Bank Strategy Analysis - PNC Bank

PITTSBURGH NATIONAL

CORPORATION BANK STRATEGY

ANALYSIS

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FIN-6246 Financial Markets and Institutions Project

Contents Bank Strategy Analysis ...................................................................... Error! Bookmark not defined.

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Financial Performance 2023 .............................................................. Error! Bookmark not defined.

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Interest Rate Risk Profile ................................................................... Error! Bookmark not defined.

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Current Position and Future Outlook ................................................ Error! Bookmark not defined.

Management and Governance .......................................................... Error! Bookmark not defined.

Ownership and Control ..................................................................... Error! Bookmark not defined.

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Overview I. Bank Strategy Analysis Process

Assessing the fundamental drivers of a bank’s growth and value involves an in-depth evaluation of a bank’s business model and financial performance with emphasis on the balance sheet and income statement, as these key reports depict a financial representation of a bank executing its business. This strategy analysis of Pittsburgh National Corporation (PNC) Bank, herein referred to as “the Bank” includes:

(1) An analysis of the Bank’s risk profile that includes an assessment of the Bank’s compliance with regulatory requirements, as well as a consideration of the composition of the balance sheet for certain asset/liability classes and an identification of their unique characteristics and associated risks,

(2) Understanding the management and governance, and (3) An evaluation of the Bank’s financial performance and standing relative to its past

performance and peer group in terms of certain key financial metrics and ratios, and stock performance

II. Summary The balance sheet illustrates the economic quantification of the execution of the various lines of business within the Bank. PNC is the sixth largest deposit base in the United States and operates in both physical locations and online with a national bank charter and footprint. It operates three primary lines of business: Retail Banking, Corporate & Institutional Banking, and the Asset Management Group. Though not a line of business, the Bank’s Capital Markets and Treasury departments enter into: (i) purchase and sale transactions on behalf of the business lines; and (ii) hedging and other balance sheet management transactions to manage and mitigate risk (e.g., interest rate risk, price (market) risk, and liquidity risk).

The Bank is heavily engaged in both commercial and mortgage banking activities and generates a significant portion of its deposits from customers both online and through its expansive branch network. While core-deposits are a relatively stable source of funding, PNC’s business model results in unique inherent and residual risks associated with the Bank’s core business activities, principally related to credit, interest rate, liquidity, and price risk.

The primary credit risk associated with both commercial and mortgage lending is that a borrower or counterparty will be unable to repay their loan. From an interest rate risk perspective, the economically sensitive nature of bank lending activities may generate volatility in earnings, as both production volume and margins vary significantly with interest rates. Mortgage assets contain a certain portion of prepayment risk, which is due to the borrower’s option (right) to prepay a loan. This creates volatility in the duration of these assets. Additionally, retail depositors acquired through the internet tend to be more sensitive to changes in interest rates, thus making them more difficult to both attract and retain. The cyclical nature of mortgage banking can cause certain assets like Held-For-Sale (HFS) loans to experience large swings in volume. Additionally, the need to fund these assets with short-term wholesale liabilities draws on the Bank’s available liquidity. The credit quality of the loan portfolio overall will further impact the Bank’s asset-based liquidity sources, as well as the capacity for other

sources of funding. Finally, mortgage servicing rights (MSR) and certain securities are highly sensitive to changes in interest rates and are a significant source of price risk.

Managing the balance sheet of a financial institution is a complex and dynamic process as strategies change based on current rate and market environments. Through both the established Asset and Liability Committee and the Board of Directors and its Risk Committee, PNC’s Management bears the responsibility of overseeing the risks of the Bank’s balance sheet and ensuring that the Bank complies with all regulatory requirements regarding the balance sheet composition and capital ratios. A key measure of how effective Management is at managing the balance sheet to generate earnings for the Bank is the net interest margin (NIM). The ability to optimize the distribution of a bank’s balance sheet and adapt it to address the current context’s challenges or liquidity needs is based on a need to preserve improve the NIM. The challenges associated with preserving and protecting the NIM from a strategic perspective include a combination of factors: varying maturities/duration, variable vs fixed interest rate products, (the pace of) movements in interest rates, loan portfolio performance, trends in economic cycles, and more.

III. Risk Profile As the primary regulator of federally chartered banks, the Office of the Comptroller of Currency (OCC) has the responsibility for evaluating the overall or consolidated risk profile of such banks . PNC Bank evaluates its risk exposures according to the OCC’s defined eight categories of risk for bank supervision purposes: credit, interest rate, liquidity, market, operational, compliance, strategic, and reputation. This assessment focuses primarily on compliance risk as it relates to regulatory capital adequacy requirements, and the financial categories of credit risk, interest rate risk, liquidity and insolvency risk, and market risk. Assessing operational risk is not the primary focus of this risk profile analysis and is therefore only addressed when it is a material component of a balance sheet item.

Compliance Risk Mortgage lending is subject to numerous consumer protection and fair lending laws and regulations, which have undergone extensive changes following the financial crisis in 2008. Compliance with those federal consumer financial laws is regulated by the Consumer Financial Protection Bureau (CFPB), and while they have a significant aggregate impact on mortgage banking operations, are not considered in this risk profile assessment.

As PNC Bank is chartered as a national bank, Basel III reforms establish the minimum capital ratios that must be maintained to support the safety of the institution and its customers. The table below illustrates both the regulatory minimum capital ratio requirements of an institution to be considered “well capitalized”, as well as PNC Bank’s results corresponding to each capital ratio over the last five quarters.

PNC Bank has consistently surpassed the minimum capital requirements and was considered “well capitalized” over the last five quarters. Moreover, federal banking regulators stated that they expect PNC Bank to have a capital buffer sufficient to withstand losses and allow them to meet certain needs of their customers through estimated stress scenarios. By maintaining their capital ratios above the regulatory requirement, the Bank represents its commitment to managing capital in a manner consistent with and aligned to their provided regulatory principles.

Credit Risk Credit risk arises due to client defaults within any of the credit portfolios and can be exacerbated by high concentrations within those portfolios relating to industry, geographic region, product type, etc. PNC Bank mitigates its credit risk through its quality of loan underwriting, diligent portfolio management, and effective administration over its entire lending lice cycle. The Bank has a history of conservative underwriting, reaffirmed by the results of annual capital stress testing exercises and performance of these loans during economic downturns. Successful mitigation tactics demonstrate a positive correlation with the Bank’s ability to sustain itself from deterioration to its loan portfolio through downturns in the economic cycle and the negative impact on its client base.

Loan Portfolio

The Bank’s loan portfolio consists of two segments – Commercial and Consumer. Each of these segments comprises multiple asset classes which are characterized by similarities in risk attributes and the manner in which the Bank monitors and assesses credit risk. The table below outlines the asset classes categorized within each segment.

Commercial Consumer Commercial and industrial Residential real estate

Commercial real estate Home equity Equipment lease financing Automobile

Credit card Education Other consumer

The Bank uses several indicators in monitoring the economic conditions and loan performance trends to manage exposures within its loan portfolio. Most notably, it uses credit quality indicators and trends in delinquency rates, nonperforming status, probability of default (PD) and loss given default (LGD) ratings, updated credit scores, and originated and updated loan-to-value (LTV) ratios To mitigate losses and enhance customer support, the Bank’s credit activities are continuously refined to meet needs

associated with the changing environment and, when deemed necessary, loan modification and collection programs are offered to its customers for assistance.

The table below presents an analysis of PNC Bank’s loan portfolio as of 2023 year-end, including a breakout of days past due and nonperforming loans relative to each segment and asset class. The table includes a historical analysis component which assesses 2023 year-end performance to that of the prior quarter, and prior year-end. The Bank considers loans past due to be those that have not received payment within 30 days, and considers nonperforming loans to be those which have experienced credit quality deterioration to the extent that full collection of the contractual principal and interest is not probable.

On the consumer side, the Bank is involved in originating residential mortgage loans nationwide for its balance sheet and for sale into the secondary market and expands its credit portfolio by offering products such as home equity lines of credit (HELOCs), auto loans, and student lending. The Bank also purchases residential mortgage loans for its balance sheet and, depending on market conditions, may securitize loans originated or acquired. The Bank services the majority of those residential mortgage loans that it holds on its balance sheet and acquires mortgage servicing rights .While the diversification in the consumer credit portfolio may present a certain degree of risk mitigation, due to the optionality embedded in mortgage lending products, the majority of the loan portfolio has some exposure to the broader real estate market.

PNC Bank actively manages its consumer credit portfolio by tracking borrower performance and segmenting the portfolio based upon loan delinquency, nonperforming status, modification and bankruptcy status, FICO scores, LTV, lien position, and geographic concentration.

On the commercial side, the Bank is heavily involved in originating commercial and industrial loans nationwide for its balance sheet. As of 2023 year-end, commercial and industrial loans comprised 55% of the Bank’s total loan portfolio. The majority of the Bank’s commercial and industrial loans are secured by collateral that serves to provide a secondary source of repayment should a borrower experience a cash generation difficulty. PNC Bank actively manages its commercial and industrial loans to assess any changes (both positive and negative) in the level of credit risk at both the borrower and portfolio level. To evaluate the level of credit risk, the Bank assigns internal risk ratings reflecting its estimates of the borrower’s PD and LGD for

each related credit facility, and monitors concentrations of credit risk pertaining to both specific industries and geographies that may exist in the portfolio. While total nonperforming loans increased $57MM and $195MM QoQ and YoY, respectively, the increase in total nonperforming loans was attributed to the Bank’s commercial credit portfolio. Nonperforming loans in the Bank’s commercial credit portfolio increased $96MM QoQ and $449MM YoY, while nonperforming loans in the Bank’s consumer credit portfolio decreased $39MM QoQ and $254MM YoY. Moreover, as of 2023 year-end, approximately 97% of total nonperforming loans were secured by collateral. The Bank maintains an allowance for credit losses (ACL) to absorb expected losses in its credit portfolios. The table below presents PNC Bank’s ACL as a % of total assets for 2023 year-end, the prior quarter, and prior year-end.

PNC Bank’s allowance for credit losses as a percent of total assets is relatively small, representing only 85 basis points of total assets as of 2023 year-end, and has remained relatively both QoQ and YoY. The Bank’s small reserve for absorbing losses across its credit portfolios reaffirms the positive impacts its quality of loan underwriting, diligent portfolio management, and effective administration of credit risk management and monitoring activities have in its lending business activities.

Interest Rate Risk Interest rate risk results primarily from traditional banking activities of gathering deposits and extending loans. PNC Bank has moderate amounts of interest rate risk prevalent in its loan portfolio. Periods of increasing interest rates can reduce home buyers’ willingness or ability to finance a real estate loan and therefore can adversely affect the volume of loan originations and can negatively affect the Bank’s profitability. Rising interest rates, however, and the accompanying lower prepayments can increase servicing income and the value of the MSR portfolio. The table below shows PNC Bank’s MSR portfolio, as well as MSR as a % of total assets for 2023 year-end, the prior quarter, and prior year-end.

As of 2023 Q4, the Bank’s MSR portfolio totaled approximately $3.7 billion, a $263MM increase YoY, offset by a $320MM decrease QoQ. MSR exhibits negative convexity, as the value of the asset does not move in a linear relationship with interest rates. When rates rise, MSR values do not increase as much as they decline when rates fall (asymmetrical effect). Decreasing interest rates, by contrast, normally result in faster loan prepayments, which can reduce projected interest income from the lending portfolio. When interest rates fall and prepayment speeds increase, MSR values will also decline. The effect of

changes in interest rates on the fair value and market price of MSR depends on both the severity of rate movements and the asymmetrical nature of MSR value changes. Falling interest rates and mortgage refinancing can also subject the Bank to premium recapture. The Bank may have to forfeit premiums received from the sale of loans that refinance within a defined period.

In addition to its MSR portfolio, real estate loans and lines of credit expose PNC Bank to interest rate risk because they can be written on a fixed-rate basis, variable-rate basis, or a combination of the two, in which either the rate is fixed for a period and then becomes variable, or the rate is variable and then becomes fixed. In times of rising interest rates, interest income on loans made on a fixed-rate basis may fall below the Bank’s cost of funds. With variable rates, using different indexes for loans than for the cost of funds can increase exposure to interest rate risk. All of these scenarios should be adequately identified and addressed in the Bank’s primary processes and tools for managing interest rate risk.

On the liability side, the Bank’s composition of deposits illustrates a larger concentration in higher priced, interest-bearing (IB) deposits, relative to its non-interest-bearing (NIB) deposit accounts. When rates are higher, customers tend to shift deposits from NIB accounts to IB accounts, thereby negatively impacting net interest income. PNC Bank has acknowledged its need to increase its deposit rates in order to remain competitive, despite the negative impact to net interest income that effort has. Deposits are a low-cost source of funds for PNC Bank and, therefore, losing deposits could increase the Bank’s funding costs, further reducing its net interest income. The charts below depict PNC Bank’s deposit mix between interest-bearing and non-interest-bearing as of 2023 year-end, the prior quarter, and prior year-end.

The Bank has experienced a deposit mix shift from IB to NIB, with a 1% and 6% increase of its total deposits shifting to IB accounts QoQ and YoY, respectively. The deposit mix shift has been largely driven by the Bank’s commercial deposits, which comprised 48% of its total deposits as of 2023 year-end. While the Bank’s rate paid on interest-bearing deposits has increased to an average rate paid of 2.48% as of 2023 year-end, the Bank anticipates declining its rate paid with future rate cuts.

PNC Bank utilizes derivative contracts to mitigate certain forms of interest rate risk. A derivative is an instrument or contract whose cash flow or value is derived by the fluctuation or performance of its

underlying. An underlying can be an interest rate, index, or asset. The Bank uses derivatives to offset risks associated with a position or activity with a counterbalancing instrument. Risks are mitigated through the use of derivatives (e.g., cash flow hedges) to hedge an exposure to either overall changes in the cash flows associated with a recognized asset or liability or of a forecasted transaction, or changes in the cash flows attributable to a particular risk of a qualified hedge item. The Bank primarily uses interest rate derivatives to hedge floating rate commercial loans and fixed rate debt. As of 2023 year-end, PNC Bank has $33.3 billion in receive fix / pay float swaps, with a weighted average duration of 2.3 years and an average fixed rate of 2.1%.

A rising rate environment in conjunction with a continued flattening of the yield curve presents the potential for heightened interest rate risk; the risk to earnings (net interest income) or capital (equity). Changes in interest rates also affect the Bank’s underlying economic value – the value of the Bank’s assets, liabilities, and interest-rate-related, off-balance-sheet contracts is affected by a change in rates by way of the present value of future cash flows. The nature and mix of the Bank’s business lines and interest rate risk characteristics of its activities dictates the type of quantitative measures of interest rate risk used by the Bank. PNC Bank utilizes sensitivities of net interest income (NII) forecasts, and economic value of equity (EVE) to identify and measure short-term and long-term structural interest rate risks .The Bank’s Asset and Liability Management group centrally manages interest rate risk prescribed by its internal, risk-related management policies.

Liquidity and Insolvency Risk Traditionally speaking, banks can be perceived as inherently fragile due to the term mismatch between short-term liabilities (in the form of non-maturity deposits) and longer-term, illiquid assets (including loans). This term mismatch exposes banks to runs on deposits, which puts them at increased risk of insolvency. Liquidity risk involves the inability to access funding sources or manage fluctuations in funding levels. Banks with large mismatches between liability maturities and asset maturities have greater earnings exposure to changes in interest rates. Changes in market conditions are often unpredictable and sometimes severe. These changes can make it difficult for banks to secure funds, retain additional funding, and manage the maturity of their funding structure.

From a purely mortgage banking perspective, the degree of liquidity risk is affected by a variety of factors, including whether portfolio production is underwritten to secondary market standards and the ability to fund commitments to borrowers. PNC Bank originates and acquires mortgages with the intention of maintaining a vast majority of these loans in the held for investment (HFI) portfolio. Contingent liquidity needs, however, may require the Bank to sell some of these loans in the secondary market. Credit and operational risk management weaknesses can cause liquidity problems if the Bank fails to underwrite or service loans in accordance with investors or insurers’ requirements. If the mortgages considered for sale are not underwritten in compliance with investor guidelines, like those of Fannie Mae, Freddie Mac, or private investors, the Bank may be unable to sell mortgage inventory or servicing rights at an acceptable price. Additionally, the investor may require the Bank to indemnify or repurchase loans that were inappropriately underwritten or serviced. As a servicer of mortgages, the Bank could face increased liquidity risk from elevated levels of defaulted loans that require continued remittance of principal and interest to investors during the liquidation process of properties where the loan has gone into default. Failure to appropriately manage the liquidation process can result in delayed or denied reimbursement from the insuring agency.

Liquidity risk is present on both sides of the Bank’s balance sheet. On the asset side, liquidity risk resides in the ability and time for the Bank to convert an asset to cash without a discount, and on the liability side, it arises from the ability to fund the Bank in support of its operations and lending activities.

The Bank’s ability to grow depends on its ability to generate deposits, which can be deployed to fund additional loan growth. Developing and sourcing an inflow of new customer deposits that provide a reasonable source of cost of funds is key to any bank’s sustainability. In addition to customer deposits, other sources of liquidity at PNC Bank include investments in its securities portfolio, the ability to sell or securitize loans in secondary markets, and to pledge loans to access secured borrowing facilities through the Federal Home Loan Bank (FHLB).

Generally, when loans-to-deposits (LTD) ratios exceed 100%, this becomes a potential indicator of unbalanced growth. A LTD ratio of 100% means that a bank loaned one dollar to customers for every dollar it received in core deposits. When a LTD ratio exceeds 100%, this indicates that the bank has a loan book greater than its deposit base and is overextending themselves. Banks with LTD ratios above 100% are more likely to be risky along many dimensions besides liquidity risk. Conversely, banks with low LTD ratios may have lower interest income, resulting in lower earnings due to foregone opportunity in not utilizing deposits to earn revenue. The table below shows PNC Bank’s LTD ratio for 2023 year-end, the prior quarter, and prior year-end.

PNC Bank’s LTD ratio was 76% as of 2023 year-end, up 1% QoQ and YoY. With a LTD ratio of 76%, the Bank is maintaining a healthy balance of maintaining its lending activity compared to its deposit base.

Deposits are an important low-cost source of funding for PNC Bank and affect both net interest income and the net interest margin. The table below includes details of the Bank’s funding sources for 2023 and 2022 year-ends.

Deposits for PNC Bank include interest-bearing and noninterest-bearing demand deposits and transaction accounts, as well as other non-transaction accounts such as savings and money-market accounts and time deposits. PNC’s deposit base comprised 85% of its total funding sources as of 2023 year-end – down 3% YoY, reflecting the impact of competitive pricing dynamics and inflationary pressures. While the Bank’s funding sources include brokered deposits and borrowed funds (primarily from the FHLB) to support growth in the loan portfolio, manage volatility in certain asset categories, and help manage interest rate risk, the Bank is mature and not heavily dependent on these external sources for its funding. PNC Bank is predominantly funded by core deposits, which provide a relatively stable, low-cost source of funding.

As part of its liquidity risk management activities, Management monitors the Bank’s liquidity through a series of early warning indicators (EWIs) that may indicate a potential market, or PNC-specific, liquidity stress event. Additionally, Management performs a series of internal liquidity stress tests over multiple time horizons, in which levels of severity are varied to identify pressures and maintain an adequate contingency funding plan (CFP). Other liquidity risk monitoring activities the Bank utilizes include measuring its liquidity coverage ratio (LCR) to ensure the Bank maintains an adequate level of liquidity to meet net liquidity needs over a hypothetical 30-day stress scenario per regulatory minimums, and its net stable funding ratio (NSFR), which assesses the stability of the maturity structure of the Bank’s assets and liabilities over a one-year time horizon.

Market Risk Market risk, also known as price risk, encompasses the changes in market factors (e.g., interest rates, market liquidity, and volatility) which affect the value of tradeable instruments. Changes in interest rates can affect the value of pipeline commitments and cause market losses if not adequately hedged. Falling interest rates may cause borrowers to seek more favorable terms and withdraw their loan application before the loan closes. If customers do not close on their loan applications, commonly known as fallout, the Bank may have to purchase additional loans in the secondary market at higher prices. Alternatively, the Bank could choose to terminate its sales commitment to deliver mortgages by paying a fee to the counterparty, known as a pair-off arrangement. Rising rates may result in more loans closing at a below- market rate without sufficient pipeline hedge protection. These loans would typically be sold at a loss. Rate volatility can produce significant risk if inappropriate risk positions are taken based on a biased or overtly speculative view of future rates. MSR can be a volatile asset due to its sensitivity to interest rate movements, and the risk that changes in interest rates will lower the fair value of MSR, while perceivably considered interest rate risk, its considered price risk as the Bank is actively buying (and potentially selling) MSR.

PNC Bank’s Market Risk Management function provides independent oversight of its market risk exposure by monitoring the Bank’s compliance with established guidelines and reporting significant risks in the business to corresponding management committees, as well as the Bank’s Risk Committee of the Board of Directors. The Bank’s Market Risk Management leverages the quantitative measures the Bank’s Asset and Liability Management group uses in its management of interest rate risk, such as sensitivities of net interest income (NII) forecasts, and economic value of equity (EVE).

I. Management and Governance

Overview

PNC Bank, headquartered in Pittsburgh, Pennsylvania, is one of the largest diversified financial services institutions in the United States. With a history dating back to the mid-19th century, PNC has evolved into a leading player in retail banking, corporate and institutional banking, asset management, and residential mortgage banking. The bank operates in over 20 states and the District of Columbia, serving millions of customers through a network of branches, ATMs, and online platforms. PNC Bank's robust suite of financial products and services caters to a wide range of clients, including individuals, small businesses, corporations, and government entities. Its retail banking arm offers checking and savings accounts, credit cards, loans, mortgages, and wealth management services, providing comprehensive solutions to meet the diverse needs of consumers. In the corporate and institutional banking space, PNC provides a broad array of financial services, including treasury management, capital markets, corporate lending, and international banking, serving businesses of all sizes across various industries (The PNC Financial Services Group Inc Def 14A, 2024).

Additionally, PNC's asset management division offers investment management, retirement planning, and wealth advisory services to individuals, families, and institutional investors. PNC Bank distinguishes itself through its commitment to innovation, sustainability, and community engagement. The bank leverages technology to enhance customer experiences, streamline operations, and drive efficiency. Moreover, PNC is actively involved in initiatives aimed at promoting environmental sustainability, social responsibility, and economic development in the communities it serves. With a focus on prudent risk management and strategic growth initiatives, PNC Bank continues to navigate the complexities of the financial services industry while maintaining a solid balance sheet and delivering value to its stakeholders.

At the heart of PNC Bank's enduring success lies a robust framework of management and governance, meticulously crafted to steer the institution through dynamic markets and evolving regulatory landscapes. With a legacy spanning over a century, PNC Bank has honed its approach to leadership and oversight, establishing itself as a paragon of effective management and transparent governance practices. Within the intricate tapestry of the banking industry, understanding the nuances of ownership and control is paramount to grasping the essence of institutions like PNC Bank. As one of the leading financial entities in the United States, PNC's ownership and control framework offers insights into its corporate structure, decision-making processes, and broader implications for stakeholders. We will explore the intricate interplay between management strategies, corporate governance principles, and PNC Bank's unwavering commitment to delivering value to stakeholders while upholding integrity and accountability at every level of operation. Delving into the intricate web of governance structures and regulatory oversight mechanisms that shape the ownership and control dynamics of PNC Bank, sheds light on the factors influencing its strategic direction and operational resilience in an ever-evolving marketplace.

Ownership and Control

PNC Bank's strength lies in its ownership structure, which is built on the foundation of its shareholders. These shareholders range from individual investors who purchase shares through brokerage accounts to institutional investors who manage large pools of capital on behalf of clients. Notable shareholders may include pension funds seeking long-term returns, mutual funds diversifying their portfolios, and activist investors advocating changes to enhance shareholder value.

Aligned with its shareholder composition, PNC Bank's governance framework encompasses a board of directors, an executive management team, committees, and policies designed to ensure accountability, transparency, and regulatory compliance. The board of directors, comprising experienced professionals from diverse backgrounds, holds fiduciary duties to oversee the bank's affairs, including strategic planning, risk management, and executive compensation (Misback,2021). Additionally, governance mechanisms such as annual shareholder meetings, proxy voting, and disclosure requirements facilitate stakeholder transparency and engagement.

The interplay between ownership and control dynamics significantly influences PNC Bank's strategic decision-making processes. Shareholder activism, for instance, may exert pressure on the bank to pursue initiatives such as mergers and acquisitions, capital allocation strategies, or corporate governance reforms (Zhan,2024). Moreover, the governance framework serves as a mechanism to balance the interests of various stakeholders, mitigate conflicts of interest, and ensure alignment with the bank's long-term objectives.

PNC Bank's ownership and control dynamics represent a multifaceted ecosystem that shapes its organizational behavior, governance practices, and stakeholder interactions. By understanding the intricacies of its shareholder composition, governance framework, and implications for strategic decision-making, stakeholders can gain insights into the underlying factors driving PNC Bank's performance and resilience in an ever-evolving financial landscape.

Corporate Governance

PNC Bank ratifies rigorous internal management practices emphasizing the importance of disclosure and transparency. The company consistently complies with best practices by informing stakeholders of vital information through regulatory filings with entities such as the Securities and Exchange Commission (SEC) and the annual comprehensive reporting. This includes disclosing diverse information on bank operations, financial outcomes, and future goals for the shareholders and other stakeholders (Wali et al., 2023). The superstructure of PNC Bank's corporate governance relies on its remuneration methodology, which inevitably receives a coating of economic performance and shareholder interests. Pay packages are developed within this system to motivate top managers to follow corporate objectives and prevent them from taking unnecessary risks that can negatively affect the business. These remunerations are based on performance indicators related to generational value and operational efficiency. Therefore, the top management is recompensed in line with their value creation and quality management role.

To establish a performance-based culture among the management team, PNC Bank utilizes one of the least expensive and most straightforward measures - linking executives' income to performance. This way, profit-seeking executives are encouraged to accelerate projects geared towards creating

shareholder value and to focus on prudent management of risk and sustainable growth strategies. Besides that, such a scheme shines the spotlight on the bank's stance as governance practices comprising transparency, fairness, and alignment of interest between executives and investors. In a nutshell, PNC Bank keeps true to its strong corporate governance standards through quality communication and compensation systems based on performance, which ultimately help generate trust, maximize shareholder value, and sustain success in the ever-changing financial market.

Interaction with markets

PNC Bank's interaction with financial markets is multifaceted and encompasses various activities such as lending, investment, and market participation. Here are some examples illustrating PNC Bank's engagement with financial markets:

• Lending Activities: PNC Bank actively participates in the lending market by providing financing solutions to businesses, individuals, and government entities. For instance, PNC offers commercial loans to support businesses in their expansion efforts, mortgages to help individuals purchase homes, and municipal financing to assist local governments in funding infrastructure projects. PNC facilitates economic growth and development by extending credit to diverse borrowers.

• Investment Portfolio Management: PNC Bank manages a substantial investment portfolio

across various asset classes, including equities, fixed-income securities, real estate, and alternative investments. The bank's investment professionals analyze market trends, economic indicators, and risk factors to make informed investment decisions to optimize returns while managing risk. PNC's investment activities contribute to market liquidity and efficiency while generating income for the bank and its clients.

• Market Participation and Trading: PNC Bank actively participates in financial markets by trading

various instruments, including currencies, commodities, derivatives, and securities. The bank's traders execute buy and sell orders on behalf of clients and the bank's proprietary trading desk, aiming to capitalize on market inefficiencies and price discrepancies. PNC's market participation enhances market liquidity and efficiency while providing opportunities for clients to access capital markets.

• Strategic Investments and Acquisitions: PNC Bank strategically invests in or acquires financial

institutions, fintech startups, and other companies to expand its market reach, diversify its revenue streams, and leverage emerging technologies. For example, PNC's acquisition of BBVA USA in 2020 significantly expanded its presence in key markets such as Texas and the Sun Belt region, strengthening its competitive position and market share. Such strategic moves reflect PNC's proactive approach to adapting to changing market dynamics and seizing growth opportunities.

In summary, PNC Bank's interaction with financial markets is characterized by its active involvement in lending, investment management, risk mitigation, market participation, and strategic initiatives. PNC contributes to market liquidity, efficiency, and stability through these activities while creating value for

its clients, shareholders, and the broader financial ecosystem. As it continues to evolve, PNC Bank is poised to uphold its legacy of excellence and shape the future of finance. Indeed, the success of these activities can be felt through the adoption of effective strategic planning, a provision of regulatory compliance, and transparency and accountability measures. The finance sector is subject to frequent changes in regulations; the Bank should be flexible and able to adapt to these changes, utilize technological innovations, and enhance engagement with stakeholders in the future to maintain a competitive edge. It is essential to consolidate risk management systems with agencies catering to corporate social responsibility with balanced objectives in sustainable business practices and enhancing stakeholder value. PNC Bank must be able to fly in every fluctuating public fund situation by strengthening its risk management mechanisms, hence establishing strong controls against the new menaces. Also, the Bank can connect the course of working with the social responsibility of corporations by remaining on the public and among the rest of the stakeholders. Besides, technology such as digital banking and artificial intelligence will be used in respective ways. For example, they will allow the Bank to operate efficiently and improve customer service simultaneously, making it a strong competitor in the market. Nonetheless, well-organized, shorter-term strategies will govern the structure of cybersecurity demands to minimize the associated risks. Implementing the recommendations given by PNC Bank would allow the Bank to serve prepared and take advantage on both occasions. Thus, the Bank will be able to prevent difficulties, benefit from opportunities, and achieve consistent growth and resilience. The type of forward-thinking approach, which not only protects the Bank's interests but also shows the Bank's loyalty towards the stakeholders and the society, keeps the Bank's position in any changing situation and surely helps it to be successful and popular all the time.

II. Historical and Peer Comparison Financial Performance Metric Analysis

The following key financial metrics were used in assessing PNC Bank’s performance relative to its past and peers: loans-to-assets ratio, net interest margin, non-interest income as a % of total revenue, cost efficiency ratio, and equity-to-assets ratio. The Bank’s peer group was established on the basis of asset size, business model, and relevance within the financial market sector. For underlying data and calculations used throughout the financial performance metric analysis, refer to the “Peer Bank Analysis” file within the Appendix. All financial figures were sourced from quarterly and annually published financial reports using S&P Capital IQ.

Loans-to-Assets Ratio

The loans-to-assets ratio is helpful in analyzing a financial institution’s profitability and can be used by investors and financial analysts to understand where a bank generates the majority of its income from. A bank with a high loans-to-assets ratio may generate more income from its loans and investments, whereas a bank with a low loans-to-assets ratio may generate the majority of its income from non- interest-earning sources.

The table below shows PNC Bank’s loans-to-assets ratio compared to its peers quarterly for the last three years.

PNC Bank’s loans-to-assets ratio was 57% at 2023 year-end, relatively flat QoQ and YoY. With a loans-to- assets ratio of 57% for the quarter end of 2023 Q4, the Bank was in the 50th percentile of its peers.

Net Interest Margin

A key measure of how effective management is at managing the balance sheet to generate earnings for a bank is the net interest margin (NIM). The NIM measures the difference between a bank’s interest income and the amount of interest it pays out, relative to the amount of its interest-bearing assets. The ability to optimize the distribution of a bank’s balance sheet and adapt it to address the current context’s challenges or liquidity needs is based on a need to preserve improve the NIM. The challenges associated with preserving and protecting the NIM from a strategic perspective include a combination of factors: varying maturities/duration, variable vs fixed interest rate products, (the pace of) movements in interest rates, loan portfolio performance, trends in economic cycles, and more.

The table below shows PNC Bank’s NIM compared to its peers quarterly for the last three years.

PNC Bank’s net interest margin was 2.68% at 2023 year-end, down -5bps QoQ from 2.73%, and down -27bps YoY from 2.95% in 2022 Q4. With a net interest margin of 2.68% for the quarter end of 2023 Q4, the Bank was below the 25th percentile of its peers by 8bps.

Non-Interest Income as a % of Total Revenue

A bank’s non-interest income represents the non-credit revenue it generates from activities other than its core business operations involving gathering deposits and making loans, or from its investments. By analyzing a financial institution’s non-interest income as a percentage of its total revenue, investors and financial analysts can assess how much of a bank’s income comes from non-core activities.

The table below shows PNC Bank’s non-interest income as a percentage of its total revenue compared to its peers quarterly for the last three years.

PNC Bank’s non-interest income as a percentage of its total revenue was 37% at 2023 year-end, relatively flat QoQ and YoY. With non-interest income comprising 37% of its total income for the quarter end of 2023 Q4, the Bank was in the 50th percentile of its peers.

The table below shows PNC Bank’s sources of non-interest income for the full years of 2022 and 2023.

Non-interest income for PNC Bank includes asset management and brokerage fees, capital management and advisory services, card and cash management fees, lending and deposit service fees, residential and commercial mortgage servicing fees, as well as other non-interest income sources. Non-interest income sources are important for the Bank, as they provide diversification during difficult interest rate environments that may impact its lending, or credit-revenue driven business activities. The Bank’s largest sources of non-interest income in 2023 were its asset management and brokerage fees, card and cash management fees, and lending and deposit services fees. These three sources of non-interest income comprised 71% of the Bank’s total non-interest income for the full year of 2023, up 7% YoY from 64% for the full year of 2022.

Cost Efficiency Ratio (Non-Interest Expense as a % of Total Income)

The cost efficiency ratio is helpful in analyzing a financial institution’s profitability and can be used by investors and financial analysts to understand how efficiently a bank manages its cost base and/or what portion of a bank’s non-interest expense was incurred for each dollar of income it generated. Banks aim to keep their cost efficiency ratio as low as possible, as a lower cost efficiency ratio equates to higher efficiency in generating income.

The table below shows PNC Bank’s cost efficiency ratio compared to its peers quarterly for the last three years.

PNC Bank’s non-interest expense as a percentage of its total income was 64% at 2023 year-end, up 2% QoQ from 62%, and up 4% YoY from 60% in 2022 Q4. With non-interest expense reaching 64% of its total revenue for the quarter end of 2023 Q4, the Bank was slightly above the 50th percentile of its peers.

Equity-to-Assets Ratio

The equity-to-assets ratio can be used to assess what percentage of a financial institution’s assets are owned by investors, compared to what percentage of assets are leveraged. The equity-to-assets ratio is valuable to investors and financial analysts, as investing in a company with low equity-to-assets ratio may indicate that the company is primarily using debt to acquire its assets, in turn leading to higher financial risk of insolvency. That said, the equity-to-assets ratio can vary greatly across different industries, as different industries may have different capital structures. Typical equity-to-assets ratios for banks vary within the range of 5% to 10%. Stronger banks may have equity-to-asset ratios over 10%.

The table below shows PNC Bank’s equity-to-assets ratio compared to its peers quarterly for the last three years.

PNC Bank’s total equity as a percentage of its total assets was 9% at 2023 year-end, relatively flat QoQ and YoY. With an equity-to-assets ratio of 9% for the quarter end of 2023 Q4, the Bank was in the 50th percentile of its peers.

5%

7%

9%

11%

13%

15%

17%

1Q21 2Q21

3Q21 4Q21

1Q22 2Q22

3Q22 4Q22

1Q23 2Q23

3Q23 4Q23

Equity-to-Assets %

JPMorgan Chase & Co.

Capital One Financial Corporation

KeyCorp

The PNC Financial Services Group, Inc.

Truist Financial Corporation

Fifth Third Bancorp

Citizens Financial Group, Inc.

Wells Fargo & Company

U.S. Bancorp

M&T Bank Corporation

Bank of America Corporation

Regions Financial Corporation

Stock Performance

PNC Bank’s Share Price

The following graphs present compilations of PNC Bank’s month-end share prices (using adjusted close), as well as returns over the last 5 years, from January of 2019 to December of 2023. For underlying data used to create the following visual representations, refer to the “PNC Stock Performance” file within the Appendix. All figures were sourced from Yahoo Finance.

Competitor Comparison

Truist Financial Corporation (“Truist Bank”) was determined to be a suitable financial institution to perform a comparison of PNC Bank’s stock returns with, on the basis of its similarities to PNC Bank in relation to the financial performance metrics analyzed throughout this analysis. The table below shows Truist Bank’s financial performance metrics compared to those of PNC Bank. In addition to both banks’ similarities according to the following financial metrics, the Banks were similar in asset size relative to the entirety of PNC Bank’s peer group. Figures in the table below are representative of 2023 Q4 results for both banks, with the exception of Truist Bank’s efficiency ratio, which is reflective of its 2023 Q3 results. Truist Bank’s efficiency ratio from 2023 Q3 was found to be more suitable for comparison to PNC Bank’s efficiency ratio, as Truist Bank experienced a $6.1B goodwill impairment in the 4th quarter of 2023, which drove its other non-interest expenses (including goodwill impairment losses) higher.

The following graph present a compilation of both PNC Bank and Truist Bank’s stock returns over the last 5 years, from January of 2019 to December of 2023. For underlying data used to create the following visual representations, refer to the “PNC Stock Performance” file within the Appendix. All figures were sourced from Yahoo Finance.