PNC Comes Up Short

| About: PNC Financial (PNC)

PNC Financial Services Group Inc.’s (PNC) third-quarter adjusted earnings of $1.56 per share were two pennies short of the Zacks Consensus Estimate of $1.58. Results also compare favorably with adjusted earnings of $1.12 in the prior-year quarter.

Adjusted earnings for the quarter leave out the gain of 62 cents on the sale of PNC Global Investment Servicing and integration costs of 11 cents. Adjusted results for the year-ago quarter leave out integration costs of 12 cents. Considering these non-recurring items, earnings came in at $2.07 compared with $1.00 in the year-ago quarter.

Results for the reported quarter were primarily affected by lower revenue due to a challenging operating environment. However, a substantial decrease in the provision for credit losses, lower non-interest expenseexpenses and improved credit quality were the upside.

Quarter in Detail
Total revenue came in at $3.6 billion, down 7% from $3.9 billion in the prior-year quarter. Revenue missed the Zacks Consensus Estimate of $3.8 billion.

The provision for credit losses during the quarter was $486 million, down 47% from $914 million in the prior-year quarter. This reflects PNC’s return to a moderate risk profile.

Net interest income for the reported quarter was $2.2 billion, down 9% sequentially but almost flat compared with the year-ago quarter. Net interest margin decreased 39 basis points (bps) sequentially, but increased 20 bps over the year-ago quarter to 3.96%. The sequential decrease in net interest income and margin was primarily due to lower purchase accounting accretion, loan sales, continued soft loan demand and the low interest rate environment. The year-over-year increase primarily resulted from a decrease in the cost of deposits of 36 bps.

Non-interest income decreased 15% year over year to $1.4 billion. The decrease was primarily due to the lower overdraft charges, reduction in value of commercial mortgage servicing rights and prior-year quarter’s gains on sales of commercial loans.

Non-interest expense for the reported quarter decreased 3% year over year to $2.2 billion. The decrease was primarily due to higher acquisition-related cost savings. Annualized acquisition cost savings for the reported quarter were $1.7 billion. Integration costs for the reported quarter were $96 million, compared with $89 million in the year-ago quarter.

Credit Quality
Credit quality was mixed during the reported quarter. Non-performing assets decreased 4% sequentially to $5.7 billion. The ratio of non-performing assets to total assets decreased 8 bps sequentially, but increased 10 bps year over year to 2.18%. Annualized net charge-offs decreased 57 bps sequentially but increased 2 bps year over year to 1.61%.

Capital Level
At September 30, 2010, PNC Financial’s Tier 1 common capital ratio was an estimated 9.6%, up from 8.3% as on June 30, 2010 and 5.5% as on September 30, 2009. The Tier 1 risk-based capital ratio increased to an estimated 11.9% from 10.7% at the end of the prior quarter and 10.9% at the end of the prior-year quarter. The increase in the ratios was primarily due to retention of earnings, the sale of PNC Global Investment Servicing, and lower risk-weighted assets.

PNC Financial continues to strengthen its balance sheet with a focus on risk and expense management which should propel it forward. Moreover, benefits from the National City acquisition continue to exceed the company's expectations. Further, the sluggish economic recovery might deter the improvement in credit metrics.

PNC Financial currently retains its Zacks #3 rank, which translates into a short-term “Hold’ rating. We also maintain a long-term “Neutral” recommendation on the stock.