Business context and reporting period
PNC Financial Services Group, Inc. is a diversified U.S. bank with retail banking, corporate and institutional banking, and asset management businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. Results include BBVA USA from its June 1, 2021 acquisition; the quarter reflects a full quarter of acquired operations. PNC paid $11.5 billion in cash. BBVA USA merged into PNC Bank on October 8, and customer and branch conversion was substantially completed by October 12.
Comparisons with 2020 require care: PNC sold its BlackRock investment in 2020, and its $4.6 billion after-tax gain was reported in discontinued operations. Nine-month continuing-operations results are more comparable than total net income.
Key financial metrics
| Metric | Q3 2021 | Prior comparable period |
|---|---|---|
| Total revenue | $5.197 billion | $4.281 billion, Q3 2020 |
| Net income from continuing operations | $1.490 billion | $1.532 billion, Q3 2020 |
| Diluted EPS from continuing operations | $3.30 | $3.39, Q3 2020 |
| Net interest income | $2.856 billion | $2.484 billion, Q3 2020 |
| Net interest margin | 2.27% | 2.39%, Q3 2020 |
| Provision for (recapture of) credit losses | $(203) million | $52 million, Q3 2020 |
| Noninterest expense | $3.587 billion | $2.531 billion, Q3 2020 |
For the first nine months, revenue was $14.084 billion and continuing-operations net income was $4.419 billion, or $9.83 diluted EPS, versus $12.693 billion and $1.547 billion, or $3.11 EPS, respectively, in 2020. The prior-year continuing result reflected substantially higher credit-loss provision expense. Q3 noninterest income rose 30% year over year, supported by BBVA and strong merger and acquisition advisory fees; noninterest expense rose 42%, reflecting BBVA operations, integration costs, and increased business and marketing activity. The Q3 efficiency ratio was 69%, versus 59% a year earlier. The effective tax rate was 17.8%, compared with 9.8%.
For the first nine months, operating cash flow was $3.720 billion, investing cash flow was $6.262 billion, and financing cash flow was $(8.156) billion. These totals include acquisition-related and substantial balance-sheet cash movements. Period-end cash and due from banks, including restricted cash, was $8.843 billion.
Balance sheet, credit, capital and liquidity
At September 30, 2021, assets were $553.5 billion, up 19% from December 31, 2020, primarily because of BBVA. Loans were $290.2 billion, up 20%; deposits were $448.9 billion, up 23%; investment securities were $125.6 billion, up 41%; and borrowed funds were $33.5 billion, down 10%. The loan-to-deposit ratio was 65%. Senior and subordinated debt totaled $30.0 billion. Total shareholders’ equity was $56.3 billion.
PNC reported a 10.3% CET1 ratio (10.0% fully implemented, excluding the CECL transition benefit); the decline from 12.2% at year-end 2020 was primarily acquisition-related. The company said it remained well capitalized. Its liquidity coverage ratio exceeded the 100% regulatory minimum. Liquid assets included $87.0 billion of cash and short-term investments and $124.1 billion of available-for-sale securities.
The allowance for credit losses on loans and unfunded commitments was $6.0 billion. Nonperforming assets were $2.6 billion; nonperforming loans were 0.87% of loans. Q3 net charge-offs were $81 million, or 0.11% of average loans on an annualized basis, compared with $155 million, or 0.24%, a year earlier. The provision recapture reflected improving credit quality and portfolio changes, while acquired BBVA assets added reserves. Management noted continued uncertainty for pandemic-affected industries and consumer payment behavior as government support expired.
Outlook, commentary and risks
For Q4 2021 versus Q3, PNC expected average loans excluding PPP loans and net interest income to increase modestly; fee income to decline approximately 3% to 5%; other noninterest income, excluding securities gains and Visa activity, of $375 million to $425 million; noninterest expense excluding integration costs to decline 3% to 5%; and net loan charge-offs of $100 million to $150 million. PNC said it was on track for $900 million of net expense savings against its forecast of BBVA’s 2022 expense base. It expected approximately $980 million of total merger and integration costs, with about $450 million, mostly the remaining costs, expected in Q4.
Management expected continued U.S. economic expansion, while identifying the Delta variant and supply-chain difficulties as near-term drags and inflation as elevated in the near term. PNC expected the federal funds rate to remain at 0.00% to 0.25% until late 2022. Risks include economic and market changes, credit deterioration, interest-rate and LIBOR transition exposure, legal and regulatory developments, and challenges or delays integrating BBVA. PNC reported no material changes to previously disclosed risk factors. Capital returns remain subject to regulatory capital requirements.
Legal matters include USAA patent-infringement litigation, with trial scheduled for April 2022, and other regulatory inquiries. PNC paid a judgment in the pre-need funeral arrangements case after an appellate affirmation. For disclosed legal matters where it could estimate exposure, PNC said reasonably possible losses in excess of accruals were in aggregate less than $100 million; the estimate excludes matters that could not be estimated and is not a maximum exposure estimate. Management concluded disclosure controls were effective; BBVA was excluded from the internal-control-over-financial-reporting assessment under the permitted acquisition transition period.
Important facts for investors to verify
- How BBVA integration, customer conversion, and the projected $900 million expense savings progress, and whether remaining integration costs stay within the stated estimate.
- Whether Q4 guidance is achieved, particularly fee income, expenses, loan growth, and charge-offs.
- Credit performance in pandemic-affected sectors, acquired BBVA portfolios, and consumer loans after stimulus and hardship relief; also track reserve adequacy and nonperforming assets.
- Capital and liquidity levels after acquisition-related effects and shareholder distributions, including regulatory limits on future capital returns.
- Developments in USAA litigation, other legal and regulatory matters, and the LIBOR transition.