PNC Financial Services Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. PNC is a diversified U.S. financial institution with Retail Banking, Corporate & Institutional Banking, and Asset Management businesses.
Financial performance
| Metric | Q3 2023 | Comparison |
|---|---|---|
| Total revenue | $5.23 billion | Down 6% from Q3 2022; down $60 million sequentially |
| Net interest income | $3.42 billion | Down 2% year over year and 3% sequentially |
| Net interest margin | 2.71% | Down 11 basis points year over year and 8 basis points sequentially |
| Net income | $1.57 billion | Down 4% year over year; up 5% sequentially |
| Diluted EPS | $3.60 | Down from $3.78 in Q3 2022; up from $3.36 in Q2 2023 |
| Provision for credit losses | $129 million | Down from $241 million in Q3 2022 and $146 million in Q2 2023 |
| Noninterest expense | $3.25 billion | Down 1% year over year and 4% sequentially |
For the first nine months, revenue was $16.13 billion, up 5%; net income was $4.76 billion, up 4%; and diluted EPS was $10.94, versus $10.39 in the prior-year period. Higher net interest income drove growth, partly offset by lower noninterest income, higher expenses, and increased credit-loss provision. Year-to-date noninterest income fell 7%, including negative Visa Class B fair-value adjustments of $179 million.
Q3 return on average assets was 1.12%, return on average common equity 13.65%, and efficiency ratio 62% (versus 59% a year earlier). Nine-month operating cash flow was $5.25 billion, compared with $5.04 billion; investing cash flow was negative $1.71 billion and financing cash flow negative $5.28 billion. Cash and due from banks at period-end was $5.30 billion.
Balance sheet, credit, and capital
- At September 30, assets were $557.3 billion; loans $318.4 billion; deposits $423.6 billion; borrowed funds $66.2 billion; and total shareholders’ equity $49.5 billion.
- Compared with year-end 2022, loans decreased 2%, deposits decreased 3%, and borrowed funds increased 13%. Commercial loans declined 4%, while consumer loans grew 1%. Deposit outflows included a shift from noninterest-bearing accounts to interest-bearing products.
- Uninsured deposits were approximately 46% of deposits. Contingent liquidity sources totaled $222.9 billion; average Q3 LCR was 107%, and PNC reported that LCR and NSFR remained above their 100% regulatory minimums.
- CET1 was 9.8% (estimated 9.7% fully phased in for CECL). The loan-related allowance for credit losses was $5.4 billion, or 1.70% of loans.
- Nonperforming assets rose 7% from year-end to $2.16 billion, primarily due to commercial real estate. Net charge-offs were $121 million, or 0.15% of average loans, in Q3. Overall accruing delinquencies declined 14% from year-end.
- Office CRE exposure was $8.6 billion, or 2.7% of loans; 7.7% was nonperforming, 23.2% criticized, and reserves were 8.5% of office loans. Management identified office lending as an area of continued uncertainty and monitoring.
Changes, outlook, and notable items
- PNC’s baseline outlook anticipated a mild recession beginning around mid-2024, with real GDP contracting less than 1%, unemployment approaching 5% in early 2025, and inflation moving toward the Federal Reserve’s 2% objective in the second half of 2024. PNC expected the federal funds rate to remain at 5.25%–5.50% through mid-2024, with cuts starting in Q3 2024.
- For Q4 2023 versus Q3, PNC expected average loans up about 3%, net interest income down 1%–2%, fee income up about 1%, and net loan charge-offs of $200–$250 million. Noninterest expense was expected up 8%–9%, including approximately $150 million of workforce-reduction charges; core expense, excluding those charges, was expected up 3%–4%.
- On October 2, after quarter-end, PNC acquired Signature Bridge Bank capital commitment facilities totaling approximately $16 billion, including $9 billion of funded loans. PNC said the transaction had no material impact on total assets, capital ratios, or tangible book value per share; it involved no FDIC funding, guarantee, or loss-sharing agreement.
- On October 6, PNC committed to a workforce reduction of approximately 4%, with about $150 million in one-time costs and expected annual 2024 personnel expense savings of approximately $325 million before tax.
- Common share repurchases were paused in Q3 and expected to remain paused in Q4 amid proposed bank capital-rule changes. Q3 common dividends were $1.55 per share; the board declared another $1.55 dividend on October 2.
- The FDIC special assessment related to the failures of Silicon Valley Bank and Signature Bank was not included in expense guidance; PNC expected it to significantly increase deposit-insurance costs, with final amount and timing pending. Proposed capital and resolution-planning rules, CRA changes, and a proposed debit interchange-fee reduction are also relevant regulatory uncertainties.
- For disclosed legal matters where PNC could estimate exposure, it reported reasonably possible losses above related accruals of less than $300 million in aggregate. The estimate excludes some matters and is not a maximum exposure estimate.
Investor verification priorities
- Track deposit trends, deposit pricing and funding costs, including the level and composition of uninsured deposits.
- Monitor NIM, net interest income, and delivery of Q4 expense and credit-cost guidance, including workforce-reduction charges and the FDIC assessment.
- Review office CRE criticized and nonperforming balances, reserve coverage, delinquencies, and charge-offs as economic conditions evolve.
- Assess the effects of the Signature portfolio acquisition on loan growth, credit quality, capital, and liquidity.
- Follow proposed capital rules, repurchase-pause decisions, and any resulting changes to CET1 requirements or capital returns.
- Consider the sensitivity of securities values and AOCI to interest rates; available-for-sale securities had $5.6 billion of gross unrealized losses at quarter-end.