01—Abstract
Summary
Summary of the 10-K filed March 1, 2011. Cited figures are marked; the original filing is the authoritative source.
PNC Financial Services Group closed 2010 with record net income of $3.4 billiona (diluted EPS $5.74, up from $4.36), driven by a sharp fall in credit costs, lower funding costs and a $639 million pretax gain from the sale of PNC Global Investment Servicing.
Net interest income rose 2% to $9.2 billionb and the net interest margin expanded to 4.14% from 3.82%. Noninterest income fell $1.2 billion to $5.9 billion because 2009 included a $1.1 billion BlackRock/BGI gain, and noninterest expense declined 5% to $8.6 billion as National City cost savings reached an annualized $1.8 billion. Credit quality improved through the year.
The provision for credit losses fell to $2.5 billionc from $3.9 billion, nonperforming assets dropped $1.0 billion to $5.3 billion, and the allowance covered 109% of nonperforming loans. Capital strengthened: the Tier 1 common ratio rose to 9.8% from 6.0% after a $3.4 billion common equity raise and the February 2010 redemption of $7.6 billion of TARP preferred stock. Total loans declined 4% to $150.6 billion, and deposits fell to $183.4 billion.
The filing flags material headwinds for 2011. Management expects purchase accounting accretion to fall by as much as $700 milliond and the net interest margin to decline, and it estimates roughly $400 million of incremental fee pressure from Regulation E and proposed debit interchange limits.
Dodd-Frank, the CFPB and Basel III are described as likely to reduce revenue and raise costs. Residential mortgage foreclosure documentation problems have led to expected consent orders with the Federal Reserve and OCC, and the company faces numerous mortgage-related and other litigation matters, with reasonably possible aggregate losses disclosed up to $400 million.
02—Key points
Key Highlights
- Record 2010 net income of $3.4 billion, up 41% from 2009; diluted EPS of $5.74 versus $4.36, with ROE of 10.88%
- Net interest margin widened to 4.14% from 3.82%, while net interest income rose 2% to $9.2 billion on lower deposit and borrowing costs
- Provision for credit losses fell 36% to $2.5 billion; nonperforming assets declined to $5.3 billion and the ALLL equaled 3.25% of loans
- Tier 1 common ratio rose to 9.8% (up 380 bps) after a $3.4 billion common offering and the $7.6 billion TARP preferred redemption
- Noninterest expense fell 5% to $8.6 billion; National City acquisition cost savings reached $1.8 billion annualized, ahead of target
- 2011 outlook: NII expected to fall as accretion declines by up to $700 million, provision expected to drop by at least $800 million, and noninterest expense expected to decline
- Mortgage foreclosure review leads to expected consent orders with the Federal Reserve and OCC; regulatory reform (Dodd-Frank, CFPB) expected to pressure fee revenue by about $400 million in 2011
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 1, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $15.18B$16.23B | −6.5% |
| Operating Income | $3.02B$2.36B | +28.2% |
| Interest Expense | $1.92B$3.00B | −36.1% |
| Net Income | $3.40B$2.40B | +41.4% |
| EPS (Basic) | $5.80$4.40 | +31.8% |
| EPS (Diluted) | $5.74$4.36 | +31.7% |
| Shares Outstanding (Basic) | 517.00M454.00M | +13.9% |
| Shares Outstanding (Diluted) | 520.00M455.00M | +14.3% |
05—Questions
Frequently Asked Questions
What drove the increase in PNC's 2010 earnings?
Earnings rose mainly because the provision for credit losses fell from $3.9 billion to $2.5 billion, noninterest expense declined 5%, and net interest margin expanded to 4.14%. The $639 million pretax gain on the GIS sale also contributed, although 2009 included a larger $1.1 billion BlackRock gain that partly offset the improvement in noninterest income.
How strong is PNC's capital position after the TARP redemption?
Capital improved despite redeeming $7.6 billion of TARP preferred stock in February 2010. The Tier 1 common ratio reached 9.8%, the Tier 1 risk-based ratio was 12.1%, and PNC Bank, N.A. remained well capitalized. Common equity grew by $7.6 billion during 2010, and management believes it has capacity to increase capital returns to shareholders subject to regulatory approval.
What are the main risks to PNC's 2011 outlook?
Key risks include the expected decline in purchase accounting accretion (up to $700 million), margin compression, and roughly $400 million of fee pressure from Regulation E and proposed debit interchange limits. Regulatory uncertainty from Dodd-Frank and Basel III, possible mortgage foreclosure enforcement penalties, and pending litigation (reasonably possible losses up to $400 million) also pose risks. The Federal Reserve's capital review could also limit dividend increases or buybacks.
How is PNC's credit quality trending?
Credit quality improved through 2010. Nonperforming assets fell $1.0 billion to $5.3 billion, accruing loans past due 30 or more days declined, and net charge-offs were $2.9 billion, or 1.91% of average loans. Management expects continued improvement in 2011, with the average quarterly provision below the fourth-quarter 2010 level of $442 million, although purchased impaired loans and home equity troubled debt restructurings remain elevated.
06—Continue