PNC Reports First Quarter Net Income Of $1.0 Billion And $1.76 Diluted EPS Strong Earnings and Returns

PITTSBURGH, April 17, 2013 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported net income of $1.0 billion, or $1.76 per diluted common share, for the first quarter of 2013 compared with net income of $719 million, or $1.24 per diluted common share, for the fourth quarter of 2012 and $811 million, or $1.44 per diluted common share, for the first quarter of 2012.

"PNC's diversified businesses delivered solid revenue despite weaker lending in the first quarter and ― combined with significantly reduced expenses ― drove improved returns for our shareholders," said James E. Rohr, chairman and chief executive officer. "We are making important progress on all of our strategic priorities as we continue to focus on growing deposits, loans and revenue. Our strong capital position should enable us to continue to invest to meet our clients' needs even as we remain committed to disciplined expense management over the course of the year."

Income Statement Highlights

  • Strong first quarter earnings resulted from continued customer growth and a significant increase in pretax pre-provision earnings driven by solid revenue and a substantial reduction in expenses from fourth quarter.
  • Net interest income of $2.4 billion for the first quarter of 2013 declined $35 million compared with the fourth quarter of 2012 due to lower scheduled purchase accounting accretion. Core net interest income was stable.
  • Noninterest income was $1.6 billion for the first quarter of 2013 and reflected the diversification of PNC's businesses. Noninterest income decreased $79 million compared with fourth quarter 2012 due in part to the impact of robust fourth quarter capital markets activity.
  • Provision for credit losses declined to $236 million for the first quarter of 2013 compared with $318 million for the fourth quarter of 2012 as a result of overall credit quality improvement.
  • Noninterest expense was significantly reduced by $434 million, or 15 percent, to $2.4 billion for the first quarter of 2013 compared with fourth quarter 2012.
    • First quarter included lower expense for residential mortgage foreclosure-related matters and no expense for trust preferred securities redemption discounts and merger integration costs.
    • The decline in first quarter expense also reflected continued commitment to disciplined expense management, lower marketing expense and reduced expense for lower capital markets activities.

Balance Sheet Highlights

  • Loans increased $.7 billion to $187 billion at March 31, 2013 compared with year end 2012 as loan growth slowed during the first quarter.
    • Total commercial lending increased $1.4 billion, or 1 percent, over fourth quarter 2012 as a result of specialty lending businesses including public finance, asset-based lending and real estate.
    • Consumer lending decreased $.7 billion from pay downs of residential real estate, credit card and education loans.
  • Underlying credit quality continued to improve during the first quarter of 2013 compared with the fourth quarter of 2012.
    • As previously disclosed, credit quality metrics for the first quarter of 2013 were impacted by alignment with regulatory guidance which increased nonperforming assets by $426 million and net charge-offs by $134 million.
  • Total deposits decreased $1.5 billion to $212 billion at March 31, 2013 compared with December 31, 2012.
    • Runoff of year-end seasonally higher transaction deposits resulted in a decrease of $1.3 billion at March 31, 2013 compared with December 31, 2012.
    • Average transaction deposits grew $3.1 billion in the first quarter of 2013 compared with the fourth quarter.
  • PNC's balance sheet remained core funded with a loans to deposits ratio of 88 percent at March 31, 2013.
  • PNC had a strong capital position at March 31, 2013.
    • The Tier 1 common capital ratio increased to an estimated 9.8 percent at March 31, 2013 compared with 9.6 percent at December 31, 2012.
    • The estimated proforma Basel III Tier 1 common capital ratio was 7.9 percent at March 31, 2013 without benefit of phase-ins.
    • In April 2013 the PNC board of directors raised the quarterly cash dividend on common stock to 44 cents per share, an increase of 4 cents per share, or 10 percent, effective with the May dividend.

Earnings Summary


In millions, except per share data



1Q13




4Q12




1Q12



Net income


$

1,004



$

719



$

811



Diluted earnings per common share


$

1.76



$

1.24



$

1.44



Average diluted common shares outstanding



528




528




529



Return on average assets



1.34

%



.95

%



1.16

%


Return on average common equity



10.68

%



7.48

%



9.41

%


Book value per common share  Period end


$

68.23



$

67.05



$

63.26



Cash dividends declared per common share


$

.40



$

.40



$

.35



The Consolidated Financial Highlights accompanying this news release include additional information regarding selected income statement items and reconciliations to reported amounts of non-GAAP financial measures, including a reconciliation of business segment income to net income. Reference to pretax pre-provision earnings is to total revenue less noninterest expense. Reference to core net interest income is to total net interest income less purchase accounting accretion, which consists of scheduled accretion and excess cash recoveries. Information in this news release including the financial tables is unaudited. See the notes in the Consolidated Financial Highlights. 

CONSOLIDATED REVENUE REVIEW























Revenue

Change



Change

















1Q13 vs



1Q13 vs


In millions



1Q13




4Q12




1Q12




4Q12



1Q12


Net interest income


$

2,389



$

2,424



$

2,291




(1)

%



4

%


Noninterest income



1,566




1,645




1,441




(5)

%



9

%


Total revenue


$

3,955



$

4,069



$

3,732




(3)

%



6

%


Total revenue for the first quarter of 2013 declined $114 million compared with the fourth quarter of 2012 primarily due to a decrease in noninterest income from lower asset sales, including the fourth quarter $130 million gain on sale of Visa shares, and the impact on corporate service fees of higher fourth quarter market activity. Partially offsetting these items was a substantially reduced provision for residential mortgage repurchase obligations. Total revenue for the first quarter of 2013 grew $223 million compared with the first quarter of 2012 as both noninterest income and net interest income increased.

Net interest income for the first quarter of 2013 decreased modestly by $35 million compared with the fourth quarter of 2012 due to lower scheduled purchase accounting accretion. Core net interest income remained stable. Net interest income increased $98 million compared with first quarter 2012 as a result of higher core net interest income from organic loan growth, lower funding costs and the full quarter impact of the RBC Bank (USA) acquisition. The net interest margin decreased modestly to 3.81 percent for the first quarter of 2013 compared with 3.85 percent for the fourth quarter of 2012 and 3.90 percent for the first quarter of 2012 reflecting lower purchase accounting accretion as core net interest margin has remained stable.

Noninterest Income

Change



Change



















1Q13  vs



1Q13  vs


In millions



1Q13




4Q12




1Q12




4Q12



1Q12


Asset management


$

308



$

302



$

284




2

%



8

%


Consumer services



296




294




264




1

%



12

%


Corporate services



277




349




232




(21)

%



19

%


Residential mortgage























Residential mortgage banking



238




254




262




(6)

%



(9)

%



Provision for residential mortgage
























repurchase obligations



(4)




(254)




(32)




(98)

%



(88)

%


Service charges on deposits



136




150




127




(9)

%



7

%


Net gains on sales of securities



14




45




57




(69)

%



(75)

%


Net other-than-temporary impairments



(10)




(15)




(38)




33

%



74

%


Other



311




520




285




(40)

%



9

%






$

1,566



$

1,645



$

1,441




(5)

%



9

%


Noninterest income for the first quarter of 2013 declined $79 million compared with the fourth quarter of 2012. Asset management fees grew $6 million reflecting stronger equity markets and growth in customers. Consumer service fees increased $2 million. Corporate service fees decreased $72 million primarily due to the impact of higher fourth quarter merger and acquisition advisory fees and capital markets activities. Residential mortgage revenue reflected a substantially reduced provision for residential mortgage repurchase obligations. Residential mortgage banking revenue decreased $16 million attributable to lower loan sales revenue partially offset by higher net hedging gains on mortgage servicing rights. Service charges on deposits declined $14 million compared with the fourth quarter reflecting seasonally lower customer activity. Other noninterest income declined $209 million compared with the linked quarter primarily due to the fourth quarter gain of $130 million on the sale of Visa Class B common shares and lower revenue associated with asset valuations and sales.  

Noninterest income for the first quarter of 2013 increased $125 million compared with the first quarter of 2012. Asset management fees increased $24 million from stronger equity markets and growth in customers. Consumer service fees grew $32 million due to growth in customers and transaction volume. Corporate service fees increased $45 million primarily as a result of higher commercial mortgage servicing revenue. Residential mortgage banking revenue decreased $24 million as lower net hedging gains on mortgage servicing rights were partially offset by higher loan sales revenue. Service charges on deposits increased $9 million reflecting customer growth including the RBC Bank (USA) acquisition. Other noninterest income increased $26 million compared with first quarter 2012 primarily attributable to higher revenue associated with commercial mortgage banking activity.

CONSOLIDATED EXPENSE REVIEW
























Noninterest Expense

Change



Change


















1Q13 vs



1Q13 vs


In millions



1Q13




4Q12




1Q12




4Q12



1Q12


Personnel


$

1,169



$

1,216



$

1,111




(4)

%



5

%


Occupancy



211




226




190




(7)

%



11

%


Equipment



183




194




175




(6)

%



5

%


Marketing



45




70




68




(36)

%



(34)

%


Other



787




1,123




911




(30)

%



(14)

%





$

2,395



$

2,829



$

2,455




(15)

%



(2)

%


Noninterest expense for the first quarter of 2013 decreased substantially by $434 million, or 15 percent, compared with the fourth quarter of 2012 reflecting declines in all reported expense categories. Several fourth quarter 2012 expenses did not recur in the first quarter of 2013. Expense related to the residential mortgage business was lower, including a decline of $76 million for foreclosure-related matters expense and the impact of a fourth quarter $45 million noncash charge for goodwill impairment. Fourth quarter charges for unamortized discounts related to redemption of trust preferred securities and merger integration costs were $70 million and $35 million, respectively. Marketing expense was lower in the first quarter of 2013 compared with the fourth quarter and incentive compensation costs declined primarily due to lower capital markets activities.

Noninterest expense for the first quarter of 2013 decreased $60 million compared with the prior year first quarter primarily driven by the impact of first quarter 2012 integration costs of $145 million partially offset by a full quarter of operating expense for the RBC Bank (USA) acquisition.

PNC is on track to reduce its full year 2013 noninterest expense from 2012 levels and achieve its $700 million continuous improvement expense savings goal for 2013.

The effective tax rate was 24.2 percent for the first quarter of 2013 compared with 22.0 percent for the fourth quarter of 2012 and 25.7 percent for the first quarter of 2012.

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $301 billion at March 31, 2013 compared with $305 billion at December 31, 2012 and $296 billion at March 31, 2012. The decline from year end was primarily due to lower interest-earning deposits with banks and investment securities. In the comparison with first quarter 2012, strong organic loan growth was partially offset by lower investment securities.

Loans

Change


Change

















3/31/13 vs


3/31/13 vs


In billions


3/31/2013


12/31/2012


3/31/2012


12/31/12


3/31/12


Commercial lending


$

110.3



$

108.9



$

100.6




1

%



10

%


Consumer lending



76.2




76.9




75.6




(1)

%



1

%


Total loans


$

186.5



$

185.8



$

176.2




.4

%



6

%

























For the quarter ended:






















Average loans


$

186.1



$

183.2



$

164.6




2

%



13

%


Total loans at March 31, 2013 increased $.7 billion compared with December 31, 2012 as loan growth slowed in the first quarter. Commercial lending increased $1.4 billion during the first quarter of 2013 as a result of specialty lending businesses including public finance, asset-based lending and real estate. Consumer lending decreased $.7 billion compared with year end as a result of lower residential real estate, credit card and education loans. First quarter 2013 average loans grew $2.9 billion over fourth quarter 2012 driven by commercial lending. Average loans in the first quarter of 2013 increased $21.5 billion compared with first quarter 2012 primarily due to organic loan growth and the full quarter impact of loans added in the RBC Bank (USA) acquisition, which closed March 2, 2012.

Investment Securities

Change


Change

















3/31/13 vs


3/31/13 vs


In billions


3/31/2013


12/31/2012


3/31/2012


12/31/12


3/31/12


At quarter end


$

59.4



$

61.4



$

64.6




(3)

%



(8)

%


Average for the quarter ended


$

58.5



$

59.4



$

61.6




(2)

%



(5)

%


Investment securities declined in all comparisons primarily as a result of prepayments and maturities. At both March 31, 2013 and December 31, 2012, the available for sale investment securities balance included a net unrealized pretax gain of $1.6 billion, representing the difference between fair value and amortized cost, compared with $.6 billion at March 31, 2012. The increase compared with first quarter 2012 was primarily due to improvement in the value of non-agency residential mortgage-backed securities and lower market interest rates.

Deposits

Change


Change

















3/31/13 vs


3/31/13 vs


In billions


3/31/2013


12/31/2012


3/31/2012


12/31/12


3/31/12


Transaction deposits


$

175.4



$

176.7



$

164.6




(1)

%



7

%


Other deposits



36.2




36.4




41.5




(1)

%



(13)

%


Total deposits


$

211.6



$

213.1



$

206.1




(1)

%



3

%



For the quarter ended:






















Average deposits


$

209.7



$

207.5



$

192.1




1

%



9

%


Total deposits at March 31, 2013 decreased $1.5 billion compared with December 31, 2012. Seasonally higher deposits at year end declined in early January 2013 as reflected in a decrease in transaction deposits of $1.3 billion from December 31, 2012. However, average deposits grew in the first quarter of 2013 compared with the fourth quarter due to growth of $3.1 billion in average transaction deposits. In the comparison with March 31, 2012, deposits grew $5.5 billion attributable to organic transaction deposit growth partially offset by a decline in retail certificates of deposit due to runoff of maturing accounts. The increase in average deposits compared with first quarter 2012 included the full quarter impact of deposits added in the RBC Bank (USA) acquisition.

Borrowed Funds

Change


Change

















3/31/13 vs


3/31/13 vs


In billions


3/31/2013


12/31/2012


3/31/2012


12/31/12


3/31/12


At quarter end


$

37.6



$

40.9



$

42.5




(8)

%



(12)

%


Average for the quarter ended


$

39.7



$

40.3



$

40.2




(1)

%



(1)

%


Borrowed funds at March 31, 2013 decreased $3.3 billion compared with December 31, 2012 primarily due to lower Federal Home Loan Bank borrowings and commercial paper balances somewhat offset by net issuance of bank notes and senior debt and subordinated debt. In the comparison with first quarter 2012, the decline in borrowed funds of $4.9 billion was attributable to lower Federal Home Loan Bank borrowings and net redemptions and maturities of bank notes and senior debt and subordinated debt.

Capital




3/31/2013*


12/31/2012


3/31/2012


Common shareholders' equity    In billions

$

36.1



$

35.4



$

33.4



Tier 1 common capital ratio



9.8

%



9.6

%



9.3

%


Tier 1 risk-based capital ratio



11.7

%



11.6

%



11.4

%


* Ratios estimated


PNC continued to improve its strong capital levels and ratios. Common shareholders' equity and Tier 1 common capital ratio increased in both comparisons due to growth in retained earnings. The increase in retained earnings compared with March 31, 2012 was partially offset by higher risk-weighted assets from loan growth. The estimated proforma Basel III Tier 1 common capital ratio was 7.9 percent at March 31, 2013 without benefit of phase-ins, based on PNC's current understanding of Basel III proposed rules, estimates of Basel II (with proposed modifications) risk-weighted assets, and application of Basel II.5 rules. See Note (e) in the Consolidated Financial Highlights under Capital Ratios.

On April 4, 2013, the PNC board of directors raised the quarterly cash dividend on common stock to 44 cents per share, an increase of 4 cents per share, or 10 percent. The dividend payment date is May 5, 2013, payable the next business day. This action is consistent with PNC's capital plan which was accepted by the Board of Governors of the Federal Reserve System in March 2013.

CREDIT QUALITY REVIEW





















Credit Quality

Change


Change





At or for the quarter ended


3/31/13 vs


3/31/13 vs


In millions


3/31/2013


12/31/2012


3/31/2012


12/31/12


3/31/12


Nonperforming loans


$

3,422


$

3,254


$

3,581



5

%



(4)

%


Nonperforming assets


$

3,927


$

3,794


$

4,361



4

%



(10)

%


Accruing loans past due 90 days or more


$

1,906


$

2,351


$

2,585



(19)

%



(26)

%


Net charge-offs


$

456


$

310


$

333



47

%



37

%


Provision for credit losses


$

236


$

318


$

185



(26)

%



28

%


Allowance for loan and lease losses


$

3,828


$

4,036


$

4,196



(5)

%



(9)

%


Overall credit quality improved during the first quarter of 2013. While credit quality metrics for the first quarter of 2013 were impacted by alignment with regulatory guidance, underlying credit quality continued to improve. Alignment with interagency supervisory guidance on practices for loans and lines of credit related to consumer lending in the first quarter of 2013 had the overall effect of accelerating charge-offs and nonaccrual classification while reducing delinquencies.

Nonperforming assets at March 31, 2013 increased $133 million compared with December 31, 2012. The increase was driven by the classification to nonperforming of $426 million primarily related to adoption of a policy to classify performing second-lien consumer loans as nonperforming where the first-lien loan is 90 days or more past due. Commercial lending nonperforming loans decreased $115 million, or 8 percent, as a result of improving credit quality. Nonperforming assets to total assets were 1.31 percent at March 31, 2013 compared with 1.24 percent at December 31, 2012 and 1.47 percent at March 31, 2012.

Overall delinquencies decreased $588 million as of March 31, 2013 compared with December 31, 2012. The decline was due in part to $395 million for alignment with regulatory guidance. A substantial portion of this decrease was reflected in accruing loans past due 90 days or more.

Net charge-offs for first quarter 2013 increased $146 million compared with fourth quarter 2