PNC Financial Services Group, Inc. — First-Quarter 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet figures are as of March 31, 2024. PNC is a diversified U.S. financial institution with Retail Banking, Corporate & Institutional Banking, and Asset Management businesses. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2024 | Comparison |
|---|---|---|
| Total revenue | $5.145 billion | Down 8% year over year; down 4% from Q4 2023 |
| Net interest income (GAAP) | $3.264 billion | Down 9% year over year; down 4% quarter over quarter |
| Net interest margin | 2.57% | Down 27 basis points year over year; down 9 basis points quarter over quarter |
| Noninterest income | $1.881 billion | Down 7% year over year |
| Provision for credit losses | $155 million | Compared with $235 million in Q1 2023 and $232 million in Q4 2023 |
| Noninterest expense | $3.334 billion | Essentially unchanged year over year; down 18% quarter over quarter |
| Net income | $1.344 billion | Down 21% year over year; up 52% quarter over quarter |
| Common diluted EPS | $3.10 | Compared with $3.98 in Q1 2023 and $1.85 in Q4 2023 |
| Operating cash flow | $1.758 billion provided | Compared with $1.876 billion provided in Q1 2023 |
Lower net interest income reflected higher funding costs and lower average loan balances. Higher yields on interest-earning assets did not offset the rise in deposit and borrowing costs. Fee income was affected by lower private equity and mortgage revenue, and lower capital-markets activity versus the prior quarter. Net income’s quarter-over-quarter increase chiefly reflected lower expenses and credit provision, including unusually high FDIC assessment and workforce-reduction charges in Q4 2023.
At quarter end, assets were $566.2 billion, loans $319.8 billion, deposits $425.6 billion, borrowed funds $72.7 billion, and shareholders’ equity $51.3 billion. Loans declined 1% and deposits increased 1% from year-end 2023. The loan-to-deposit ratio was 75%; CET1 was 10.1% (estimated 10.0% fully implemented for CECL). PNC reported that its LCR and NSFR exceeded their 100% regulatory minimums throughout the quarter, but did not state the actual ratios in the provided text.
Q1 investing cash outflow was $6.365 billion, principally reflecting a $9.808 billion increase in interest-earning bank deposits, partly offset by securities maturities and loan cash flows. Financing cash inflow was $3.619 billion. Cash and due from banks ended at $5.933 billion; these cash-flow figures reflect bank balance-sheet activity and are not free cash flow.
Material changes and credit quality
- Revenue and earnings: Year-over-year revenue fell 8%, net interest income fell 9%, and net income fell 21%. Noninterest income declined 7%; lower private equity and mortgage revenue was partly offset by card, cash-management, asset-management, and brokerage growth.
- Funding: Interest-bearing deposits grew, while noninterest-bearing deposits declined. Average borrowed funds were up 20% year over year, primarily due to parent-company debt issuance, contributing to higher funding costs.
- Credit: The loan-related allowance for credit losses was $5.4 billion, or 1.68% of loans, versus $5.5 billion and 1.70% at year-end. Nonperforming assets rose 9% to $2.4 billion, mainly from commercial real estate. Net charge-offs were $243 million, or 0.30% of average loans, up from $195 million in Q1 2023.
- Office real estate exposure: Office loans were $7.8 billion (2.4% of loans); 26.4% were criticized and 10.5% nonperforming. Updated weighted-average LTV was 69%, and reserves were 9.7% of office loans. Multi-tenant office was more stressed: 18.1% nonperforming, 75% weighted-average LTV, and a 14.4% reserve rate. About 42% of office balances were expected to mature over the following 12 months; PNC expects additional stress.
- Capital returns: PNC returned $0.8 billion to shareholders in Q1, including more than $0.6 billion in common dividends and more than $0.1 billion in repurchases. The board declared a $1.55-per-share dividend payable May 6, 2024.
Outlook, risks, and unusual items
For Q2 2024 versus Q1, PNC expected average loans to be stable, net interest income down about 1%, fee income up 1%–2%, other noninterest income of $150–$200 million, revenue stable, core noninterest expense up 2%–4%, and net loan charge-offs of $225–$275 million.
For full-year 2024 versus 2023, PNC expected average loans up about 1%, net interest income down 4%–5%, noninterest income up 4%–6%, revenue stable to down 2%, core noninterest expense stable, and an effective tax rate of about 18.5%. Management’s baseline assumed slower growth in 2024, two federal funds rate cuts beginning in Q3, and a year-end rate range of 4.75%–5.00%. These are forward-looking estimates, not guarantees. Core expense guidance excludes the FDIC-related charges and workforce-reduction charges noted below; revenue guidance excludes net securities gains and Visa activity.
- FDIC assessment: Q1 included an additional $130 million pretax expense reflecting increased expected FDIC losses; Q4 2023 included $515 million of FDIC special-assessment expense.
- Workforce reduction: PNC incurred $150 million in Q4 2023 and expects the reduction to lower 2024 personnel expense by approximately $325 million pretax.
- Market and funding risks: Deposit competition, higher funding costs, interest-rate changes, economic conditions, and customer behavior could affect earnings and liquidity. PNC’s modeled first-year net interest income sensitivity was approximately negative 0.2% under either a 200-basis-point increase or decrease in rates.
- Contingent liquidity: Primary contingent liquidity sources totaled $231.2 billion, including $53.2 billion at the Federal Reserve, available securities, and unused FHLB and Federal Reserve borrowing capacity. Uninsured deposits were approximately 43% of deposits.
- Legal matters: For disclosed matters where losses could be estimated, PNC estimated reasonably possible losses in excess of related accruals of less than $300 million in aggregate; this excludes matters for which an estimate was unavailable and is not a maximum exposure estimate. A proposed interchange-litigation settlement remained subject to court approval.
- Visa subsequent event: PNC tendered its Visa Class B-1 shares into Visa’s exchange offer. If accepted, PNC could potentially liquidate 50% of its holdings during Q2 and Q3 2024, subject to transaction terms and timing restrictions.
Most important facts for investors to verify
- Whether net interest income and margin stabilize as deposit pricing, loan balances, and funding mix evolve.
- Whether full-year guidance remains achievable, particularly revenue, core expense, and credit-loss expectations.
- Trends in commercial real estate, especially office maturities, criticized and nonperforming loans, collateral values, and reserve adequacy.
- Deposit composition, uninsured-deposit trends, borrowing needs, and actual regulatory liquidity ratios.
- The effect of FDIC assessment revisions, proposed Basel III capital rules, and resulting capital-return decisions.
- Visa exchange-offer completion and any related proceeds or effects on reported results.
- Legal and regulatory developments, including the interchange settlement and potential losses beyond amounts currently estimable.