10-QPeriod: Q3 FY2010

PNC FINANCIAL SERVICES GROUP, INC. Quarterly Report for Q3 Ended Sep 30, 2010

Filed November 9, 2010For Securities:PNC

Summary

PNC Financial Services Group, Inc. reported solid results for the third quarter and first nine months of 2010, demonstrating a recovery from the previous year's performance. Net income significantly increased year-over-year, driven by a substantial reduction in the provision for credit losses, indicating improved asset quality. The company successfully completed the integration of National City, achieving its cost savings targets ahead of schedule. A key strategic move was the sale of PNC Global Investment Servicing Inc., which generated a significant after-tax gain. The balance sheet remained strong, with improved capital ratios, including a notable increase in the Tier 1 common capital ratio. Total assets and loans decreased slightly from the previous year-end, reflecting ongoing portfolio management and loan repayments, while deposits remained stable with growth in transaction deposits. The company emphasized its commitment to returning to a moderate risk profile, focusing on disciplined credit management and expense control. The report also highlighted the potential impacts of the Dodd-Frank Act, which the company believes will be manageable.

Financial Statements
Beta
Revenue$3.60B
Operating Income$2.20B
Interest Expense$486.00M
Net Income$1.10B
EPS (Basic)$2.08
EPS (Diluted)$2.07
Shares Outstanding (Basic)523.00M
Shares Outstanding (Diluted)526.00M

Key Highlights

  • 1Net income surged year-over-year, reaching $1.103 billion for Q3 2010 and $2.577 billion for the first nine months of 2010, a significant improvement from $559 million (Q3 2009) and $1.296 billion (nine months 2009).
  • 2Provision for credit losses decreased significantly, falling to $486 million in Q3 2010 from $914 million in Q3 2009, and from $2.881 billion in the first nine months of 2009 to $2.060 billion, reflecting improved credit quality.
  • 3The company successfully completed the integration of National City, exceeding its cost-saving targets and on track to achieve $1.8 billion in annualized non-interest expense reductions by year-end 2010.
  • 4PNC completed the sale of PNC Global Investment Servicing Inc. (GIS) on July 1, 2010, for $2.3 billion, recognizing an after-tax gain of $328 million from discontinued operations.
  • 5Tier 1 common capital ratio improved substantially to 9.6% at September 30, 2010, up from 6.0% at December 31, 2009, reflecting strong capital generation and a capital raise.
  • 6Net interest margin showed resilience, increasing to 3.96% in Q3 2010 from 3.76% in Q3 2009, and the nine-month margin improved to 4.18% from 3.72% in the prior year.
  • 7Total noninterest expense decreased by 3% in Q3 2010 compared to Q3 2009, driven by acquisition-related cost savings and disciplined expense management.

Frequently Asked Questions

The sale of GIS on July 1, 2010, for $2.3 billion in cash, resulted in an after-tax gain of $328 million. This gain was recognized in 'Income from discontinued operations' and contributed positively to the overall net income for the period.

PNC's capital position strengthened significantly. The Tier 1 common capital ratio increased from 6.0% at December 31, 2009, to 9.6% at September 30, 2010. This improvement was driven by retained earnings, a common stock offering in Q1 2010, and the sale of GIS, along with lower risk-weighted assets.

PNC expects net interest income and margin to trend downwards in the fourth quarter of 2010 compared to the third quarter, primarily due to lower purchase accounting accretion, continued soft loan demand, and the prevailing low interest rate environment.

PNC carries its residential MSRs at fair value and actively hedges their value against interest rate fluctuations using securities and derivative instruments. The fair value of residential MSRs was $788 million at September 30, 2010, down from $1.332 billion at December 31, 2009, primarily due to lower interest rates and a smaller servicing portfolio. The company also notes that their mortgage servicing-related costs are expected to increase due to industry-wide reviews and enhancements to procedures.