01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
PNC's 2012 Form 10-K shows a company that grew its balance sheet substantially through the March 2012 RBC Bank (USA) acquisition while net income dipped modestly.
Net income was $3.0 billiona, down 2% from $3.1 billion in 2011, and diluted EPS was $5.30 versus $5.64. Total revenue rose 8% to $15.5 billion, with net interest income up 11% to $9.6 billion, but noninterest expense climbed 16% to $10.6 billion, driven by RBC integration costs, trust preferred redemption charges, and a $761 million addition to residential mortgage repurchase reserves that weighed on Residential Mortgage Banking, which posted a $308 million loss. Total assets reached $305.1 billion and deposits $213.1 billion.
Credit quality improved: provision for credit losses fell to $987 millionb from $1.15 billion, nonperforming assets declined 9% to $3.8 billion, and net charge-offs fell 21% to $1.3 billion. Capital remained solid, with a Tier 1 common ratio of 9.6% (versus 10.3%), though management disclosed a pro forma Basel III Tier 1 common estimate of 7.5% and a target of 8.0–8.5% by year-end 2013.
Management guided to lower net interest income and margin pressure in 2013 as purchase accounting accretion falls by about $400 millionc, while expecting core net interest income and noninterest income to grow and expense to decline by mid-single digits. Key risks for investors include the pace of mortgage repurchase demands from FNMA and FHLMC, ongoing regulatory and legal exposure (including interchange, overdraft, and CBNV mortgage litigation, with reasonably possible losses up to about $450 million), the Dodd-Frank and Basel III capital rule uncertainty, and the outcome of the 2013 CCAR capital plan review, which will determine the pace of dividend increases and share repurchases.
02—Key points
Key Highlights
- Net income of $3.0 billion ($5.30 diluted EPS) declined about 2% from 2011, as an 8% revenue increase was more than offset by a 16% rise in noninterest expense.
- Net interest income rose 11% to $9.6 billion, driven by the RBC Bank (USA) acquisition, organic loan growth, and lower funding costs; net interest margin was 3.94%.
- Residential Mortgage Banking swung to a $308 million loss after a $761 million provision for residential mortgage repurchase obligations, with the repurchase reserve reaching $614 million.
- Credit quality improved: nonperforming assets fell 9% to $3.8 billion, net charge-offs fell 21% to $1.3 billion, and the provision declined to $987 million.
- Tier 1 common ratio was 9.6% at year-end 2012; the estimated pro forma Basel III Tier 1 common ratio was 7.5%, with a 2013 target of 8.0–8.5%.
- The Federal Reserve's 2013 CCAR response is expected by March 15, 2013 and will shape PNC's dividend and share repurchase plans; management does not expect to repurchase common stock in 2013.
- Management expects 2013 net interest income to decline because purchase accounting accretion falls about $400 million, while noninterest expense is expected to decline by mid-single digits.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $15.51B$14.33B | +8.3% |
| Interest Expense | $1.09B$1.49B | −26.8% |
| Net Income | $2.99B$3.07B | −2.5% |
| EPS (Basic) | $5.33$5.70 | −6.5% |
| EPS (Diluted) | $5.28$5.64 | −6.4% |
| Shares Outstanding (Basic) | 526.00M524.00M | +0.4% |
| Shares Outstanding (Diluted) | 529.00M526.00M | +0.6% |
05—Questions
Frequently Asked Questions
How did the RBC Bank (USA) acquisition affect PNC's 2012 results and balance sheet?
PNC acquired RBC Bank (USA) on March 2, 2012 for $3.6 billion in cash, adding about $18.1 billion of deposits, $14.5 billion of loans, and $1.1 billion of goodwill and intangibles. It drove much of the increase in net interest income, total assets (up $33.9 billion to $305.1 billion), and deposits, and contributed to higher operating expense and integration costs of $267 million.
Why did earnings decline in 2012 despite revenue growth?
Revenue grew 8%, but noninterest expense rose 16% to $10.6 billion. Drivers included RBC operating costs, $295 million of noncash charges on trust preferred redemptions, $225 million of foreclosure-related expenses, a $45 million residential mortgage goodwill impairment, and a $761 million increase in mortgage repurchase reserves that cut mortgage banking revenue.
What are the main risks around PNC's residential mortgage business?
PNC faces elevated repurchase demands from FNMA and FHLMC on loans sold in 2004–2008, with management expecting more claims in 2013 from the 2004–2005 vintages. Its repurchase liability could require further losses; management estimates reasonably possible additional losses of up to about $332 million above its accrual on residential mortgages sold. The company also faces ongoing regulatory inquiries, consent order obligations, and the CFPB's new mortgage servicing rules.
What is the outlook for capital return to shareholders?
Dividend increases and share repurchases depend on the Federal Reserve's 2013 CCAR review. PNC raised its quarterly dividend to $0.40 in April 2012, and management said it does not expect share repurchases under the existing program during 2013. Its Basel III pro forma Tier 1 common ratio of 7.5% is below its 8.0–8.5% year-end 2013 goal, and trust preferred securities will phase out of Tier 1 capital.
06—Continue