Executive Summary / Key Takeaways

• PNC Financial Services Group is executing a focused strategy centered on organic growth in expansion markets, deepening client relationships, and leveraging technology to drive efficiency and enhance its competitive position against larger national banks and regional peers.
• Recent financial performance demonstrates momentum, with Net Interest Income inflecting upward and expected to reach record levels in 2025, supported by lower funding costs and the ongoing repricing of fixed-rate assets, despite a conservative outlook for loan growth.
• The company maintains a strong capital and liquidity position, exceeding regulatory minimums and demonstrating resilience in stress tests, providing flexibility for strategic investments, supporting customers, and returning capital to shareholders through dividends and share repurchases.
• Investments in technology, including a new online banking platform and enhanced digital capabilities, alongside targeted branch expansion, are key operational initiatives aimed at improving customer experience and driving future organic growth, particularly in consumer lending where PNC is currently under-penetrated.
• While facing expected stress in the Commercial Real Estate office portfolio and broader economic uncertainties like tariff impacts, PNC believes it is adequately reserved and is actively managing these risks, while its diversified business model and expense discipline (supported by continuous improvement programs) underpin its ability to generate positive operating leverage.

The Bedrock of a Diversified Financial Powerhouse

The PNC Financial Services Group, Inc., founded in 1865 and headquartered in Pittsburgh, Pennsylvania, stands as one of the largest diversified financial institutions in the United States. Organized around three core reportable business segments – Retail Banking, Corporate & Institutional Banking, and Asset Management Group – PNC provides a comprehensive suite of financial products and services to a broad base of consumer, small business, corporate, and institutional clients across a coast-to-coast network and through strategic international offices.

PNC's foundational strategy is built on cultivating deep, long-term relationships with clients, understanding their diverse financial needs, and delivering tailored solutions across savings, liquidity, lending, payments, investment, and retirement planning. This relationship-based approach, coupled with a focus on prudent risk and expense management, forms the bedrock of its business model.

In the competitive U.S. banking landscape, PNC operates alongside giants like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), as well as large regional banks such as U.S. Bancorp (USB). While PNC may not possess the sheer scale or global reach of the largest money center banks, it leverages its extensive physical footprint, strong regional brand presence, and diversified business mix to compete effectively. PNC's strategic emphasis on targeted expansion markets, particularly in the Southwest, and its ongoing investments in technology aim to enhance its competitive standing, addressing areas where it may trail larger peers, such as digital innovation speed, while capitalizing on its strengths in regional efficiency and customer loyalty. The recent agreement to acquire Aqueduct Capital Group, complementing Harris Williams' capabilities, further underscores PNC's strategic focus on enhancing its fee-based service offerings within the competitive capital markets advisory space.

Strategic Investments Fueling Organic Momentum

PNC's strategic priorities are designed to enhance long-term value by expanding its banking franchise, deepening customer relationships, and leveraging technology for efficiency. The company is actively investing in these areas to drive organic growth.

A key initiative involves significant investment in the retail distribution network. PNC plans to invest approximately $1.5 billion over five years to open more than 200 new branches in key growth markets like Atlanta, Austin, Charlotte, Dallas, Denver, Houston, Miami, Orlando, Phoenix, Raleigh, San Antonio, and Tampa, while also renovating 1400 existing locations. This targeted expansion aims to build density in attractive regions and capture new customer relationships, complementing the existing coast-to-coast network.

Simultaneously, PNC is undertaking a substantial effort to enhance its digital capabilities. The upcoming rollout of a new online banking platform is a critical component of this, designed to improve the customer experience through easier navigation and increased self-service options. Crucially, this technological upgrade is expected to enable faster product introduction and adaptation, moving from a process that could take months to one achievable overnight. While PNC acknowledges it currently scores highly on branch experience but is only average in online and mobile capabilities compared to peers, these investments are aimed squarely at closing that gap and meeting competitive demands in the digital space.

Furthermore, PNC is strategically focusing on areas where it is currently under-penetrated, particularly within consumer lending products like credit cards and auto loans, relative to its existing client base. The recent launch of new credit card products, such as the PNC Cash Unlimited and PNC Spend Wise Visa, signals a renewed push to offer more competitive products and improve the underlying technology and processes (including application and approval workflows) to increase penetration and capture a greater share of client relationships. These investments in people, credit management capabilities, marketing, and product delivery are expected to drive material upside over time.

Expense discipline remains a core tenet of PNC's strategy, supporting its ability to invest for the future while delivering positive operating leverage. The Continuous Improvement Program (CIP) is central to this effort, with targets set at $450 million in 2024 and $350 million in 2025. These programs are explicitly designed to fund a significant portion of the company's ongoing business and technology investments, demonstrating a commitment to self-funding growth initiatives through efficiency gains.

Financial Performance and Balance Sheet Strength

PNC's financial performance in the first quarter of 2025 demonstrated resilience and progress on key strategic fronts, building on the momentum established in 2024. Net income for Q1 2025 was $1.5 billion, or $3.51 per diluted common share. While this represented a decrease compared to the fourth quarter of 2024, primarily due to lower noninterest and net interest income (influenced by fewer days in the quarter) and a higher provision for credit losses, it marked a significant increase of 12% compared to the first quarter of 2024.

Total revenue for Q1 2025 stood at $5.5 billion, a 2% decrease linked quarter but a robust 6% increase year-over-year. Net interest income (NII) was $3.5 billion, down 1% linked quarter but up 6% year-over-year. The linked-quarter decrease was largely attributable to the calendar effect of two fewer days, while the year-over-year growth reflected the significant benefit of lower funding costs and the continued repricing of fixed-rate assets. The net interest margin (NIM) expanded by 3 basis points linked quarter to 2.78% and by 21 basis points year-over-year, primarily driven by the favorable trend in funding costs.

Noninterest income in Q1 2025 was $2.0 billion, a 3% decrease linked quarter but a 5% increase year-over-year. The linked-quarter decline was influenced by lower capital markets and advisory activity and higher negative Visa derivative adjustments ($40 million in Q1 2025 vs. $23 million in Q4 2024). The year-over-year increase was driven by stronger performance in areas like merger and acquisition advisory, underwriting fees, and asset management (benefiting from higher average equity markets). Segment-specific performance highlights included Retail Banking revenue up 4% year-over-year, Corporate Institutional Banking revenue up 8%, and Asset Management Group revenue up 10%. Treasury management revenue, a key component of CIB, saw a notable increase year-over-year due to wider interest rate spreads on deposits, higher average deposit balances, and increased product revenue.

Noninterest expense totaled $3.4 billion in Q1 2025, a 3% decrease linked quarter but a 2% increase year-over-year. The linked-quarter decrease reflected the absence of asset impairments recognized in Q4 2024 ($97 million) and seasonally lower expenses. The year-over-year increase was attributed to higher business activity, technology investments, and increased marketing spend, although this was partially offset by the impact of the FDIC's special assessment in Q1 2024 ($130 million pre-tax). PNC successfully generated positive operating leverage for the full year 2024, demonstrating the effectiveness of its expense management efforts relative to revenue growth.

The balance sheet remains well-positioned. Total assets were $554.7 billion at March 31, 2025, a slight decrease linked quarter driven by lower balances held with the FRB and lower securities, partially offset by higher loans. Total loans increased 1% linked quarter to $318.9 billion, notably driven by a 3% increase in commercial and industrial (C&I) loans reflecting higher utilization and new production, partially offset by declines in commercial real estate (CRE) and residential real estate loans. Investment securities decreased 1% to $137.8 billion, as maturities and prepayments outpaced purchases. Interest-earning deposits with banks, primarily with the FRB, decreased 18% to $32.3 billion, reflecting lower deposits and higher loan balances.

Total deposits decreased 1% linked quarter to $422.9 billion, primarily due to lower interest-bearing deposits (commercial and brokered time deposits), partially offset by higher consumer balances. This shift in deposit mix contributed to lower funding costs. Uninsured deposits represented approximately 44% of total deposits at quarter-end, primarily concentrated in commercial operating and relationship accounts. Borrowed funds decreased 2% to $60.7 billion, mainly due to lower FHLB advances, partially offset by parent company senior debt issuances.

PNC maintains a strong capital position, with a Common Equity Tier 1 (CET1) ratio of 10.6% at March 31, 2025, up from 10.5% linked quarter and well above the regulatory minimum. The estimated CET1 ratio inclusive of AOCI was 9.4%. Tangible book value per common share increased to $100.40, up 5% linked quarter and 17% year-over-year, benefiting from net income and an improvement in AOCI. PNC returned $0.8 billion of capital to shareholders in Q1 2025 through dividends ($0.6 billion) and share repurchases ($0.2 billion), and expects share repurchase activity to increase in Q2 2025. The company's stress capital buffer (SCB) remains at the regulatory minimum of 2.50% for the period beginning October 1, 2024, and its performance in recent stress tests, demonstrating the lowest start-to-trough capital depletion among peers, underscores its balance sheet resiliency.

Managing Risks in an Evolving Environment

PNC operates within a dynamic risk environment, actively managing credit, market, liquidity, and operational risks. Credit quality remains a key focus, particularly given macroeconomic uncertainties and specific portfolio exposures.

Overall credit quality performance in Q1 2025 was solid. Total loan delinquencies increased slightly linked quarter, influenced by consumer loan delinquencies related to California wildfire forbearance. Nonperforming assets were stable. Net loan charge-offs decreased linked quarter, primarily driven by lower CRE net charge-offs. The provision for credit losses in Q1 2025 was $219 million, reflecting net charge-offs and a net increase in the Allowance for Credit Losses (ACL) due to changes in macroeconomic factors and portfolio activity. The ACL related to loans remained stable linked quarter at $5.2 billion, or 1.64% of total loans.

The Commercial Real Estate (CRE) office portfolio continues to be an area of uncertainty. At March 31, 2025, outstanding balances totaled $6.3 billion (2% of total loans). Criticized loans were 32.6%, and nonperforming loans were 12.1%. While the weighted average LTV at origination was 59%, for loans recently appraised, this increased to 81.5%. PNC has established reserves of 13.4% against the office portfolio, with a higher rate of 18.7% for the multi-tenant segment (55.1% of the portfolio), which exhibits greater stress (53.5% criticized, 21.3% nonperforming). The company actively manages this portfolio with quarterly risk ratings, accelerated reappraisals, and elevated approval levels for credit actions, expecting additional stress as approximately 41% of the portfolio matures over the next 12 months, potentially involving principal curtailments or charge-offs.

The CRE multifamily portfolio, totaling $16.0 billion (5% of total loans), is also being closely monitored. While inflationary pressures, higher rates, and elevated supply have impacted risk assessments, the company has not seen a notable change in loan performance to date.

PNC's liquidity position is strong, supported by its stable customer deposit base and access to contingent funding sources like FHLB and FRB borrowing capacity. The company consistently exceeds regulatory LCR and NSFR requirements. Market risk, particularly interest rate risk, is centrally managed. While the fair value of investment securities and MSRs is sensitive to interest rate changes, PNC uses derivatives to hedge these exposures. The company's estimated Economic Value of Equity (EVE) sensitivity to interest rate changes has become more symmetrical following the introduction of a new deposit runoff model, reflecting a more neutral balance sheet duration.

Regulatory and legal developments also pose risks. PNC is subject to ongoing investigations and inquiries that could result in financial remedies or reputational harm. The company's ability to take capital actions is subject to meeting regulatory minimums and the SCB, although its strong capital levels provide significant flexibility.

Outlook and Investment Implications

PNC's outlook for 2025, as articulated by management, signals continued financial improvement driven by factors within its strategic control. For the full year 2025 compared to 2024, the company expects:

• Average loans to be stable, equating to spot loan growth of 2% to 3%.
• Net interest income (NII) to be up 6% to 7%.
• Noninterest income to be up approximately 5%.
• Total revenue to be up approximately 6%.
• Noninterest expense to be up approximately 1%.
• The effective tax rate to be approximately 19%.

This guidance solidly points to achieving record NII in 2025, a key milestone driven by the continued benefit of fixed-rate asset repricing and expected lower funding costs, even with a conservative assumption for loan growth. The projected revenue growth, coupled with disciplined expense management (supported by the CIP), is expected to generate substantial positive operating leverage in 2025.

For the second quarter of 2025 compared to the first quarter, PNC expects average loans to be up approximately 1%, NII to be up 1% to 2%, fee income to be up 1% to 3%, total revenue to be up 1% to 3%, and noninterest expense to be stable. Net loan charge-offs are expected to be approximately $300 million in Q2 2025, reflecting expected variability, particularly within the CRE office portfolio.

Management's economic baseline forecast anticipates continued, albeit slower, expansion in 2025, with real GDP growth below 1% and unemployment rising to around 5% over the next year. They forecast four 25 basis point Fed rate cuts in 2025, starting in July. However, they acknowledge that recent turbulence in trade policy has materially increased downside risks, potentially leading to weaker growth and higher unemployment, and note that the longer the trade dispute persists, the greater the likelihood of a near-term recession. Despite this uncertainty, they view the current environment as too fluid to change their reserve estimates significantly at this time but have incorporated considerations for tariffs into their ACL.

The investment thesis for PNC rests on its ability to execute its organic growth strategy in attractive markets, leverage its balance sheet strength to benefit from the current interest rate environment, and maintain expense discipline to drive profitability and shareholder returns. The strategic investments in technology and distribution are crucial for long-term competitive positioning and growth, particularly in capturing opportunities in consumer lending. While the CRE office portfolio presents an ongoing challenge, the company's proactive management and reserve levels are intended to mitigate the impact. The strong capital and liquidity positions provide a buffer against potential economic downturns and regulatory changes, supporting continued capital return to shareholders.

Conclusion

PNC Financial Services Group is demonstrating solid execution against its strategic priorities, positioning itself for continued growth and profitability. The company's diversified business model, coupled with a disciplined approach to expense management and targeted investments in high-opportunity areas, is expected to drive meaningful positive operating leverage and record Net Interest Income in 2025. While macroeconomic uncertainties and specific credit exposures, particularly in the CRE office sector, warrant careful monitoring, PNC's strong balance sheet, robust capital levels, and proactive risk management framework provide a solid foundation. For investors, the story of PNC is one of a well-managed institution leveraging its core strengths and strategic investments to generate value in an evolving financial landscape, with a clear path towards enhanced financial performance underpinned by organic expansion and balance sheet optimization.