PNC Financial's Profit Drops 43%

Earnings get hit by the bank's settlement with prosecutors over flawed accounting for bad loans.
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Pittsburgh-based

PNC Financial Services

(PNC) - Get Report

reported a 43% decline in second-quarter profit, due partly to the bank's settlement with federal prosecutors over its flawed accounting treatment for some bad loans.

In the quarter, PNC earned $184 million, or 65 cents share, compared with $320 million, or $1.12 a share, a year ago.

The regional lender's earnings were weighed down by its $120 million settlement earlier this year with the Department of Justice. The settlement, which stems from the bank's improper transfer of more than $700 million in bad loans to an off balance sheet venture, reduced PNC's earnings by 31 cents a share.

Excluding the settlement cost, PNC earned 96 cents a share on an operating basis, 3 cents better than the Thomson First Call estimate of 93 cents a share.

With the government settlement out of the way, many banking industry observers consider PNC a potential acquisition target for a bigger bank looking to increase its retail presence in Pennsylvania and New Jersey.

One thing that could fuel buyout speculation is the fact that total revenue was down 9% at PNC on a year-over-year basis to $1.3 billion and was unchanged essentially from the first quarter.

The bank was hurt by low interest rates, which cut into the profitability of its lending operation. Net interest income in the quarter was $523 million, compared with $558 million a year ago. The bank's net interest margin -- a ratio that measures the profitability of a bank's lending operation -- declined to 3.91% from 3.99%.

This year many regional bankers are seeing their operating margins squeezed by low interest rates. That's because the spread is narrowing for banks on their own borrowing costs versus the interest payments they make to depositors.

The good news for PNC was that the level of nonperforming, or overdue, loans in its portfolio declined from the end of the first quarter and was flat compared to a year ago. At quarter's end, the bank listed $327 million in loans as nonperforming, compared to $335 million at the end of the first quarter.