01—Abstract
Summary
Summary of the 10-K filed March 13, 2003. Cited figures are marked; the original filing is the authoritative source.
PNC Financial Services Group's 2002 annual report shows a year of recovery from the 2001 strategic repositioning.
Net income was $1.184 billiona, or $4.15 per diluted share, versus $377 million ($1.26) in 2001, which had absorbed about $1.2 billion of pretax charges. Return on average common equity rose to 18.83% from 5.65%, and return on average assets to 1.78% from 0.53%. Results were helped by the adoption of SFAS 142, which ended goodwill amortization (about $117 million of expense avoided), and by $147 million of net gains on liquidating institutional loans held for sale.
Net interest income fell 3% to $2.197 billionb, though net interest margin widened to 3.99%. Noninterest income rose to $3.197 billion from $2.652 billion. Credit quality remained a concern.
The provision for credit losses fell to $309 millionc from $903 million, but nonperforming assets rose to $418 million from $391 million, and nonperforming loans reached 0.87% of total loans, up from 0.56%. Net charge-offs were $223 million (0.60% of average loans), including two Market Street liquidity-facility charge-offs totaling $90 million. Total assets declined to $66.4 billion from $69.6 billion as the Corporation shrank its loan book, with loans down to $35.5 billion from $38.0 billion.
Shareholders' equity rose to $6.9 billiond and the common equity to assets ratio improved to 10.3%. Investors should weigh the improved profitability against lingering regulatory and legal overhang. The SEC cease-and-desist order and written agreements with the Federal Reserve and OCC remain in force.
These restrict stock repurchases above 10% of consolidated net worth in any 12-month period without prior approval. Shareholder class action litigation tied to the 2001 restatement is pending, and a $22 million NASD arbitration award was taken as a $10 million pretax charge. Management expects 2003 to remain challenging, with a planned share repurchase of $250 million to $1 billion.
02—Key points
Key Highlights
- Net income of $1.184 billion ($4.15 diluted EPS) rebounded sharply from $377 million ($1.26) in 2001, which included roughly $1.2 billion of pretax strategic repositioning charges.
- Return on average common equity improved to 18.83% from 5.65%, and return on average assets rose to 1.78% from 0.53%.
- Net interest margin widened to 3.99% from 3.84%, while net interest income declined 3% to $2.197 billion as the loan book shrank.
- Noninterest income rose to $3.197 billion from $2.652 billion, aided by $147 million of gains on liquidating institutional loans held for sale and a $28 million benefit from the NBOC put option liability revaluation.
- Credit quality weakened at the margin: nonperforming loans rose to 0.87% of total loans from 0.56%, and net charge-offs of $223 million included $90 million tied to Market Street liquidity facilities.
- Capital strengthened, with the common equity-to-assets ratio rising to 10.3% from 8.3% and Tier 1 risk-based capital at 8.8% versus 7.8%; both bank subsidiaries were rated well capitalized.
- Regulatory overhang persists: the SEC cease-and-desist order and written agreements with the Federal Reserve and OCC remain, requiring prior approval for certain acquisitions and capping buybacks above 10% of consolidated net worth in any 12-month period.
03—Questions
Frequently Asked Questions
Why did PNC's earnings rise so sharply in 2002?
Most of the increase reflects the absence of 2001's roughly $1.2 billion pretax strategic repositioning charges, which cut 2001 net income by $768 million. Adopting SFAS 142 also eliminated goodwill amortization, worth about $117 million pretax in 2002. Gains of $147 million on liquidating institutional loans held for sale further helped results.
Is PNC's credit quality deteriorating?
Partly. Provision for credit losses fell to $309 million from $903 million, and net charge-offs were 0.60% of average loans, down from 2.12% in 2001 (which included large repositioning charge-offs). However, nonperforming assets rose to $418 million from $391 million, and nonperforming loans reached 0.87% of total loans versus 0.56%. Two Market Street liquidity-facility charge-offs totaling $90 million also weighed on 2002 results.
What regulatory restrictions does PNC still face?
PNC consented to an SEC cease-and-desist order in July 2002 over three 2001 transactions that led to a restatement, without admitting or denying the findings. The Federal Reserve and OCC written agreements remain in place, so certain acquisitions and new activities need prior approval. Stock repurchases above 10% of consolidated net worth in any 12-month period also require regulatory approval. The Federal Reserve notified PNC on December 19, 2002 that it met the financial holding company and well-capitalized requirements, lifting the activity restrictions imposed in July.
What litigation and legal risks should investors monitor?
A consolidated securities class action, filed on behalf of purchasers between July 2001 and July 2002, seeks unquantified damages and is subject to a motion to dismiss that management intends to defend vigorously. A Department of Labor investigation of the Incentive Savings Plan committee is ongoing. A NASD arbitration award of $22 million to First of Michigan produced a $10 million pretax charge in 2002. Management says the ultimate outcome of the class action and DOL matter cannot be assessed at this time.
What is the outlook and capital return plan for 2003?
Management expects 2003 to be a challenging operating environment that limits revenue growth. Its main challenges are asset quality, revenue growth, and developing value-added customer relationships. PNC expects to repurchase between $250 million and $1 billion of common stock in 2003 under a 35 million share authorization running through February 2004. It also expects to maintain quarterly dividends at the current $0.48 rate, and it projected higher 2003 pension expense of about $50 million versus $15 million in 2002.
04—Continue