01—Abstract
Summary
Summary of the 10-K filed February 29, 2016. Cited figures are marked; the original filing is the authoritative source.
PNC Financial Services Group's 2015 results show a year of modest earnings pressure alongside a strong balance sheet and capital position.
Net income was $4.1 billiona, down 2% from $4.2 billion in 2014, and diluted EPS was $7.39 versus $7.30 a year earlier (diluted EPS rose slightly because share count fell with buybacks). Total revenue fell 1% to $15.2 billion, driven by a 3% decline in net interest income to $8.3 billion as net interest margin compressed to 2.74% from 3.08%. Noninterest income grew 1% to $6.9 billion, led by consumer and corporate services fees and asset management revenue.
Credit quality improved during the year. Nonperforming assets fell 16% to $2.4 billionb, net charge-offs declined 27% to $386 million (0.19% of average loans), and the provision for credit losses fell to $255 million. Noninterest expense was held roughly flat at $9.5 billion, reflecting continued cost discipline and a $500 million continuous improvement program.
Management guided to a $400 millionc cost-savings goal in 2016 and expects full-year 2016 noninterest expense to be stable and net interest income to face headwinds from lower purchase accounting accretion (down about $175 million). PNC ended 2015 with total assets of $358.5 billion, deposits of $249.0 billion, and shareholders' equity of $44.7 billion. The Transitional Basel III CET1 ratio was 10.6% and the pro forma fully phased-in CET1 ratio was an estimated 10.0%, both comfortably above requirements.
The company returned capital through 22.3 million share repurchases ($2.1 billion) and a dividend increase to $0.51d per quarter, and redeemed $500 million of Series K preferred stock. Key risks flagged in the filing include the sustained low-rate environment, energy-sector loan exposure, residential mortgage repurchase and litigation exposure, and ongoing regulatory and Volcker Rule compliance demands.
02—Key points
Key Highlights
- Net income of $4.1 billion (-2% YoY) and diluted EPS of $7.39 (vs. $7.30); ROACE of 9.50% (vs. 9.91%).
- Net interest income fell 3% to $8.3 billion as net interest margin compressed to 2.74% from 3.08%, reflecting higher liquidity holdings, lower accretion and lower asset yields.
- Noninterest income rose 1% to $6.9 billion, with strong growth in consumer services, corporate services and asset management fees; noninterest income reached 46% of total revenue.
- Credit quality improved: nonperforming assets down 16% to $2.4 billion, net charge-offs down 27% to $386 million, and provision for credit losses down to $255 million.
- Strong capital position: Transitional Basel III CET1 ratio of 10.6% and pro forma fully phased-in CET1 of 10.0%; $2.1 billion of share repurchases and dividend raised to $0.51/quarter.
- Balance sheet growth: total assets up 4% to $358.5 billion, deposits up 7% to $249.0 billion, and investment securities up 26% to $70.5 billion, with a loans-to-deposits ratio of 83%.
- 2016 outlook guides to stable net interest income, lower purchase accounting accretion (about -$175 million), flat noninterest expense, a 25%–26% effective tax rate and a $75–125 million first-quarter provision.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 29, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $15.22B$15.38B | −1.0% |
| Interest Expense | $1.04B$906.00M | +15.3% |
| Net Income | $4.14B$4.21B | −1.5% |
| EPS (Basic) | $7.52$7.44 | +1.1% |
| EPS (Diluted) | $7.39$7.30 | +1.2% |
| Shares Outstanding (Basic) | 514.00M529.00M | −2.8% |
| Shares Outstanding (Diluted) | 521.00M537.00M | −3.0% |
05—Questions
Frequently Asked Questions
Why did PNC's net interest income and margin decline in 2015?
Net interest income fell $247 million (3%) to $8.3 billion, and net interest margin dropped to 2.74% from 3.08%. The main drivers were a 32 basis point decline in the yield on interest-earning assets, driven by a larger liquidity position held at the Federal Reserve (interest-earning deposits rose substantially after new short-term liquidity standards took effect), lower loan and securities yields in the low-rate environment, and lower purchase accounting accretion. Management expects net interest income to be stable in Q1 2016 but accretion to fall about $175 million for full-year 2016.
How strong is PNC's capital position and how is it returning capital to shareholders?
PNC reported a Transitional Basel III CET1 ratio of 10.6% and a pro forma fully phased-in CET1 ratio of about 10.0%, with a Tier 1 risk-based ratio of 12.0%, total capital of 14.6%, and a supplementary leverage ratio of 8.6%. Both PNC and PNC Bank were 'well capitalized.' During 2015 the company repurchased 22.3 million common shares for $2.1 billion, raised its quarterly common dividend to $0.51 from $0.48, and redeemed $500 million of Series K preferred stock. Future capital actions remain subject to Federal Reserve CCAR review, with 2016 capital plan submission due in April and the Fed response expected in June 2016.
What are the main credit risk trends in PNC's loan portfolio?
Credit trends improved in 2015. Nonperforming loans fell to $2.1 billion (1.03% of total loans), accruing loans 90+ days past due declined 20%, and total delinquencies dropped 16% to $1.6 billion. Net charge-offs were 0.19% of average loans, down from 0.27%. The company flagged elevated risk in its oil and gas portfolio ($2.6 billion, about 2% of commercial lending), where deterioration emerged in Q4 2015, and noted that a change in the derecognition policy for purchased impaired pooled loans reduced the ALLL and loan balances by $468 million at year-end, which lowered the reported allowance-to-loans ratio to 1.32% from 1.63%.
What legal and regulatory risks could materially affect PNC?
The filing discloses a range of significant matters, most notably a March 2015 jury verdict in the NPS pre-need funeral trust litigation, later reduced to about $289 million and now on appeal to the Eighth Circuit. Other matters include the CBNV mortgage class action (class certified and under Supreme Court review), the DD Growth Premium Master Fund claims in Ireland, lender-placed insurance litigation, the Visa/MasterCard interchange antitrust cases, and several government mortgage-servicing and FHA-related inquiries. PNC estimates reasonably possible losses above accruals of up to about $550 million across disclosed matters. Regulatory developments such as the Volcker Rule (legacy covered fund conformance through 2017, with possible extension) and new liquidity and capital standards could also constrain operations and returns.
How is PNC's business mix positioned, and where does growth come from?
PNC operates six reportable segments. Corporate & Institutional Banking is the largest contributor, earning $2.0 billion in 2015 with average loans up 8% and deposits up 10%. Retail Banking earned $907 million, up 25%, benefiting from a funds transfer pricing enhancement and growth in fee income, while the branch network was reduced by 81 branches and ATMs increased by 351. BlackRock contributed $548 million, and Asset Management Group earned $194 million. Residential Mortgage Banking earned only $26 million as loan sales revenue fell, and the Non-Strategic Assets Portfolio (earnings of $301 million) continues to run off. Management's strategic priorities are growing customers, deepening relationships in underpenetrated Mid-Atlantic and Southeast markets, expanding fee income and controlling expenses through its continuous improvement program.
06—Continue