PNC Financial Services Group Inc.’s (PNC) first-quarter 2011 adjusted earnings of $ 1.57 per share were ahead of the Zacks Consensus Estimate of $ 1.37.
Results also compared favorably with adjusted earnings of 66 cents per share in the prior-year quarter. Consequently, reported net income increased 24% year over year to $ 832 million.
However, earnings per share of 66 cents in the first quarter 2010 included a reduction of 50 cents per share related to the redemption of TARP preferred shares.
A substantial contraction in the provision for credit losses, lower non-interest expenses, a strong balance sheet and improved credit quality were attributed to the results. However, revenues were lower due to a challenging operating environment.
Total revenue came in at $ 3.63 billion, down 3.5% from $ 3.76 billion in the prior-year quarter, while slightly exceeding the Zacks Consensus Estimate of $ 3.58 billion. The drop was due to lower net interest income.
Net interest income for the reported quarter was $ 2.18 billion, down 1.1% sequentially and 8.5% year over year. Net interest margin climbed 1 basis point sequentially but dipped 30 basis points year-over-year to 3.94%. The decrease in net interest income and margin was attributed to lower purchase accounting accretion, continued soft loan demand and the low interest rate environment, which were partially offset by lower funding costs.
Non-interest income decreased 14.5% sequentially, but edged up 5.1% year over year to $ 1.46 billion. In the reported quarter, non-interest income included a gain of $ 160 million on 7.5 million BlackRock Inc. (BLK) shares sold by PNC Financial as part of BlackRock’s secondary common stock offering.
Additionally, the decline could be attributed to higher residential mortgage fees, higher net gains on sales of securities net of other-than-temporary impairments and a decrease in repurchase reserves partially offset by lower corporate service fees and a decline in service charges on deposits.
Non-interest expense for the reported quarter decreased 11.5% sequentially and 2.0% year over year to $ 2.07 billion. The sequential decline was seen primarily due to disciplined expense management and elevated fourth quarter expense levels due to higher residential mortgage expenses principally related to foreclosure activities, the impact of integration costs and compensation-related costs.
These declines were partially offset by a reversal of a portion of an indemnification liability for certain Visa Inc. (V) litigation of $ 38 million in the reported quarter, compared with $ 76 million in prior quarter as well as investments in the businesses. The year-over-year decline resulted from lower integration costs and reversal of a portion of an indemnification liability in the reported quarter partially offset by investments in the businesses.
Credit quality significantly improved in the quarter. Non-performing assets decreased 20% year over year to $ 5.3 billion, mainly aided by lower commercial real estate non-performing loans and lower residential real estate non-performing loans. The ratio of non-performing assets to total assets decreased 43 basis points year over year to 2.03%.
Net charge-offs plunged $ 158 million year over year to $ 533 million in the reported quarter. The provision for credit losses during the quarter was $ 421 million, down 44% from $ 751 billion in the prior-year quarter, principally driven by overall credit quality improvement during 2010 and measures to reduce exposure levels. This reflects PNC Financial’s return to a moderate risk profile.
As of March 31, 2011, PNC’s Tier 1 common capital ratio was an estimated 10.3%, up from 9.8% as on December 31, 2010 and 7.9% as on March 31, 2010. The Tier 1 risk-based capital ratio increased to an estimated 12.6% from 12.1% at the end of the prior quarter and 10.3% at the end of the prior-year quarter. The increase in the ratios was primarily due to retention of earnings and lower risk-weighted assets.
Total assets under administration increased to $ 219 billion at the end of the reported quarter from $ 212 billion at the end of prior quarter and $ 209 billion at the end of year-ago quarter.
Capital Deployment Update
On April 7, 2011, the Board of PNC declared a 250% increase in quarterly cash dividend and its intention to buy back up to $ 500 million of common stock during the remainder of 2011, following the approval from Federal regulators under the Supervisory Capital Assessment Program.
The company will now pay a quarterly cash dividend of 35 cents per share on the common stock, up 25 cents per share from 10 cents paid in the prior quarter. The new dividend is payable on May 5, to shareholders of record as on April 18, 2011.
The share buyback would take place under its existing 25 million share repurchase program in the open market or through privately negotiated transactions. Currently, the company has 24.7 million shares remaining. It has been in effect since October 4, 2007, and has no expiry date. Additionally, PNC’s Board of Directors declared a quarterly cash dividend on Series B, K and L preferred stock. Its capital deployment efforts justify the company’s capital strength and its commitment to return value to shareholders.
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