home equity and education declines offsetting growth in residential real estate and auto loans.
- Retail Banking earnings rose to $264 million from $249 million, while Corporate & Institutional Banking earnings declined to $552 million from $563 million. Asset Management Group earnings fell to $45 million from $62 million. BlackRock contributed $197 million of segment earnings in both periods.
- PNC returned $1.2 billion to shareholders in Q1: $725 million of common-stock repurchases and $438 million of common dividends. The quarterly dividend was $0.95 per share, compared with $0.75 a year earlier. Future capital actions remain subject to regulatory review.
- Adoption of the new lease standard on January 1, 2019 resulted in recognition of $2.1 billion of lease liabilities and $2.0 billion of right-of-use assets, plus a one-time $83 million pretax adjustment to retained earnings; the income-statement impact was immaterial.
- PNC issued $750 million of five-year senior notes in January and an additional $300 million of the same series in February. Subsequent to quarter-end, it issued $1.5 billion of ten-year senior notes on April 22.
Outlook, commentary, and risks
Management expected average loans in Q2 2019 to grow approximately 1% from Q1; net interest income to rise by low-single digits; fee income to rise by mid-single digits; provision for credit losses of $125 million to $200 million; and noninterest expense to increase by low-single digits. Other noninterest income was expected to run at $275 million to $325 million per quarter, excluding securities gains or losses and Visa activity.
For full-year 2019 versus 2018, management expected average loan growth of 3% to 4%, revenue growth at the higher end of low-single digits, expense growth at the lower end of low-single digits, an effective tax rate of approximately 17%, and positive operating leverage. PNC’s baseline economic outlook assumed no federal funds rate change in 2019 or 2020, while identifying trade restrictions, geopolitical concerns, and a possible slowdown in growth as downside risks.
Management stated that overall credit quality remained strong. Key risks include economic and market conditions, interest rates and deposit competition, credit performance, regulatory and legal developments, operational and cyber risks, and the valuation of mortgage servicing rights and other investments. PNC estimated reasonably possible losses on certain disclosed legal matters at less than $100 million in aggregate, but stated that the estimate excludes some matters and is not a maximum exposure estimate. A DD Growth Premium Master Fund matter was settled subject to court approval; PNC’s contribution was described as not material.
Other notable items include a $31 million negative derivative fair-value adjustment related to Visa Class B shares in Q1, compared with $2 million in Q1 2018. PNC expects adoption of CECL in 2020 to increase credit-loss reserves; the amount will depend on portfolio composition and economic conditions at adoption. The filing also cautions that forward-looking statements do not account for potential legal and regulatory contingencies.
Most important facts for investors to verify
- Whether loan growth and net interest income meet management’s Q2 and full-year expectations as funding costs and deposit mix change.
- Whether the higher credit-loss provision and consumer charge-offs—particularly in auto and credit cards—remain consistent with the reported strong overall credit quality.
- The sustainability and composition of fee income, including mortgage servicing valuation, Visa-related adjustments, and BlackRock-related earnings.
- Actual regulatory liquidity and capital ratios, and the effect of planned distributions, debt issuance, and the Federal Reserve’s capital-review process.
- The eventual CECL reserve increase, material developments in legal or regulatory matters, and the impact of economic, interest-rate, market, and operational risks.