PNC Lays Mortgage Egg: Financial Loser

NEW YORK (TheStreet) -- PNC Financial Services Group (PNC) was the loser among the largest U.S. financial names on Tuesday, with shares pulling back over 1% to close at $57.50.

The broad indexes saw gains of over 1%, despite continued fears over the stability of the eurozone, with yields on Spain's 10-year bond soaring to a record 6.81% earlier in the day, despite an agreement over the weekend with eurozone leaders for a $125 bailout of the country's beleaguered banking sector. Spain's 10-year yields later fell to 6.65%.

Investors are also worried over Greece's elections this weekend, with a victory of parties in favor of the country's previous austerity agreements tied to a eurozone bailout hardly assured.

U.S. banks showed broad strength, with the KBW Bank Index (I:BKX) rising over 2% to close at 43.49, with all 24 index components rising for the session, except for PNC.

PNC's shares have now risen 1% year-to-date, after a 3% decline during 2011.

The shares trade for 1.3 times tangible book value, according to Thomson Reuters Bank Insight, and for 12 times the consensus 2013 earnings estimate of $4.84, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $6.20.

PNC disclosed in a filing that it was experiencing "elevated levels of GSE-related repurchase demands" during the second quarter, primarily for mortgage loans originated from 2005 to 2008.

The GSEs are the government-sponsored enterprises that buy and securitize mortgages, including Fannie Mae (FNMA) and Freddie Mac (FMCC), which were taken under government conservatorship in September 2008.

PNC estimated its new mortgage repurchase claims for the second quarter would total $288 million in the second quarter, increasing from $213 million during the first quarter and average quarterly putback demands of $193 million during 2011. The company said that "As a result, PNC expects to add residential mortgage repurchase reserves of approximately $350 million in 2Q12."

PNC CEO James Rohr said during a presentation at the Morgan Stanley Financials Conference that the loans underlying the putback demands "came with the National City acquisition" which was completed in October 2008, and that one of the GSEs has "become more aggressive in its put-back efforts recently, and has been requesting and reviewing increasing [numbers] of files over the recent months, particular those that [defaulted] more than two years ago," according to a transcript provided by Thomson Reuters.

Rohr added that "questions regarding property values and the accuracy of appraisals have been common reasons cited for the repurchase demands," and that while the company was continuing "to research and assess the validity of these asserted claims," it would increase its mortgage repurchase reserves by the reported $350 million, "or $0.43 per diluted share in the second quarter of 2012."

The CEO said that "barring some significant change in the future behavior and the demand patterns of the investors, we believe that we will be appropriately reserved for this change in the trend."

PNC's outlook for all of 2012 includes a percentage increase in loans on the balance sheet in the "mid to high teens," along with increases in total revenue and expenses in the "high single digits," with an "improving" loan loss provision.

Atlantic Equities analyst Richard State later on Tuesday lowered his second-quarter earnings estimate for PNC by 43 cents to $1.11. The analyst now estimates PNC will earn $5.59 a share this year, followed by 2013 EPS of $7.42.

The analyst reiterated his "Overweight" rating for PNC, with a $75 price target, saying that "we believe other banks have also seen more demands from the GSE over the prior six months but we think PNC may be relatively unique in making such a large one off adjustment to its reserve," adding that "this could be due to under reserving on the part of PNC in the past."

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