PNC Financial Services ( PNC) shares fell nearly 8% Thursday, after it reported second-quarter profits that fell 87% from swelling credit costs coming from its recent acquisition of National City and the weakening economy. The Pittsburgh-based financial company said net income applicable to shareholders was $65 million, or 12 cents a share, vs. $505 million, or $1.45 a share in the year-earlier period. Revenue nearly doubled to $3.98 billion for the quarter. PNC's profit was affected by a number of special items in the quarter. The company, like other banks, was required to pay a special assessment to the Federal Deposit Insurance Corp. of 19 cents a share. It also had integration costs totaling 20 cents a share from its Dec. 31 purchase of National City. Analysts, on average, had predicted the company's operating earnings to be 45 cents a share, according to Thomson Reuters. Shares fell as low as $34.51, but recently were down 5.4% to $35.38. Additionally, PNC said that it paid preferred dividends of $95 million, or 21 cents a share, related to $7.6 billion the company received from the federal government through the Troubled Asset Relief Program. PNC has yet to repay the TARP funds. PNC in May raised $624 million in new common equity through the issuance of 15 million shares of common stock. It plans to redeem the preferred shares issued under TARP "when appropriate in a shareholder-friendly manner, subject to approval by its banking regulators," the company said.
"Our businesses performed well in the second quarter given the extremely challenging economic environment," Chairman and CEO James E. Rohr said in a statement, noting that sales above expectations and touting the company's ability to add clients and customers. "We see opportunities for further market share growth through the successful implementation of our business model across our expanded franchise," he said. Still credit costs rose significantly in the quarter. The $280 billion-asset company took a $1.08 billion provision compared to $880 million in the first quarter. PNC said that, as expected, credit quality continued to deteriorate during the quarter reflecting a weakened economy, but at a slower rate. PNC increased its loan loss reserves beyond net charge-offs by $292 million. It increased the total allowance for loan and lease losses to total loans to 2.77%, up from 2.51% in the previous quarter. The company's nonperforming loans to total loans rose to 2.44% from 1.73% as of March 31. Net charge-offs to average loans increased to 1.89% for the second quarter from 1.01% from March 31. The increase in net charge-offs was consistent with $2.8 billion of reserves for expected losses PNC established for National City loans at the time of purchase, it said. PNC's nonperforming asset growth slowed during the second quarter, rising 29% as opposed to 61% in the quarter before, but FBR Capital Markets analyst Paul Miller noted that "the dollar increase is very significant and percentage growth will become meaningless as NPA balances continue increasing."
"We believe PNC loss acceleration will be later cycle due to its higher exposure to commercial loan types than peers, therefore, we expect
net charge-off pressures to continue gaining momentum as commercial credit comes under greater pressures," he writes in a note. Fifth Third Bancorp ( FITB) on Thursday reported a profit of $856 million, or $1.15 per share, due to a large gain, but said credit costs soared in the three months ending June 30. On Wednesday, a host of regional banks including US Bancorp ( USB), SunTrust Banks ( STI) and KeyCorp ( KEY) also reported rising nonperforming assets and continued stress in their loan portfolios. Commercial loans are increasingly becoming a problem for many regional banks as the economy continues to suffer. Still, many banks said they saw signs of improvement regarding loans very early in the delinquency stage. "We have seen improvements in delinquency buckets pretty much across the board with some companies attributing it to seasonality and others attributing it to fundamental improvements," Miller writes. "The jury is still out in our opinion and we will look to unemployment trends and numbers in the second half of this year before we get excited; however, we believe a clear bifurcation of opinion is forming on the Street surrounding credit."