A FINANCIAL INSTITUTION ANALYSIS B Y B R E N D A

J A N S E N

HISTORY

• PNC has a history dating back to the 1800s• Pittsburgh National Corporation was originally formed 1852 as

Pittsburgh Trust and Savings Company • The oldest bank in Pittsburgh• First bank to apply for a charter under the National Banking Act of

1863• The bank came to be First National Bank of Pittsburgh• Joined with Peoples-Pittsburgh Trust Company in 1946 forming

Peoples First National Bank and Trust Company• 1959: Fidelity Trust Company merged with Peoples First which

merged with First National• A new symbol in the shape of a triangle

HISTORY CONT.

• PNC also has roots in Provident Life and Trust Company, an insurance company that was created in 1865

• Informally known as “the Quaker bank”• 1922: The company split into two separate entities of Provident

Mutual Life Insurance Company and Provident Trust Company• Provident Trust Company of Philadelphia merged with Provident

Tradesmens Bank and Trust Company in 1957 to create Provident National Bank.

• 1982: Pennsylvania passed a law that allowed banks to have statewide banking

• Two of the first banks to act on this were Pittsburgh National and Provident National

• In 1983, the two banks came together in the largest U.S. bank merger at the time and used their shared initials to create a new entity called PNC Financial Corp.

• The company now has the name The PNC Financial Services Group, Inc.

PRODUCTS AND SERVICES

• PNC serves individuals, small businesses, corporations, and government entities• Retail banking:

• Lending, deposits, cash management, and investment services• 6 million consumer and small business customers • 19 states and the District of Columbia • 2,700 branches and 74,000 ATMs• Online and mobile services• Award-winning Virtual Wallet

• Wealth management group:• Tailored investments, wealth planning, trust and estate administration and

private banking services• Wealth Insight • Institutional Investments• PNC Capital Advisors, LLC (a multi-strategy investment management

organization)

PRODUCTS AND SERVICES CONT.

• Corporate and Institutional Banking:• Serves the middle market• Harris Williams (PNC’s investment bank) is one of the most successful advisory

teams in the nation• Residential Mortgage:

• 2,700 bank branches and 90 retail mortgage offices in the U.S.• PNC Mortgage • One of the top residential mortgage originators and servicers in the nation

• As of September 2013, PNC’s loan portfolio is $115 billion• BlackRock:

• One of the largest publicly traded investment management firms in the country• PNC owns 25%• Around the world they provide equity, fixed income, liquidity and alternative

investment products to institutional and individual investors • Provide risk management, investment system outsourcing, and financial

advisory services to institutional investors

MANAGEMENT STRUCTURE

• Vertical management structure• Lots of levels• PNC’s president and CEO is William S. Demchak• Elected to CEO in February of 2013• At the Annual Meeting of Shareholders on April 23, 2013 James E. Rohr elected to step down as CEO• Rohr will assume new role as executive chairman and plans to retire in 2014

• Board of Directors• Regional Managers• Branch Managers

William S. Demchak

RISK FACTORS

• Economic conditions• Still recovering from recent crash

• Regulatory • Uncertainty of ultimate impacts of Dodd-Frank law passed in July

2010• New capital and liquidity standards (proposed June 2012)• Risk retention plan

• Competition• Other big banks such as Citigroup • Financial services institutions are interrelated

RISK FACTORS CONT.

• Highly subjective and various interpretations• Estimation of the amount of loss allowances and impairments• Asset valuation methods • Use of models

• Operational • Internal processes and systems, human error and external events• Technology: need to keep up to date to remain competitive, new

products frequently, help serving customers better• Information systems

GEOGRAPHIC CONSIDERATIONS

• Nationally:• 6 million consumer and small business customers throughout the

U.S.• 19 states and the District of Columbia • 2,700 branches and 74,000 ATMs

• Globally:• PNC’s ownership in BlackRock• Provide equity, fixed income, liquidity and alternative investment products to institutionaland individual investors around the world

REGULATORY CONSIDERATIONS

• Federal and state levels of governance• Federal Reserve is the national regulatory body• In every state where PNC has a branch, there are different rules

and regulations• Securities and Exchange Commission (SEC)• Form 4

• Federal Deposit Insurance Corporation (FDIC) provides deposit insurance for every depositor up to $250,000

• Office of the Comptroller of the Currency (OCC)• U.S. Department of the Treasury

• The Dodd-Frank Wall Street Reform and Consumer Protection Act

PROFITABILITY

• Observations from ratios:• Net profit margin is declining• Profit growth is negative in 2011 and 2012• Sales are up

• Most of their revenue is from fees and interest• Risk that a failure to sustain reduced amounts of the provision for

credit losses could result in decreases in net income• Provision for credit losses totaled $3.9 billion in 2009 • $1.0 billion in 2012

IMPORTANT RATIOS

2010 2011 201217.00%

18.00%

19.00%

20.00%

21.00%

22.00%

23.00%

22.38%

21.44%

19.35%

Net Profit Margin

IMPORTANT RATIOS

2010 2011 2012 8.80 9.00 9.20 9.40 9.60 9.80

10.00 10.20 10.40

9.40

9.90

10.26

P/E Ratio

IMPORTANT RATIOS

2010 2011 2012

-8.00%-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%

-6.48% -5.60%

8.28%

Sales Growth

IMPORTANT RATIOS

2010 2011 2012

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

41.36%

-9.60%

-2.28%

Profit Growth

IMPORTANT RATIOS

2010 2011 20122.90%

3.00%

3.10%

3.20%

3.30%

3.40%

3.50%

3.60%

3.49%

3.21%3.16%

Net Interest Income/Average Assets

IMPORTANT RATIOS

2010 2011 20120.00%

0.20%

0.40%

0.60%

0.80%

1.00%0.95%

0.42%0.32%

Provision for Loan Losses/Average Assets

IMPORTANT RATIOS

2010 2011 20120.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.29%1.13%

0.98%

Net Income/Average Assets

IMPORTANT RATIOS

2010 2011 20120.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

7.87%

20.18%

28.92%

Cash Dividends/Net Income

IMPORTANT RATIOS

2010 2011 20129.40%

9.60%

9.80%

10.00%

10.20%

10.40%

10.60%

10.80%

9.87%

10.72%

9.91%

Tier 1 Capital/Average Assets

IMPORTANT RATIOS

2010 2011 20120.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2.32%

1.85%1.99%

Non-Current Loans/Total Loans

INVESTMENT CRITERIA

Credit Rating

The PNC Financial Services Group, Inc.

Senior debt A3 A- A+ A (high)

Subordinated debt

Baa1 BBB+ A A

Preferred stock

Baa3 BBB BBB- BBB

 

PNC Bank, N.A.

Subordinated debt

A3 A- A A (high)

Long-term deposits

A2 A AA- AA (low)

Short-term deposits

P-1 A-1 F1+ R-1 (middle)

Moody'sStandard& Poor's

Fitch DBRS

*As of November 30, 2013

INVESTMENT CRITERIA

• Credit Rating isn’t that great but its not the worst • BBB S&P rating is considered the lowest “good” stock

• Profit Growth rates are going down• Opportunity to go up

• In 2013, stock price has gone from 55 in January to 75 in December • P/E is going up• Diverse products and services• Broad geographic location• Could expand into other states

• I would invest in PNC