How did PNC's profitability trend in 1998?

Net income rose to $1.115 billion from $1.052 billion, and diluted EPS increased 10% to $3.60. Results were helped by fee-based growth and one-time gains from divestitures, but the provision for credit losses and expenses rose significantly.

What is driving the shift in PNC's revenue mix?

Fee-based businesses such as asset management (BlackRock, PNC Advisors), mutual fund servicing (PFPC), and mortgage banking drove the shift. Noninterest income reached 50% of total revenue in 1998, compared with 42% in 1997, reflecting acquisitions and a strategy to be less capital-intensive.

Are there concerns about credit quality?

Yes. Net charge-offs rose to 0.80% of average loans from 0.51%, and the allowance fell to 1.31% of total loans from 1.79%. Management attributed this mainly to credit cards and a single health care credit tied to AHERF, and expects credit card losses to end once the business is sold. Nonperforming assets were stable at 0.58% of total loans and foreclosed assets.

What should investors expect for 1999?

Management expects the balance sheet to shrink and the net interest margin to narrow because of the credit card sale and continued portfolio downsizing. It expects a lower provision for credit losses in Corporate Bank and an offsetting gain from the credit card sale and the EPS (Electronic Payment Services) merger with Concord EFS. Hilliard Lyons is expected to add about $135 million in brokerage revenue, while credit card fees will fall by about $95 million.

How strong is PNC's capital position and shareholder return policy?

Capital is strong. The Tier I risk-based ratio is 7.80% and the total risk-based ratio is 11.16%, and all banks are well capitalized. The company repurchased 6.5 million shares in 1998, authorized up to 15 million more, and paid $1.58 in dividends per share for the year, a payout ratio of about 43%.

PNC 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 25, 1999. Cited figures are marked; the original filing is the authoritative source.

PNC Bank Corp. reported record 1998 results, with net income of $1.115 billion^a (up 6% from $1.052 billion) and diluted EPS of $3.60 (up 10% from $3.28).

Total assets reached $77.2 billion^b, deposits were $47.5 billion, and shareholders' equity was $6.0 billion. Growth was driven by fee-based businesses: noninterest income rose 41% to $2.623 billion and now represents about 50% of total revenue, up from 42% in 1997. Returns on average common equity (20.81%) and average assets (1.49%) were stable or improved, and the efficiency ratio improved to 54.8%.

The quality of growth has some caveats. Earnings were supported by one-time gains from divestitures, the sale of BlackRock equity to management, and MSR hedging. Credit costs rose sharply: the provision for credit losses increased to $225 million^c from $70 million, and net charge-offs rose to 0.80% of average loans from 0.51%, driven mainly by credit cards and a single health care credit (AHERF).

Noninterest expense climbed 22.5% to $3.261 billion^d, largely due to higher mortgage servicing rights amortization. Management guided to a shrinking balance sheet and a narrower net interest margin in 1999 because of the pending credit card sale to MBNA, which is expected to produce a substantial gain. Capital remained strong and all subsidiary banks were rated well capitalized.

The Tier I risk-based ratio was 7.80%, the total risk-based ratio 11.16%, and the leverage ratio 7.28%. The board authorized a new buyback of up to 15 million shares, and the quarterly dividend was raised to $0.41 in the fourth quarter, bringing the 1998 total to $1.58.

02—Key points

Key Highlights

Record net income of $1.115 billion in 1998, up 6%; diluted EPS of $3.60, up 10%, with returns on average common equity of 20.81%
Noninterest income rose 41% to $2.623 billion, now 50% of total revenue, driven by asset management, mortgage banking, and acquisitions (Midland Loan Services, Hilliard Lyons)
Credit quality weakened: the provision for credit losses tripled to $225 million and net charge-offs rose to 0.80% of average loans, mainly from credit cards and the AHERF exposure
Noninterest expense grew 22.5% to $3.261 billion, largely from $240 million higher mortgage servicing rights amortization
Pending sale of the credit card business to MBNA (about $2.9 billion in receivables) is expected to close in Q1 1999 with a substantial gain, but will reduce loans and the net interest margin
Capital remains solid: Tier I risk-based ratio of 7.80%, total risk-based 11.16%, leverage 7.28%; all bank subsidiaries are well capitalized
New share repurchase authorization of up to 15 million shares through February 2000; quarterly dividend raised to $0.41 in Q4 1998

03—Questions

Frequently Asked Questions

How did PNC's profitability trend in 1998?
Net income rose to $1.115 billion from $1.052 billion, and diluted EPS increased 10% to $3.60. Results were helped by fee-based growth and one-time gains from divestitures, but the provision for credit losses and expenses rose significantly.
What is driving the shift in PNC's revenue mix?
Fee-based businesses such as asset management (BlackRock, PNC Advisors), mutual fund servicing (PFPC), and mortgage banking drove the shift. Noninterest income reached 50% of total revenue in 1998, compared with 42% in 1997, reflecting acquisitions and a strategy to be less capital-intensive.
Are there concerns about credit quality?
Yes. Net charge-offs rose to 0.80% of average loans from 0.51%, and the allowance fell to 1.31% of total loans from 1.79%. Management attributed this mainly to credit cards and a single health care credit tied to AHERF, and expects credit card losses to end once the business is sold. Nonperforming assets were stable at 0.58% of total loans and foreclosed assets.
What should investors expect for 1999?
Management expects the balance sheet to shrink and the net interest margin to narrow because of the credit card sale and continued portfolio downsizing. It expects a lower provision for credit losses in Corporate Bank and an offsetting gain from the credit card sale and the EPS (Electronic Payment Services) merger with Concord EFS. Hilliard Lyons is expected to add about $135 million in brokerage revenue, while credit card fees will fall by about $95 million.
How strong is PNC's capital position and shareholder return policy?
Capital is strong. The Tier I risk-based ratio is 7.80% and the total risk-based ratio is 11.16%, and all banks are well capitalized. The company repurchased 6.5 million shares in 1998, authorized up to 15 million more, and paid $1.58 in dividends per share for the year, a payout ratio of about 43%.

04—Continue

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