PNC Financial Services Group, Inc. — First-Quarter 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 9, 2012. PNC is a diversified U.S. financial services company with retail and commercial banking, asset management, and residential mortgage businesses. Comparisons below are with first-quarter 2011 unless otherwise noted.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Total revenue | $3.732 billion | $3.631 billion | Up 3% |
| Net interest income | $2.291 billion | $2.176 billion | Up 5% |
| Net interest margin | 3.90% | 3.94% | Down 4 basis points |
| Noninterest income | $1.441 billion | $1.455 billion | Down $14 million |
| Noninterest expense | $2.455 billion | $2.070 billion | Up $385 million |
| Provision for credit losses | $185 million | $421 million | Down $236 million |
| Net income | $811 million | $832 million | Down 3% |
| Net income attributable to common shareholders | $766 million | $833 million | Down 8% |
| Diluted EPS | $1.44 | $1.57 | Down 8% |
Pretax, pre-provision earnings were $1.277 billion, versus $1.561 billion. The efficiency ratio increased to 66% from 57%; return on average common equity was 9.41%, versus 11.12%.
First-quarter operating cash flow was $2.764 billion, compared with $727 million. Investing activities used $7.108 billion, including cash paid for the RBC acquisition; financing activities provided $4.401 billion. Cash and due from banks ended the quarter at $4.162 billion. These cash flow figures include substantial balance-sheet and acquisition-related movements.
Balance sheet, credit, liquidity, and capital
- Total assets were $295.9 billion at March 31, up $24.7 billion from year-end 2011; total loans were $176.2 billion, up $17.2 billion, and deposits were $206.1 billion, up $18.2 billion. Much of the growth reflects RBC Bank (USA), acquired March 2.
- Borrowed funds were $42.5 billion, up from $36.7 billion at year-end. The loans-to-deposits ratio was 85%. PNC reported $59.5 billion in liquid assets, of which $23.9 billion was pledged as collateral.
- Tier 1 common capital was 9.3%, down from 10.3% at year-end; Tier 1 risk-based capital was 11.4% and total risk-based capital was 14.4%. PNC attributed the declines primarily to RBC-related growth in goodwill and risk-weighted assets. PNC and PNC Bank were reported well-capitalized under then-applicable Basel I requirements.
- Credit indicators generally improved year over year: annualized net charge-offs were 0.81% of average loans, versus 1.44%; nonperforming assets were $4.36 billion, or 1.47% of assets, versus $4.94 billion and 1.90% a year earlier. The allowance for loan and lease losses was $4.20 billion, 2.38% of loans, compared with $4.76 billion and 3.19% a year earlier.
- Versus year-end 2011, nonperforming assets rose $205 million, mainly due to acquired other real estate owned and a policy change placing home-equity loans on nonaccrual at 90 rather than 180 days past due. The allowance covered 117% of nonperforming loans, down from 122% at year-end.
Material changes and unusual items
- PNC paid approximately $3.6 billion in cash for RBC Bank (USA) and a credit-card portfolio. The acquisition added approximately $18.1 billion of deposits, $14.5 billion of loans, and $954 million of goodwill; RBC contributed $98 million of revenue and $43 million of net income after acquisition during the quarter. PNC reported $145 million of pretax integration costs.
- Other notable first-quarter expense items included $72 million added to legal reserves, $40 million of RBC operating expenses, and $38 million of residential mortgage foreclosure-related expenses. These items were not significant in first-quarter 2011.
- Noninterest income was affected by higher residential mortgage and asset-management revenue, offset by lower consumer service fees and other income. Debit interchange limits reduced first-quarter revenue by about $70 million; PNC expected a further approximately $230 million reduction in 2012 based on projected volumes.
- Other comprehensive income was $386 million after tax, lifting accumulated other comprehensive income to $281 million from a $105 million loss at year-end, largely reflecting securities valuation gains.
- Segment earnings improved in Retail Banking ($50 million versus an $18 million loss), Corporate & Institutional Banking ($470 million versus $432 million), BlackRock ($90 million versus $86 million), and the Non-Strategic Assets Portfolio ($71 million versus $25 million). Asset Management Group earnings fell to $28 million from $43 million; Residential Mortgage Banking fell to $61 million from $71 million.
Outlook, capital actions, and risks
- Management expected 2012 net interest income to rise at a high-single-digit percentage rate, noninterest income at a mid-single-digit rate, and provision for credit losses to improve versus 2011, assuming economic conditions continued recent trends. Expense guidance was a mid-to-high-single-digit percentage increase, excluding legal and regulatory contingencies, trust-preferred redemption charges, and integration expenses.
- The Federal Reserve accepted PNC’s 2012 capital plan without objection. PNC announced an increase in its quarterly common dividend from $0.35 to $0.40 per share and planned up to $250 million of share repurchases during the remainder of 2012; no shares were repurchased under the program in Q1.
- PNC issued $1 billion of 3.30% senior notes due 2022 in March. After quarter-end, it issued $1.5 billion of preferred stock and redeemed $306 million of trust-preferred securities; it also announced a $500 million trust-preferred redemption. The redemptions were expected to generate an approximately $130 million noncash charge in Q2. A further $1 billion of trust-preferred securities could be callable later in 2012.
- Legal proceedings remained a material uncertainty. For disclosed matters where PNC could estimate possible losses, it estimated reasonably possible aggregate losses of up to approximately $550 million; this excludes matters it could not estimate and is not a maximum exposure estimate. Mortgage repurchase and indemnification liabilities totaled $152 million, with up to $104 million of additional reasonably possible losses above the recorded liability.
- Other key risks include RBC integration, acquired-loan performance and deposit retention, mortgage servicing and foreclosure matters, regulatory change (including Dodd-Frank and Basel III), low interest rates, economic conditions, credit quality, and market valuations. PNC stated that actual results could differ materially from its forward-looking estimates.
Most important facts for investors to verify
- Whether RBC integration delivers expected savings and growth, and whether acquired deposits remain stable and acquired-loan credit marks prove adequate.
- Whether credit improvement continues, particularly in home equity, commercial real estate, nonperforming assets, and the allowance for loan losses.
- How legal, mortgage repurchase, foreclosure, and regulatory matters develop relative to recorded reserves and the disclosed possible-loss estimates.
- Whether capital ratios, liquidity, and funding costs support the announced dividend increase and planned repurchases, especially after acquisition and preferred-stock actions.
- Whether the full-year revenue, expense, and credit-provision outlook is achieved, including the forecast interchange-fee impact and mortgage-related costs.