Business context and reporting period
The PNC Financial Services Group, Inc. is a diversified U.S. financial services company with retail banking, corporate and institutional banking, asset management, residential mortgage banking, a BlackRock investment and a non-strategic assets portfolio. This unaudited Form 10-Q covers the three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless otherwise noted.
Key financial metrics
Dollar amounts are in billions unless stated otherwise.
- Revenue and earnings: Revenue was $3.955, up 6%; net interest income was $2.389, up 4%; noninterest income was $1.566, up 9%. Net income was $1.004, up 24%, and net income attributable to common shareholders was $938 million. Diluted EPS was $1.76 versus $1.44.
- Expenses and margins: Noninterest expense was $2.395, down 2%. The efficiency ratio improved to 61% from 66%. Net interest margin was 3.81%, down from 3.90%.
- Credit costs and asset quality: Provision for credit losses was $236 million versus $185 million. Net charge-offs were $456 million, or 0.99% of average loans annualized; excluding $134 million of additional charge-offs tied to policy alignment, the ratio was 0.70%. Nonperforming assets were $3.927 billion, 1.31% of total assets; the allowance for loan and lease losses was $3.828 billion, or 2.05% of loans.
- Cash flows: Operating activities provided $1.016 billion, investing activities provided $3.380 billion and financing activities used $5.668 billion. Cash and due from banks decreased $1.272 billion to $3.948 billion. These banking-company cash flows include substantial portfolio and funding movements.
- Balance sheet and funding: Total assets were $300.812 billion; loans were $186.504 billion and deposits $211.620 billion. Borrowed funds totaled $37.647 billion, down from $40.907 billion at year-end 2012. The loans-to-deposits ratio was 88%. Liquid assets were reported at $54.6 billion, including $24.9 billion pledged as collateral.
- Capital and returns: Basel I Tier 1 common, Tier 1 risk-based and total risk-based capital ratios were 9.8%, 11.6% and 14.9%, respectively. Estimated pro forma Basel III Tier 1 common capital was 8.0%, without phase-ins. Return on average assets was 1.34%, and return on average common equity was 10.68%.
Material changes versus comparable periods
- Profit increased as revenue grew and expenses fell, partly offset by higher credit-loss provision. Lower integration costs contributed to the expense decline; the 2013 quarter also included a full quarter of RBC Bank (USA) operating expenses.
- Average loans and deposits increased year over year, reflecting organic growth and the full-quarter contribution of the March 2012 RBC acquisition. Period-end loans rose $648 million from December 2012, while deposits fell $1.522 billion, primarily due to seasonal runoff in transaction deposits.
- Credit trends were described as improving overall, but reported first-quarter metrics were affected by alignment with interagency consumer lending guidance. That change added $426 million to nonperforming loans and accelerated $134 million of charge-offs; it also reduced reported delinquencies.
- Nonperforming assets rose from $3.794 billion at December 31, 2012 to $3.927 billion at March 31, 2013, partly due to the guidance alignment. Commercial nonperforming loans declined, while consumer nonperforming loans increased.
- Residential mortgage repurchase liability declined to $522 million from $614 million at year-end; home equity repurchase liability declined to $25 million from $58 million.
Outlook, commentary and risks
- Management expected second-quarter 2013 net interest income to decline 2%–3% from first-quarter levels, and full-year net interest income to decline from 2012, including an expected approximately $350 million decrease in purchase-accounting accretion.
- Management expected 2013 noninterest income and total revenue to increase versus 2012. It expected second-quarter expenses to be 2%–3% higher sequentially, full-year expenses to decline by mid-single digits, and expenses excluding integration and trust-preferred redemption charges to be flat to down. PNC reported approximately $500 million of annualized savings captured toward a $700 million continuous-improvement goal.
- The board approved an increase in the quarterly common dividend from $0.40 to $0.44 per share, effective with the May 2013 payment. PNC said it did not expect common-share buybacks in 2013. Capital actions remain subject to regulatory review.
- Key risks include interest-rate and market changes, economic weakness, credit quality and loan demand, regulatory and capital requirements, legal contingencies, mortgage repurchase claims, and the accuracy of fair-value and credit-reserve estimates. Management reported up to approximately $400 million of reasonably possible losses across certain disclosed legal matters that could be estimated; this is not a maximum exposure estimate for all matters.
- PNC estimated up to approximately $357 million of reasonably possible residential mortgage repurchase losses in excess of its recorded liability. Management cautioned that claims, rescissions, housing prices and economic conditions could cause actual losses to differ from estimates.
Important facts for investors to verify
- Whether underlying credit quality continues to improve after separating the effects of the interagency-guidance policy changes from reported charge-offs, nonperforming loans and delinquencies.
- Whether PNC achieves its revenue, net interest income, expense and savings expectations, particularly as purchase-accounting accretion declines.
- The development of residential mortgage repurchase claims and losses relative to the $522 million liability and the stated potential additional loss estimate.
- Capital, liquidity and funding levels, including the assumptions behind the 8.0% estimated pro forma Basel III ratio and the impact of regulatory requirements and capital actions.
- Material legal proceedings, regulatory inquiries and contingent exposures; the filing states that some possible losses cannot currently be estimated.