01—Abstract
Summary
Summary of the 10-K filed March 2, 2015. Cited figures are marked; the original filing is the authoritative source.
PNC Financial Services Group's 2014 10-K shows a year of stable net income against a shrinking revenue base.
Net income was $4.2 billiona, flat versus 2013, with diluted EPS of $7.30 (vs. $7.36). Total revenue fell 4% to $15.4 billion, driven by a 7% decline in net interest income to $8.5 billion as net interest margin compressed from 3.57% to 3.08% in the low-rate environment and lower purchase accounting accretion. Noninterest income was essentially flat at $6.9 billion, and the provision for credit losses fell sharply to $273 million from $643 million.
Noninterest expense dropped 2% to $9.5 billionb, helped by a $500 million cost-savings goal that was exceeded. Credit quality improved meaningfully. Nonperforming assets fell 17% to $2.9 billion (0.83% of total assets), net charge-offs were roughly halved to $0.5 billion (0.27% of average loans), and the allowance covered 133% of nonperforming loans.
Loans grew 5% to $204.8 billionc, led by commercial and commercial real estate lending, while consumer lending declined. Deposits rose 5% to $232.2 billion, and borrowed funds rose 23% to $56.8 billion as the company funded liquidity buffers ahead of the Liquidity Coverage Ratio. Capital remained strong.
The transitional Basel III common equity Tier 1 ratio was 10.9%, and the pro forma fully phased-in ratio rose to an estimated 10.0% from 9.4%. The company repurchased $1.2 billiond of shares and raised its quarterly dividend to $0.48 from $0.44.
Management guided to further revenue pressure in 2015 as purchase accounting accretion is expected to fall about $225 million, partly offset by business growth and expense reductions. Key risks cited include legal exposure from residential mortgage and interchange litigation, the possibility of a Federal Reserve objection in the 2015 CCAR process, and continued low-rate pressure on margins.
02—Key points
Key Highlights
- Net income of $4.2 billion ($7.30 diluted EPS) was stable versus 2013 despite a 4% revenue decline, as lower provisions and a 2% drop in noninterest expense offset weaker net interest income.
- Net interest margin fell 49 bps to 3.08% and net interest income fell 7% to $8.5 billion, reflecting low rates, spread compression, and lower purchase accounting accretion.
- Credit quality improved: nonperforming assets down 17% to $2.9 billion, net charge-offs down 51% to $0.5 billion, and provision down 58% to $273 million.
- Loans grew 5% to $204.8 billion (commercial lending up 10%), and deposits grew 5% to $232.2 billion, with transaction deposits driving the growth.
- Capital is strong: transitional Basel III CET1 ratio of 10.9%, pro forma fully phased-in CET1 of 10.0% (up from 9.4%), and $1.2 billion of share repurchases in 2014.
- Shareholder returns increased: the quarterly dividend rose to $0.48 from $0.44, and total cash dividends declared were $1.88 per share (vs. $1.72).
- Management expects 2015 revenue pressure from roughly $225 million lower purchase accounting accretion, partly offset by business growth and a $400 million cost-savings target.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed March 2, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $15.38B$16.01B | −4.0% |
| Interest Expense | $906.00M$860.00M | +5.3% |
| Net Income | $4.21B$4.21B | −0.1% |
| EPS (Basic) | $7.44$7.45 | −0.1% |
| EPS (Diluted) | $7.30$7.36 | −0.8% |
| Shares Outstanding (Basic) | 529.00M528.00M | +0.2% |
| Shares Outstanding (Diluted) | 537.00M532.00M | +0.9% |
05—Questions
Frequently Asked Questions
Why did PNC's net interest income decline 7% in 2014 even though loans grew?
Net interest income fell $622 million to $8.5 billion. The main drivers were lower yields on loans and securities in the prolonged low-rate environment, spread compression on deposits, a decline in investment securities balances, and a reduction in purchase accounting accretion. Loan growth, especially in commercial and commercial real estate, partly offset these effects. Net interest margin declined to 3.08% from 3.57%.
Is PNC's credit quality improving?
Yes. Nonperforming assets fell $577 million to $2.9 billion, and nonperforming assets to total assets dropped to 0.83% from 1.08%. Net charge-offs were $531 million (0.27% of average loans) versus $1.08 billion in 2013. Total loan delinquencies fell 22% to $1.9 billion, and the allowance for loan and lease losses declined to 1.63% of loans, covering 133% of nonperforming loans.
How strong is PNC's capital position and what are its capital return plans?
PNC's transitional Basel III CET1 ratio was 10.9%, and its pro forma fully phased-in CET1 ratio was an estimated 10.0%, up from 9.4%. Both PNC and PNC Bank were 'well capitalized.' In 2014 PNC repurchased $1.2 billion of common stock and raised the quarterly dividend to $0.48. Future capital actions, including dividend increases and buybacks, depend on the Federal Reserve's 2015 CCAR non-objection, expected in March 2015.
What are the main risks that could affect PNC's future earnings?
Key risks include continued low interest rates pressuring net interest margin, lower purchase accounting accretion (expected to fall about $225 million in 2015), and legal and regulatory exposure. Legal matters include residential mortgage investigations and repurchase claims, Visa/MasterCard interchange litigation, the CBNV mortgage litigation, the Fulton Financial case, and overdraft and lender-placed insurance suits. PNC estimates reasonably possible losses of up to about $650 million on disclosed matters. Additional regulatory changes, including the Volcker Rule and new liquidity standards, could also affect costs and business activity.
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