PNC Reports First Quarter Net Income of $811 Million and $1.44 Diluted EPS Growth in Customers, Loans and Revenue

RBC Bank (USA): Closed, Converted and Accretive; Integration Costs of $.18 per Diluted Common Share

PITTSBURGH, April 18, 2012 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported net income of $811 million, or $1.44 per diluted common share, for the first quarter of 2012 compared with net income of $493 million, or $.85 per diluted common share, for the fourth quarter of 2011 and $832 million, or $1.57 per diluted common share, for the first quarter of 2011.

"PNC had excellent results for the first quarter reflecting strong performance across our markets," said James E. Rohr, chairman and chief executive officer. "Our success in growing revenue is a direct result of our success in growing customers and loans. With the completion of our acquisition of RBC Bank (USA), we plan to leverage our brand and innovative product set to grow market share in the southeast. We are confident that our strong capital levels and our ability to execute will lead to another good year in 2012."

Income Statement Highlights

  • Strong results for the first quarter reflected positive operating leverage compared with fourth quarter 2011 due to strong revenue growth and well-managed expenses.
  • Net interest income of $2.3 billion for the first quarter increased 4 percent compared with the fourth quarter of 2011 driven by loans from the RBC Bank (USA) acquisition, loan growth and lower funding costs.
  • Noninterest income of $1.4 billion for the first quarter increased 7 percent over fourth quarter 2011 and included higher residential mortgage and asset management revenue.
  • Provision for credit losses was essentially unchanged at $185 million for the first quarter compared with fourth quarter 2011 and overall credit quality remained stable.
  • Noninterest expense of $2.5 billion for the first quarter of 2012 decreased $264 million compared with the fourth quarter. First quarter included integration costs of $145 million, additions to legal reserves of $72 million, and operating expense of $40 million for the RBC Bank (USA) acquisition. Fourth quarter 2011 included $240 million of residential mortgage foreclosure-related expense and a noncash charge of $198 million related to redemption of trust preferred securities.

RBC Bank (USA) – Closed, Converted and Accretive

  • PNC completed the acquisition of RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada, on March 2, 2012. PNC now has 2,900 branches across 17 states and the District of Columbia.
    • PNC successfully converted 900,000 customers and over 400 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina.
    • Purchase price was below tangible book value and consideration was paid in cash.
    • The acquisition was accretive to first quarter 2012 earnings, excluding integration costs.

Balance Sheet Highlights

  • PNC continued to expand customer relationships and focus on quality growth.
    • Retail banking checking relationships increased 517,000 in the first quarter, including 460,000 from the RBC Bank (USA) acquisition.
  • Loans increased $17 billion during the first quarter to $176 billion at March 31, 2012 compared with year end 2011.
    • Loans of approximately $15 billion were added in the RBC Bank (USA) acquisition.
    • Commercial lending grew organically by approximately 4 percent reflecting PNC's focus on long-term, broad-based client relationships.
  • Total deposits were $206 billion at March 31, 2012 compared with $188 billion at December 31, 2011. 
    • Deposits of approximately $18 billion were added in the RBC Bank (USA) acquisition.
    • Transaction deposits also grew organically during the first quarter and increased to $165 billion, or 80 percent of deposits, at March 31, 2012.
  • PNC's balance sheet remained core funded with a loans to deposits ratio of 85 percent at March 31, 2012 and reflected a moderate risk profile and strong liquidity position.
  • PNC maintained strong capital levels with a Tier 1 common capital ratio of an estimated 9.3 percent at March 31, 2012 and 10.3 percent at December 31, 2011. The impact on the ratio of the acquisition of RBC Bank (USA) was a decrease of approximately 1.2 percentage points.
  • In April 2012 the PNC board of directors raised the quarterly cash dividend on common stock to 40 cents per share, an increase of 5 cents per share, or 14 percent. PNC plans to purchase up to $250 million of common stock under its existing 25 million share repurchase program in open market or privately negotiated transactions during the remainder of 2012.

Earnings Summary


In millions, except per share data



1Q12




4Q11




1Q11



Net income


$

811



$

493



$

832



Diluted earnings per common share


$

1.44



$

.85



$

1.57



Average diluted common shares outstanding



529




526




526



Return on average assets



1.16

%



.72

%



1.29

%


Return on average common equity



9.41

%



5.70

%



11.12

%


Book value per common share  Period end


$

63.26



$

61.52



$

58.01



Cash dividends declared per common share


$

.35



$

.35



$

.10



First quarter 2012 net income of $811 million, or $1.44 per diluted common share, included $145 million pretax, or $.18 per diluted common share, for integration costs and $38 million pretax, or $.05 per diluted common share, of residential mortgage foreclosure-related expense. Fourth quarter 2011 net income of $493 million, or $.85 per diluted common share, included $.30 per diluted common share of residential mortgage foreclosure-related expense, a noncash charge of $.24 per diluted common share related to redemption of trust preferred securities and $.04 per diluted common share for integration costs.

The Consolidated Financial Highlights accompanying this news release include additional information regarding residential mortgage foreclosure-related expense, integration costs and preferred redemptions and include reconciliations of reported to non-GAAP financial measures, including a reconciliation of business segment income to net income. Information in the financial tables included in this news release is unaudited. See the notes in the Consolidated Financial Highlights. 

CONSOLIDATED REVENUE REVIEW























Revenue

Change



Change

















1Q12 vs



1Q12 vs


In millions



1Q12




4Q11




1Q11




4Q11



1Q11


Net interest income


$

2,291



$

2,199



$

2,176




4

%



5

%


Noninterest income



1,441




1,350




1,455




7

%



(1)

%


Total revenue


$

3,732



$

3,549



$

3,631




5

%



3

%


Total revenue for the first quarter of 2012 increased compared with the fourth and first quarters of 2011. Net interest income and noninterest income both grew in the linked quarter comparison. Growth in net interest income compared with first quarter 2011 was partially offset by a decrease in noninterest income primarily as a result of the regulatory impact of lower interchange fees on debit card transactions.

Net interest income increased in both periods of comparison primarily due to loans from the RBC Bank (USA) acquisition, organic loan growth and lower funding costs. The net interest margin was 3.90 percent for the first quarter of 2012 compared with 3.86 percent for the fourth quarter of 2011 and 3.94 percent for the first quarter of 2011.

Noninterest Income

Change



Change


















1Q12  vs



1Q12  vs


In millions



1Q12




4Q11




1Q11




4Q11



1Q11


Asset management


$

284



$

250



$

263




14

%



8

%


Consumer services



264




269




311




(2)

%



(15)

%


Corporate services



232




266




217




(13)

%



7

%


Residential mortgage



230




157




195




46

%



18

%


Service charges on deposits



127




140




123




(9)

%



3

%



Client fee income



1,137




1,082




1,109




5

%



3

%


Net gains on sales of securities



57




62




37




(8)

%



54

%


Net other-than-temporary impairments



(38)




(44)




(34)




NM




NM



Other



285




250




343




14

%



(17)

%





$

1,441



$

1,350



$

1,455




7

%



(1)

%


Client fee income for the first quarter of 2012 grew in comparison with both the fourth and first quarters of 2011. Asset management fees increased $34 million compared with the fourth quarter as a result of improved equity markets. Corporate service fees decreased $34 million in the linked quarter comparison primarily due to lower commercial mortgage banking revenue and lower merger and acquisition advisory fees. Residential mortgage revenue increased $73 million compared with the fourth quarter from higher net hedging gains on mortgage servicing rights and an increase in loan sales revenue driven by higher loan origination volume. Service charges on deposits declined $13 million and consumer service fees decreased $5 million from fourth quarter 2011 levels primarily due to seasonally lower transaction volumes. Other noninterest income increased $35 million compared with the linked quarter largely attributable to higher revenue from private and other equity investments.

Noninterest income for the first quarter of 2012 decreased nominally from first quarter 2011. Increases were reflected in higher residential mortgage revenue from higher loan sales revenue, higher asset management fees from improved equity markets, and an increase in corporate service fees from higher merger and acquisition advisory fees and commercial mortgage banking revenue. These increases were offset by a decline in other income including a decrease in revenue from private and other equity investments and lower gains on loan sales, and by lower consumer service fees reflecting the regulatory impact of lower interchange fees on debit card transactions.

CONSOLIDATED EXPENSE REVIEW
























Noninterest Expense

Change



Change


















1Q12 vs



1Q12 vs


In millions



1Q12




4Q11




1Q11




4Q11



1Q11


Personnel


$

1,111



$

1,052



$

989




6

%



12

%


Occupancy



190




198




193




(4)

%



(2)

%


Equipment



175




177




167




(1)

%



5

%


Marketing



68




74




40




(8)

%



70

%


Other



911




1,218




681




(25)

%



34

%





$

2,455



$

2,719



$

2,070




(10)

%



19

%


Noninterest expense for first quarter 2012 decreased $264 million compared with fourth quarter 2011. The first quarter included integration costs of $145 million, additions to legal reserves of $72 million, operating expense of $40 million for the RBC Bank (USA) acquisition and $38 million of expense for residential mortgage foreclosure-related matters. Fourth quarter 2011 included $240 million of expense for residential mortgage foreclosure-related matters and a noncash charge of $198 million for the unamortized discount related to redemption of trust preferred securities.

Noninterest expense increased $385 million in the comparison with first quarter 2011 primarily driven by higher integration costs, additions to legal reserves, operating expense for the RBC Bank (USA) acquisition and an increase in expense for residential mortgage foreclosure-related matters.

The effective tax rate was 25.7 percent for the first quarter of 2012 compared with 23.0 percent for the fourth quarter of 2011 and 27.0 percent for the first quarter of 2011. The increase in the first quarter 2012 rate compared with the fourth quarter 2011 rate was due to the impact of higher pretax income.

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $296 billion at March 31, 2012 compared with $271 billion at December 31, 2011 and $259 billion at March 31, 2011. The increase in both comparisons reflected the addition of assets from the RBC Bank (USA) acquisition, loan growth and higher investment securities. 

Loans

Change


Change

















3/31/12

vs


3/31/12

vs


In billions


3/31/2012


12/31/2011


3/31/2011


12/31/11


3/31/11


Commercial lending


$

100.6



$

88.3



$

80.0




14

%



26

%


Consumer lending



75.6




70.7




69.4




7

%



9

%


Total loans


$

176.2



$

159.0



$

149.4




11

%



18

%


Commercial lending increased $12.3 billion during the first quarter of 2012 as a result of approximately $9 billion of loans added in the RBC Bank (USA) acquisition and growth in new and existing client activity in corporate banking, asset-based lending and real estate finance. Consumer lending increased $4.9 billion linked quarter due to loans added in the RBC Bank (USA) acquisition. Total loan originations and new commitments and renewals were $35 billion for the first quarter of 2012, including $1.1 billion of small business loans, compared with $41 billion for the fourth quarter of 2011 and $28 billion for the first quarter of 2011. Average loans of $164.6 billion in the first quarter of 2012 increased $8.4 billion, or 5 percent, compared with the fourth quarter, reflecting the impact of approximately $5 billion of average loans from the March 2, 2012 acquisition of RBC Bank (USA) and organic loan growth. Average commercial loans grew $5.8 billion, or 9 percent, and average consumer loans increased $1.6 billion, or 3 percent. In the comparison with first quarter 2011, average loans increased $14.4 billion, or 10 percent. Average commercial loans grew $13.0 billion, or 23 percent, and average consumer loans increased $2.7 billion, or 5 percent, partially offset by declines in average commercial real estate and residential real estate loans.

Investment securities were $64.6 billion at March 31, 2012 compared with $60.6 billion at December 31, 2011 and $61.0 billion at March 31, 2011. The increases reflected higher agency residential mortgage-backed securities from net purchase activity and asset-backed and other debt securities added in the RBC Bank (USA) acquisition. Average investment securities were $61.6 billion for the first quarter of 2012, an increase of $1.2 billion compared with the fourth quarter and a decrease of $.6 billion compared with the first quarter of 2011. At March 31, 2012, the available for sale investment securities balance included a net unrealized pretax gain of $.6 billion representing the difference between fair value and amortized cost compared with a net unrealized pretax loss of $40 million at December 31, 2011 and a net unrealized pretax loss of $.6 billion at March 31, 2011. The improvement compared with year end was mainly driven by higher valuations of non-agency residential mortgage-backed securities. The improvement over first quarter 2011 was primarily due to lower market interest rates. 

Other assets of $25.1 billion as of March 31, 2012 increased $2.4 billion compared with December 31, 2011 and $3.9 billion compared with March 31, 2011 largely attributable to assets acquired in the RBC Bank (USA) transaction.

Deposits

Change


Change

















3/31/12

vs


3/31/12

vs


In billions


3/31/2012


12/31/2011


3/31/2011


12/31/11


3/31/11


Transaction deposits


$

164.6



$

147.6



$

134.5




12

%



22

%


Other deposits



41.5




40.4




47.5




3

%



(13)

%


Total deposits


$

206.1



$

188.0



$

182.0




10

%



13

%


Total deposits at March 31, 2012 increased $18.1 billion compared with December 31, 2011 and $24.1 billion compared with March 31, 2011. The increases were due to deposits added in the RBC Bank (USA) acquisition and customer growth in transaction deposits partially offset by the continued decline of higher rate retail certificates of deposit. Average deposits were $192.1 billion for the first quarter of 2012, an increase of $5.6 billion over the fourth quarter of 2011 and $11.3 billion over first quarter 2011. Average transaction deposits increased $6.5 billion, or 4 percent, in the linked quarter comparison, and $18.0 billion, or 14 percent, compared with first quarter 2011. The growth additionally reflects customer preferences for liquidity in this prolonged period of low interest rates.

Borrowed funds were $42.5 billion at March 31, 2012, $36.7 billion at December 31, 2011 and $35.0 billion at March 31, 2011. The increase in borrowed funds was primarily to fund loan growth and for liquidity purposes. In the linked quarter comparison Federal Home Loan Bank borrowings, commercial paper and federal funds purchased and repurchase agreements increased. Borrowed funds increased compared with first quarter 2011 primarily due to higher Federal Home Loan Bank borrowings and commercial paper. Average borrowed funds were $40.2 billion for the first quarter of 2012, $35.7 billion for the fourth quarter of 2011 and $38.4 billion for first quarter 2011. In November 2011 PNC redeemed $750 million of 6.625 percent trust preferred securities issued by National City Capital Trust II. The redemption resulted in a fourth quarter 2011 noncash charge of $198 million for the unamortized discount. In March 2012 PNC announced the redemption on April 25, 2012 of $300 million of 6.125 percent trust preferred securities issued by PNC Capital Trust D and $6 million of 10.18 percent capital securities issued by Yardville Capital Trust III. Additionally, on April 10, 2012 PNC announced the redemption on May 25, 2012 of $500 million of 6.625 percent trust preferred securities issued by National City Capital Trust III. A second quarter 2012 noncash charge of approximately $130 million for the unamortized discounts is anticipated. These actions to redeem trust preferred securities were consistent with PNC's capital plan.

Capital




3/31/2012*


12/31/2011


3/31/2011


Common shareholders' equity    In billions

$

33.4



$

32.4



$

30.5



Tier 1 common capital ratio



9.3

%



10.3

%



10.3

%


Tier 1 risk-based capital ratio



11.4

%



12.6

%



12.6

%


* Ratios estimated


PNC continued to maintain strong capital levels and ratios. The increase in common shareholders' equity was primarily attributable to the retention of earnings. The Tier 1 common and Tier 1 risk-based capital ratios decreased in the comparisons due to higher risk-weighted assets and goodwill associated with the RBC Bank (USA) acquisition and higher risk-weighted assets from loan growth partially offset by retained earnings. The impact of the RBC Bank (USA) acquisition on the Tier 1 common ratio was a decrease of approximately 1.2 percentage points. The decline in the Tier 1 risk-based capital ratio compared with March 31, 2011 was also impacted by the redemption of trust preferred securities in November 2011 offset by the issuance of preferred stock in July 2011.

On April 5, 2012 the PNC board of directors raised the quarterly cash dividend on common stock to 40 cents per share, an increase of 5 cents per share, or 14 percent. The dividend payment date is May 5, 2012. PNC plans to purchase up to $250 million of common stock under its existing 25 million share repurchase program in open market or privately negotiated transactions during the remainder of 2012. These actions are consistent with PNC's capital plan.

CREDIT QUALITY REVIEW





















Credit Quality

Change


Change





At or for the quarter ended


3/31/12

vs


3/31/12

vs


In millions


3/31/2012


12/31/2011


3/31/2011


12/31/11


3/31/11


Nonperforming loans


$

3,638


$

3,560


$

4,308



2

%



(16)

%


Nonperforming assets


$

4,418


$

4,156


$

4,940



6

%



(11)

%


Accruing loans past due 90 days or more


$

2,622


$

2,973


$

2,645



(12)

%



(1)

%


Net charge-offs


$

333


$

327


$

533



2

%



(38)

%


Provision for credit losses


$

185


$

190


$

421



(3)

%



(56)

%


Allowance for loan and lease losses


$

4,196


$

4,347


$

4,759



(3)

%



(12)

%


Overall credit quality remained stable during the first quarter of 2012 compared with year end. The increase in nonperforming assets at March 31, 2012 compared with year end primarily was attributable to other real estate owned added in the acquisition of RBC Bank (USA) and higher nonperforming home equity loans from a change in policy which places home equity loans on nonaccrual status when past due 90 days or more compared with 180 days under the prior policy. These increases were partially offset by a decline in nonperforming commercial real estate and commercial loans. The decline in nonperforming assets from first quarter 2011 reflected lower commercial real estate and commercial nonperforming loans partially offset by other real estate owned added in the RBC Bank (USA) acquisition and the impact of the home equity loan policy change. Nonperforming assets to total assets were 1.49 percent at March 31, 2012 compared with 1.53 percent at December 31, 2011 and 1.90 percent at March 31, 2011.

Overall delinquencies decreased by $245 million, or 5 percent, as of March 31, 2012 compared with year end. Accruing loans past due 90 days or more declined $351 million due to the change in policy for home equity loans and a decrease in past due government insured loans. Accruing loans past due 30 to 59 days increased $130 million in the linked quarter comparison due to an increase in commercial, residential real estate and commercial real estate loans primarily related to the RBC Bank (USA) acquisition.

Net charge-offs for the first quarter of 2012 were .81 percent of average loans on an annualized basis compared with .83 percent for the fourth quarter of 2011 and 1.44 percent for the first quarter of 2011. Net charge-offs remained relatively stable in the linked quarter comparison as increases in home equity and commercial real estate loan net charge-offs were substantially offset by a decline in commercial loan net charge-offs. Net charge-offs declined in the comparison with first quarter 2011 primarily due to lower commercial real estate, commercial and residential real estate loan net charge-offs. The decline in the provision for credit losses compared with first quarter 2011 was driven by overall credit quality improvement and continued actions to reduce exposure levels.

The allowance for loan and lease losses to total loans was 2.38 percent at March 31, 2012, 2.73 percent at December 31, 2011 and 3.19 percent at March 31, 2011. The decrease in the allowance compared with first quarter 2011 resulted from improved credit quality. The allowance to nonperforming loans was 115 percent at March 31, 2012 compared with 122 percent at December 31, 2011 and 110 percent at March 31, 2011.

BUSINESS SEGMENT RESULTS
















Business Segment Income (Loss)


In millions



1Q12




4Q11




1Q11



Retail Banking


$

50



$

(28)



$

(18)



Corporate & Institutional Banking



470




576




432



Asset Management Group



28




17




43



Residential Mortgage Banking



61




(61)




71



Non-Strategic Assets Portfolio



71




(2)




25



Other, including BlackRock



131




(9)




279



Net income


$

811



$

493



$

832


















See accompanying notes in Consolidated Financial Highlights