01—Abstract
Summary
Summary of the 10-K filed March 3, 2014. Cited figures are marked; the original filing is the authoritative source.
PNC Financial Services Group's 2013 Form 10-K shows a year of solid earnings recovery and balance sheet strengthening.
Net income rose 41% to $4.2 billiona ($7.39 diluted EPS), driven by a 7% reduction in noninterest expense to $9.8 billion, a 3% increase in total revenue to $16.0 billion, and a lower provision for credit losses of $643 million (down from $987 million). The gain was helped by a $968 million swing in residential mortgage revenue, largely from a $53 million repurchase-reserve benefit versus a $761 million provision in 2012, including settlements with FNMA and FHLMC. The core earnings picture is more mixed.
Net interest income fell 5% to $9.1 billionb and net interest margin compressed to 3.57% from 3.94%, reflecting lower purchase accounting accretion, low-rate pressure on loan and securities yields, and fewer securities balances. Management guided to a further roughly $300 million decline in accretion in 2014 and expects total revenue to be under pressure in 2014, so investors should not assume the 2013 earnings level is a run-rate. Credit quality continued to improve: nonperforming assets fell 9% to $3.5 billion, net charge-offs fell 16% to $1.1 billion, and the allowance covered 117% of nonperforming loans.
Capital and balance sheet strength improved. Total assets reached $320.3 billionc, deposits $220.9 billion, and shareholders' equity $42.4 billion. The Basel I Tier 1 common ratio rose to 10.5% from 9.6%, and the pro forma fully phased-in Basel III Tier 1 common ratio was an estimated 9.4%.
Dividends increased to 44 cents per quarter, and the company filed its 2014 CCAR capital plan, with the Federal Reserve's response expected in March 2014 and an explicit note that repurchases and dividend increases remain subject to that review. Key ongoing risks include Volcker Rule compliance, pending legal matters (including interchange and mortgage-related litigation, with up to about $800 milliond of reasonably possible losses disclosed), and a dependence on continued low rates and housing recovery.
02—Key points
Key Highlights
- Net income of $4.2 billion, up 41% from $3.0 billion; diluted EPS of $7.39 versus $5.30 in 2012.
- Total revenue rose 3% to $16.0 billion, supported by a $1.0 billion increase in noninterest income to $6.9 billion, largely from residential mortgage revenue and client fees.
- Net interest margin compressed to 3.57% from 3.94%, and net interest income fell 5% to $9.1 billion, with management guiding to lower 2014 accretion (down about $300 million).
- Noninterest expense fell 7% to $9.8 billion, with cost savings exceeding $775 million against a $700 million goal and a 2014 savings target of $500 million.
- Credit quality improved: net charge-offs down 16% to $1.1 billion (0.57% of average loans), nonperforming assets down 9% to $3.5 billion, and provision down to $643 million.
- Capital strengthened: Basel I Tier 1 common ratio of 10.5% (from 9.6%), pro forma Basel III Tier 1 common of 9.4%, and total assets of $320.3 billion.
- Pending items to monitor: Federal Reserve CCAR response in March 2014, Volcker Rule conformance by July 2015 (about $806 million of covered fund interests), and debit interchange litigation that could hurt revenue (2013 debit interchange revenue of about $338 million).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed March 3, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $16.01B$15.51B | +3.2% |
| Interest Expense | $860.00M$1.09B | −21.4% |
| Net Income | $4.21B$2.99B | +40.7% |
| EPS (Basic) | $7.45$5.33 | +39.8% |
| EPS (Diluted) | $7.36$5.28 | +39.4% |
| Shares Outstanding (Basic) | 528.00M526.00M | +0.4% |
| Shares Outstanding (Diluted) | 532.00M529.00M | +0.6% |
05—Questions
Frequently Asked Questions
What drove the 41% increase in net income in 2013?
Primarily a 7% reduction in noninterest expense (to $9.8 billion, including lower trust preferred redemption charges and 2012 integration costs), a 3% increase in total revenue, and a lower provision for credit losses ($643 million versus $987 million). Residential mortgage revenue was a major contributor, rising to $871 million from $284 million, mainly because the repurchase-obligation provision reversed to a $53 million benefit from a $761 million charge in 2012.
Is PNC's 2013 earnings level sustainable in 2014?
Management expects 2014 total revenue to be under pressure and likely down from 2013, citing roughly $300 million less purchase accounting accretion and lower residential mortgage revenue, partly offset by loan growth and fee businesses. Management also expects 2014 noninterest expense to be lower than 2013, excluding legal and regulatory contingencies, and guided Q1 2014 provision to $125-200 million. The 2013 mortgage repurchase benefit is not expected to recur at the same scale.
How strong is PNC's capital position, and what could affect shareholder returns?
The Basel I Tier 1 common ratio was 10.5% and the pro forma fully phased-in Basel III ratio was an estimated 9.4% at year-end 2013, both above regulatory thresholds for 'well capitalized' status. Dividend increases and any share repurchases depend on the Federal Reserve's 2014 CCAR non-objection, expected in March 2014. The company did not repurchase shares under its program in Q4 2013 or during 2013, and it reports a remaining authorization of 21.551 million shares.
What are the main legal and regulatory risks disclosed?
Key matters include interchange antitrust litigation (largely covered by an existing escrow), the CBNV mortgage litigation, overdraft fee class actions, the Fulton Financial and FHLB Chicago securities suits, a captive mortgage reinsurance RESPA case, lender-placed insurance and patent suits, and a mortgage repurchase suit by Residential Funding Company. Regulatory inquiries cover mortgage servicing and lending, with PNC settling a $35 million fair lending matter. PNC estimates reasonably possible losses of up to about $800 million for disclosed matters where an estimate is possible, though this figure does not represent a maximum exposure.
What is PNC's exposure to European sovereign risk?
Total direct and indirect European exposure was about $4.6 billion at December 31, 2013, down from about $4.9 billion a year earlier. Exposure to the five countries PNC monitors closely (Greece, Ireland, Italy, Portugal and Spain) was small, about $237 million in total, and the company reported only $8 million of direct funded sovereign exposure in those countries' peripheral sovereign debt categories.
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