PNC Financial Services Group, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparisons are primarily with 2009. PNC is a diversified U.S. financial services company. Results include National City, acquired at year-end 2008. PNC sold PNC Global Investment Servicing (GIS) on July 1, 2010; GIS results and the sale gain are presented in discontinued operations.
Financial performance and position
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Total revenue | $15.2 billion | $16.2 billion | Down 6%; 2009 included a $1.076 billion pretax BlackRock/BGI transaction gain. |
| Net interest income | $9.23 billion | $9.08 billion | Up 2%; net interest margin increased to 4.14% from 3.82%. |
| Noninterest income | $5.95 billion | $7.15 billion | Lower primarily because of the prior-year BlackRock/BGI gain and reduced mortgage-related revenue and deposit fees. |
| Provision for credit losses | $2.50 billion | $3.93 billion | Down 36%, reflecting improved credit migration and lower exposures. |
| Noninterest expense | $8.61 billion | $9.07 billion | Down 5%; acquisition savings and certain liability reversals contributed. |
| Income from continuing operations before taxes and noncontrolling interests | $4.06 billion | $3.23 billion | Up 26%. |
| Net income | $3.40 billion | $2.40 billion | Up 41%; includes GIS discontinued operations and its after-tax sale gain. |
| Net income attributable to common shareholders | $3.01 billion | $2.00 billion | 2010 includes a $250 million noncash preferred-stock discount accretion charge related to TARP redemption. |
| Diluted EPS | $5.74 | $4.36 | Continuing operations: $5.02 versus $4.26; discontinued operations: $0.72 versus $0.10. |
| Cash flows | Operating $4.81 billion; investing $5.73 billion; financing $(11.53) billion | Operating $5.75 billion; investing $9.48 billion; financing $(15.42) billion | Cash and due from banks ended 2010 at $3.30 billion. |
Balance sheet, credit and capital
- At year-end, total assets were $264.3 billion, down from $269.9 billion; loans were $150.6 billion, down 4%; investment securities were $64.3 billion, up 15%.
- Deposits totaled $183.4 billion, down from $186.9 billion. Transaction deposits increased while higher-cost retail certificates of deposit declined. Borrowed funds were $39.5 billion, broadly flat year over year.
- Shareholders’ equity was $30.2 billion. The Tier 1 common ratio rose to 9.8% from 6.0%; Tier 1 risk-based capital was 12.1%, total risk-based capital 15.6%, and leverage ratio 10.2%. PNC Bank, N.A. was classified as well capitalized.
- Nonperforming assets fell to $5.3 billion from $6.3 billion; nonperforming loans declined to $4.5 billion from $5.7 billion. Accruing loans past due fell to $1.9 billion from $3.3 billion.
- The allowance for loan and lease losses was $4.9 billion, or 3.25% of loans and 109% of nonperforming loans. Net charge-offs increased to $2.94 billion from $2.71 billion; the net charge-off ratio rose to 1.91% from 1.64%.
- PNC reported $64.4 billion of liquid assets, including $57.3 billion of available-for-sale securities; $28.0 billion was pledged. Parent-company cash and short-term investments were approximately $7.2 billion. PNC Bank could pay approximately $1.1 billion in dividends to its parent without prior regulatory approval.
Material changes and significant items
- PNC sold GIS for $2.3 billion cash, recording a $639 million pretax gain ($328 million after tax). Its 2010 results include GIS operations only through June 30.
- PNC redeemed all $7.6 billion of TARP preferred stock in February 2010, funded with proceeds including a common-stock offering. The redemption generated a one-time, noncash $250 million reduction in retained earnings attributable to common shareholders. The U.S. Treasury later sold its PNC warrants.
- PNC issued 63.9 million common shares in 2010 for approximately $3.4 billion. It also sold 7.5 million BlackRock shares, receiving approximately $1.2 billion and recognizing a $160 million pretax gain; its economic interest in BlackRock declined to about 20%.
- PNC achieved $1.8 billion in annualized National City acquisition cost savings by fourth-quarter 2010, exceeding its original $1.2 billion target. Integration costs were $387 million in 2010.
- Adoption of revised variable-interest-entity accounting brought Market Street, a credit-card securitization trust and certain tax-credit investments onto the balance sheet. The adoption produced an after-tax cumulative adjustment to retained earnings of $92 million.
- Available-for-sale securities had a net unrealized loss of $861 million at year-end, improved from $2.3 billion in 2009. Credit-related other-than-temporary impairment charges were $325 million, down from $577 million.
Outlook, commentary and risks
- Management expected 2011 net interest margin to decline. It forecast purchase-accounting accretion could fall by as much as $700 million; excluding that effect, management expected net interest income to increase.
- Management expected 2011 noninterest income to rise in the low-to-mid single digits, excluding an estimated approximately $400 million incremental negative effect from anticipated Regulation E and debit interchange changes. It expected 2011 noninterest expense to be below 2010, depending on investment in growth.
- Management expected 2011 average quarterly credit-loss provision to be below fourth-quarter 2010’s $442 million, assuming budgeted loan growth and modest GDP growth; if expectations held, full-year provision was expected to be at least $800 million below 2010.
- PNC described the recovery as moderate and identified recession risk, weak loan demand, unemployment, housing-market weakness, interest-rate and market volatility, credit deterioration, competition, and valuation uncertainty as material risks.
- PNC expected formal regulatory consent orders concerning mortgage servicing and foreclosure practices, potentially requiring remedial programs and carrying possible civil money penalties. The company reported reviewing and enhancing foreclosure procedures and cooperating with regulatory inquiries.
- Dodd-Frank implementation and Basel III were expected to increase compliance costs and affect capital, consumer products, derivatives, interchange fees, deposit insurance and other activities; the full effects were not yet known. PNC had submitted a capital plan for Federal Reserve review and said it expected to be Basel III compliant, fully phased in, during the first half of 2012 based on its then-current interpretation.
- Mortgage repurchase and indemnification liabilities were $294 million, compared with $270 million a year earlier. Unresolved asserted claims had $509 million unpaid principal balance. The filing cautions that actual losses may differ from reserves.
- For specified disclosed legal matters where estimation was possible, PNC estimated reasonably possible aggregate losses up to $400 million, while stating losses could be zero; this estimate excluded certain matters and was not a maximum exposure for all proceedings.
Important facts for investors to verify
- Separate continuing-operations earnings from discontinued GIS results and one-time gains when assessing recurring profitability.
- Track credit quality, especially charge-offs, nonperforming assets, home-equity and commercial real-estate exposures, and the performance of acquired impaired loans.
- Assess the sustainability of net interest income as purchase-accounting accretion declines and the low-rate environment pressures margin.
- Verify the eventual financial and operational impact of mortgage-servicing consent orders, foreclosure remediation and investor repurchase claims.
- Monitor Federal Reserve capital-plan decisions, dividend and repurchase permissions, and the effect of Dodd-Frank and Basel III implementation.
- Review liquidity and funding composition, including pledged liquid assets, near-term debt maturities, deposit trends and the parent’s reliance on regulated bank-subsidiary dividends.