PNC Financial Services Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unless noted, amounts are in U.S. dollars; financial results are compared with Q1 2022, and balance-sheet amounts with December 31, 2022.
Business context and financial results
PNC is a diversified U.S. financial institution with Retail Banking, Corporate & Institutional Banking, and Asset Management Group segments.
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Total revenue | $5.60 billion | Up 19% year over year; down 3% from Q4 2022 |
| Net interest income (GAAP) | $3.59 billion | Up 28% year over year; down 3% sequentially |
| Net interest margin | 2.84% | Up 56 bps year over year; down 8 bps sequentially |
| Net income | $1.69 billion | Up 19% year over year; up 9% sequentially |
| Net income attributable to common shareholders | $1.61 billion | Compared with $1.36 billion in Q1 2022 |
| Diluted EPS | $3.98 | Compared with $3.23 in Q1 2022 |
| Provision for credit losses | $235 million | Q1 2022 included a $208 million recapture |
| Noninterest expense / efficiency ratio | $3.32 billion / 59% | Expense up 5% year over year; efficiency was 68% in Q1 2022 |
| Operating cash flow | $1.88 billion | Compared with $989 million used in Q1 2022 |
Year-over-year revenue growth reflected higher net interest income and noninterest income. Higher funding costs reduced the sequential net interest margin. Q1 2023 generated 15% positive operating leverage year over year and 2% sequentially. The effective tax rate was 17.2%.
Balance sheet, credit, capital and liquidity
- Scale and funding: Assets were $561.8 billion; loans $326.5 billion; deposits $436.8 billion; and borrowed funds $60.8 billion. Deposits were nearly unchanged from year-end, while borrowed funds rose $2.1 billion, primarily following parent-company senior debt issuance.
- Deposit mix: Noninterest-bearing deposits fell $6.5 billion from year-end, while interest-bearing deposits increased $7.0 billion. Uninsured deposits were approximately 43% of total deposits.
- Credit: Nonperforming assets were $2.05 billion, or 0.36% of assets. Accruing loans past due were $1.33 billion, down 11% from year-end. Net charge-offs were $195 million, or 0.24% of average loans; they were down sequentially but up 42% year over year. The loan-related allowance for credit losses was $5.41 billion, or 1.66% of loans.
- Commercial real estate exposure: Commercial real estate loans totaled $36.0 billion. Office loans were $8.9 billion, or 2.7% of total loans; 20.0% of office loans were criticized and 3.5% were nonperforming. Management identified office demand and remote-work trends as continuing areas of uncertainty.
- Capital and returns: CET1 was 9.2% (9.1% fully implemented). PNC returned $1.0 billion to shareholders through common dividends and repurchases in Q1. The company expected repurchases to be lower in Q2 amid market volatility and uncertainty. A $1.50-per-share common dividend was declared for payment in May.
- Liquidity: Average Q1 LCR was 108%; PNC reported that LCR and NSFR remained above regulatory minimums throughout the quarter. Liquid assets included $43.5 billion of cash and short-term investments and $43.2 billion of available-for-sale securities. Unused secured borrowing capacity was $72.3 billion; parent-company available liquidity was $13.9 billion.
- Securities and equity: Available-for-sale securities had a $43.2 billion fair value. Held-to-maturity securities had $95.0 billion amortized cost and $91.4 billion fair value. AOCI improved by $1.1 billion during Q1, but remained negative at $9.1 billion.
Outlook, risks and unusual items
- Q2 2023 outlook versus Q1: Average loans expected stable; net interest income down 2%–4%; fee income stable to down 1%; revenue down approximately 3%; noninterest expense up 1%–2%; and net charge-offs of $200 million–$250 million.
- Full-year 2023 outlook versus 2022: Average loans up 5%–7%, period-end loans up 1%–3%, revenue up 4%–5%, noninterest expense up 2%–3%, and an effective tax rate of approximately 18%.
- Economic assumptions: Management’s baseline anticipated a mild recession beginning in the second half of 2023, with recovery starting in the first half of 2024. The credit-loss scenarios also reflected increased downside risk, including stress in the banking industry.
- Banking-sector risks: PNC cited potential deposit withdrawals, market disruption and increased funding costs amid industry turmoil. The FDIC had not yet announced the amount or timing of any special assessment related to protecting uninsured depositors at failed banks. PNC also disclosed a $1.0 billion uninsured deposit with First Republic Bank, acquired out of receivership on May 1, 2023, which was to be repaid to PNC.
- Other exposures: The filing discusses proposed regulatory changes that could affect credit-card late-fee revenue and investment-adviser custody requirements, as well as new small-business lending data requirements. For disclosed legal matters where losses could be estimated, reasonably possible losses in excess of accruals were estimated at less than $300 million in aggregate; this estimate excludes matters that could not be estimated and is not a maximum exposure. PNC appealed judgments in USAA patent litigation.
- Reporting changes: PNC adopted ASU 2022-02 on January 1, 2023, replacing TDR accounting and changing loan-modification disclosures. Adoption increased retained earnings by $26 million, net of tax. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit mix, uninsured-deposit balances and deposit pricing affect funding costs and net interest margin as projected.
- Whether Q2 and full-year revenue, expense, loan-growth and credit-loss guidance is achieved, particularly under the recession outlook.
- Office commercial real estate performance, including criticized and nonperforming loans, delinquencies, collateral values and reserve adequacy.
- Liquidity and capital trends, including CET1, LCR, securities valuations and the potential effects of deposit flows or additional industry-related assessments.
- Developments in the First Republic repayment, USAA litigation appeals, other legal matters and proposed or finalized regulatory requirements.