PNC Financial Services Group, Inc. — 2016 Form 10-K
Business context and reporting period. PNC is a diversified U.S. financial services company spanning retail banking, corporate and institutional banking, asset management, residential mortgage banking, and an equity investment in BlackRock. This annual report covers the year ended December 31, 2016; balance-sheet figures are as of that date. Unless otherwise stated, dollar amounts are in billions.
Financial performance and position
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Total revenue | $15.16 | $15.23 | Down $63 million |
| Net interest income, GAAP | $8.39 | $8.28 | Up 1% |
| Net interest margin | 2.73% | 2.74% | Down 1 basis point |
| Noninterest income | $6.77 | $6.95 | Down 3% |
| Provision for credit losses | $433 million | $255 million | Higher, notably reflecting energy-related lending |
| Noninterest expense | $9.48 | $9.46 | Essentially flat |
| Net income | $3.99 | $4.14 | Down 4% |
| Net income attributable to common shareholders | $3.69 | $3.88 | Down 5% |
| Diluted earnings per common share | $7.30 | $7.39 | Down 1% |
| Net cash from operating activities | $3.64 | $5.53 | Down $1.89 |
| Net cash used in investing activities | $(7.44) | $(16.26) | Outflow narrowed |
| Net cash from financing activities | $4.62 | $10.44 | Down $5.82 |
PNC reported total assets of $366.4 billion, loans of $210.8 billion, deposits of $257.2 billion, borrowed funds of $52.7 billion, and shareholders’ equity of $45.7 billion at year-end. Loans grew 2%, led by 3% growth in commercial lending; consumer lending was nearly flat. Deposits grew 3%, with growth in demand and savings balances partly reflecting customers’ shift from money-market deposits. Investment securities rose 8% to $75.9 billion.
Credit measures were mixed: nonperforming assets declined 2% to $2.37 billion and total accruing loans 30 or more days past due fell 4% to $1.58 billion. Net charge-offs increased to $543 million from $386 million, and the allowance for loan and lease losses declined to $2.59 billion from $2.73 billion, or 1.23% of loans versus 1.32% a year earlier.
Liquidity and capital remained strong by management’s reported measures. Liquid assets totaled $89.7 billion, including $29.6 billion of short-term investments and $60.1 billion of available-for-sale securities. Parent-company liquidity was $4.5 billion. PNC and PNC Bank’s liquidity coverage ratios exceeded the fully phased-in 100% minimum at year-end. PNC’s transitional Basel III CET1 ratio was 10.6%; its estimated fully phased-in standardized-approach CET1 ratio was 10.0%. Both PNC and PNC Bank were classified as well capitalized.
PNC returned $3.1 billion to shareholders in 2016: $2.0 billion of share repurchases and $1.1 billion of common dividends. The quarterly common dividend increased to $0.55 per share in August. The effective tax rate was 24.1%, down from 24.8%.
Material changes versus the prior year
- Common earnings and diluted EPS declined despite a 1% increase in net interest income; higher credit-loss provision and lower noninterest income were the principal offsets.
- Other noninterest income fell $213 million, including Visa Class B share-sale gains of $32 million versus $166 million in 2015. Asset-management revenue also declined, partly reflecting the absence of a $30 million trust settlement recognized in 2015.
- Commercial lending grew $4.4 billion, while consumer lending declined slightly. Home equity and education balances fell, partly offset by growth in commercial real estate, residential mortgages, auto loans, and credit cards.
- Net charge-offs increased, particularly in commercial lending amid deterioration in certain energy-related credits. PNC reported $2.4 billion of oil-and-gas loans and $0.4 billion of coal loans at year-end.
- Common shares outstanding declined from approximately 504 million to 485 million, primarily reflecting repurchases. Total shareholders’ equity increased $1.0 billion, while accumulated other comprehensive income moved from a $130 million gain to a $265 million loss, primarily in connection with securities and other valuation changes.
Outlook, risks, contingencies, and unusual items
Management outlook. For 2017 versus 2016, PNC expected mid-single-digit percentage growth in loans and revenue, a $75 million decline in purchase-accounting accretion, low-single-digit percentage growth in noninterest expense, and an effective tax rate of approximately 25%–26% absent tax reform. Management’s assumptions included moderate U.S. economic and labor-market growth and two 25-basis-point Federal Reserve rate increases, forecast for June and December. For first-quarter 2017 versus fourth-quarter 2016, PNC expected modest loan growth, stable net interest income, mid-single-digit percentage fee-income decline, provision of $75 million–$125 million, and low-single-digit percentage expense decline. These are forward-looking expectations, not guarantees.
Key risks. PNC highlights credit and counterparty risk; interest-rate and market risk; economic and energy-sector exposure; regulatory, capital, and liquidity requirements; legal and mortgage-related exposure; competition and technology execution; cybersecurity, operational, and third-party risks; and reputational risk. Rising rates may support net interest income, but PNC’s modeled first-year net interest income sensitivity was negative 4.2% for a gradual 100-basis-point rate decrease. The filing also warns that results depend on assumptions in credit-loss reserves, fair-value measurements, mortgage servicing rights, and legal contingencies.
Legal and other contingencies. For disclosed legal matters where PNC could estimate exposure, it reported reasonably possible losses exceeding related accruals of up to approximately $475 million; this estimate excluded matters for which losses could not be estimated and is not a maximum exposure estimate. In the pre-need funeral arrangements case, a $289 million judgment against PNC was on appeal. A CBNV mortgage litigation settlement provided for binding arbitration between PNC’s proposed $24 million payment and plaintiffs’ proposed $70 million payment, with a decision expected by the end of March 2017. Mortgage servicing and FHA-related governmental inquiries continued. The filing describes no unresolved SEC staff comments.
Subsequent events. PNC announced an additional $300 million of share repurchases for the four-quarter period ending June 30, 2017. It also announced redemption in March 2017 of the Trust I and Trust II securities. PNC reported receiving an additional five years, through July 21, 2022, to conform or divest approximately $300 million of illiquid legacy covered-fund interests under the Volcker Rule. The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2016.
Important facts for investors to verify
- Whether credit costs, especially energy-related commercial losses, continue to rise and how reserve coverage compares with portfolio risk.
- Whether loan and revenue growth meet the 2017 outlook, including the impact of lower purchase-accounting accretion and changes in interest rates on net interest income.
- How the $475 million estimated possible legal-loss amount relates to recorded accruals, and the outcomes of the appealed pre-need judgment, CBNV arbitration, and continuing mortgage investigations.
- Whether capital distributions remain consistent with regulatory approvals, capital ratios, liquidity requirements, and the announced repurchase program.
- How the 2017 segment realignment and changes to internal funds-transfer pricing affect comparisons with prior periods.