The PNC Financial Services Group, Inc. (PNC) Earnings Call Transcript & Summary

Hello, and welcome to The PNC Financial Services Group's 2022 Annual Meeting of Shareholders. Please note that this webcast is being recorded. It is now my pleasure to turn today's meeting over to Bill Demchak, Chairman, President and Chief Executive Officer of The PNC Financial Services Group. Please go ahead.

Thank you, and good morning, everyone. On behalf of our Board of Directors and management team, we are pleased that you have joined us this morning for our 2022 Annual Meeting of Shareholders. As Chairman of The PNC Financial Services Group, I will preside as the Chair of this meeting. To begin, let me provide an overview of how our meeting will proceed. After calling the meeting to order, I will introduce our director nominees, Executive Committee members and representatives of our independent registered public accounting firm, who will be available to address questions during the general Q&A portion of the meeting. Next, our corporate secretary will provide a report on procedural matters. I will then introduce the formal business of the meeting, including the 4 items on our agenda. We will then pause for questions regarding those 4 items and open the polls for voting. After the polls are closed, our corporate secretary will report on the preliminary voting results. Following that, I'll adjourn the meeting and provide remarks on our 2021 and first quarter 2022 performance and the progress we are making toward our strategic priorities as well as our commitment to our communities, customers, employees and shareholders. Immediately following that brief presentation, I will use the remaining time to take general questions submitted by shareholders through our virtual meeting portal. I will now call this meeting to order. I would like to introduce our director nominees who joined the meeting today. They are Joseph Alvarado; Debra Cafaro; Marjorie Rodgers Cheshire; Andrew Feldstein; Richard Harshman; Daniel Hesse; Linda Medler; Robert Niblock; Martin Pfinsgraff; Bryan Salesky; Toni Townes-Whitley; and Michael Ward. Also on the line are all the members of our Executive Committee: Carole Brown; Richard Bynum; Kieran Fallon; Debbie Guild; Vicki Henn; Greg Jordan; Stacy Juchno; Ganesh Krishnan; Karen Larrimer; Mike Lyons; Bill Parsley; and Rob Reilly; as well as Tom Kelly of PricewaterhouseCoopers, our independent registered public accounting firm. They will be available to answer questions during the general question-and-answer session. Joining me today on the panel are Greg Jordan, our General Counsel and Chief Administrative Officer; Alicia Powell, our Corporate Secretary; and Bryan Gill, Director of Investor Relations. This meeting will be conducted in accordance with the regulations for conduct, which are available, along with the agenda for the meeting, in the virtual meeting portal. By attending this meeting, you agree to abide by the regulations for conduct. Because this is a meeting of our shareholders, only those who entered the meeting as a shareholder using a control number will be permitted to vote and submit questions. Shareholder questions are welcome. To vote or submit questions, please follow the instructions available on our virtual meeting portal. We will only answer questions submitted in writing via the portal. And consistent with our regulations for conduct, you can submit questions at any time during the meeting, even now. We will now turn to the formalities that are necessary for our recordkeeping. Alicia, will you please present the secretary's report.

Thank you, Bill. I have in my possession an affidavit from Broadridge Financial Solutions, PNC's distribution and tabulation agent. The affidavit provides that the proxy materials were mailed to shareholders beginning on March 16, 2022, the day we began providing access to our proxy materials. Certain other shareholders were mailed paper copies or received electronic delivery of these proxy materials, including the Notice of Annual Meeting, beginning on March 16, 2022. The materials were distributed to shareholders of record as of February 4, 2022. American Election Services has been appointed as the judge of election for this meeting. The judge of election keeps the listing of all shareholders of record. On behalf of American Election Services, James Raitt is supervising the voting, and he has delivered his oath of office to me. The affidavit, notice and oath will be filed with the records of this meeting. The judge of election has certified that at the beginning of this meeting, there were present in person, via virtual format or by proxy 370 million votes or 88% of the total voting power. Therefore, a quorum is present. Copies of the minutes from the 2021 Annual Meeting of Shareholders are available from me upon request. I would also like to remind those attending the meeting that today's presentation contains forward-looking information. Cautionary statements about this information are included in today's presentation, which is also available on our corporate website, pnc.com, under Investor Relations. And I urge you to read the cautionary statements regarding such information. This concludes my report.

Thank you, Alicia. Based on your report, I find that proper notice has been given and a quorum is present. Therefore, this meeting has been properly convened. The purpose of this meeting is to consider and act upon 4 proposals. The 3 management proposals are: first, the election of 13 -- the election of the 13 nominated directors; second, the ratification of the Audit Committee selection of PricewaterhouseCoopers as PNC's independent registered public accounting firm for 2022; and third, the advisory approval of the compensation of PNC's named executive officers. I will now ask for a single motion to introduce these proposals. May I have such a motion?

Mr. Chairman, my name is Bryan Gill. I'm a shareholder, and I so move.

May I have a second to this motion?

Mr. Chairman, my name is Greg Jordan. I'm a shareholder, and I second the motion.

I declare these proposals have been properly introduced and moved. The fourth proposal for shareholder consideration is the shareholder proposal regarding a report on risk management in the nuclear weapons industry, submitted by the Sisters of St. Joseph of Brentwood, together with cosponsors, the Sisters of Humility of Mary. If the proponent's representative, Father Carmen D'Amico, is available, I would ask the operator to unmute his line so that the proposal can be presented. The proposal is set forth in detail on Page 85 of our proxy statement. Father D'Amico, please take 3 or 4 minutes to present the proposal.

Thank you very much. I appreciate the opportunity. Hello, PNC employees and shareholders. My name is Father Carmen D'Amico. I'm a priest of the Roman Catholic Diocese of Pittsburgh, and I'm currently the pastor of St. Oscar Romero Parish located in the communities of Canonsburg, Meadowlands and Muse in Washington County, Pennsylvania. I'm representing the Sisters of St. Joseph of Brentwood in Long Island, New York and the Dominican Sisters of Hope in Ossining, New York, both long-time shareholders in PNC and the filers for the proposal requesting a report on risk management related to the nuclear weapons industry. As Catholic religious congregations in a society struggling with excessive violence, the Sisters assert that there is a clear moral responsibility for PNC and its investors to acknowledge the direct role that financing of nuclear weapons plays in perpetuating human rights harms in war and conflict. And that all actors must contribute to appropriate remedies. Russia's war in Ukraine and localized nuclear threats has put our world at the highest risk of nuclear detonation since the cold war. Nuclear weapons manufacturers that PNC finances, like General Dynamics, have touted Russians' invasion as a profitable business opportunity, and they are poised to profit. This proposal is offered, supported by strong legal and financial risk assessments, to PNC and its shareholders. It is an invitation to examine the business model in the context of its human rights responsibilities so that leadership and vision may be advanced to end the company's financing that contributes to death and destruction and instead, advance a purpose to contribute to a more positive vision of society. We believe that support for this proposal is warranted for 3 main reasons: First, PNC's risk management and due diligence systems lag behind peers and do not explicitly address the nuclear weapons industry. Second, nuclear weapons are illegal under international law as of January 2021, exposing PNC to reputational risk and legal risk as it continues to finance these activities. Lastly, many of the companies that PNC finances in the nuclear weapons industry are failing to meet their own human rights responsibilities and expose PNC to material risk. In conclusion, we agree with the statement by Pope Francis that not just the use, but even the possession of nuclear weapons is immoral. We say to PNC and all financial institutions and governments to stop banking the bomb and encourage all shareholders to support proposal 4. Thank you so much.

Thank you, Father D'Amico. We will now pause to allow for questions related to these 4 proposals. Questions unrelated to these 4 proposals will be addressed as appropriate during the general question-and-answer session that will follow the adjournment of this meeting. If multiple questions are submitted on the same topic, we will do our best to summarize them and respond collectively to allow us to address as many questions as possible. We'll make every effort to address questions and comments that are consistent with the regulations for conduct. And we have actually received several questions submitted through our virtual meeting portal prior to today's meeting, and we'll start off by addressing those.

We've received a number of questions related to the shareholder proposal that Father D'Amico just presented regarding the report on risk management and the nuclear weapons industry. And basically, it's why does the Board recommend a vote against item #4?

Thanks, Bryan. The Board recently reviewed our lending relationships with companies connected in some way to the nuclear defense industry and the potential risks these relationships present. The Board concluded that these relationships do not pose a material credit, legal, or reputational risk to PNC and are consistent with our Environmental and Social Risk Management, or ESRM framework. Our exposure to these companies is de minimis. They represent less than 0.25% of our total credit commitments as of year-end. And our lending represents approximately 2% of these companies' capital structures. The loans relevant to this proposal are subject to a management-level environmental and human rights risk assessment pursuant to our ESRM framework, which is applied to all lending decisions. We found no environmental, social and government risks that would inherently exclude these loan recipients from the application of our fair and consistent lending guidelines. Our Board is regularly updated on the ESRM framework. And as a result of shareholder feedback, it has committed to annually review that framework. I would also like to note that the companies the shareholder proponent has characterized as nuclear weapons companies are in, in fact, large and diversified companies, like Boeing, Lockheed Martin, General Dynamics and Jacobs Engineering Group, which provide a myriad of products and services that benefit society and enhance the quality of human life. The vast majority of these companies' operations and revenue bear no relationship to nuclear weapons. Further, the proponents have characterized the Treaty on the Prohibition of Nuclear Weapons as an enforceable pact that somehow put PNC's contractual relationship with these companies at risk. To the contrary, none of the world's 9 nuclear powers have signed the treaty, and the U.S. has firmly rejected the treaty as a destabilizing force, which is even clear now in light of the Russian war in Ukraine. Finally, we are not aware of a single U.S. bank that has adopted policies to prohibit lending to or stopped funding companies the co-filers have characterized as associated with the nuclear defense industry. Additional detail on the Board's recommendation to vote against this proposal can be found in our proxy statement.

Thank you, Bill. We also received a few questions about the size of PNC's Board of Directors and the compensation of our directors. Can you please discuss the Board's size and why you think it is the appropriate number of directors? And can you also discuss the director's compensation levels and why you think they are deserving of the amounts they receive?

So the Board's Nominating and Governance Committee reviews the size and composition of the Board every year. At this time, we believe the number of directors on our Board is appropriate given the size of our firm and the complexity of the oversight of financial institutions. And if anything, given the workload, it could actually be a bit larger. Also, the size of our Board today is in line with the Board's size of banks in our peer group. With respect to the compensation paid to our directors, it's important to note that serving on the Board of a highly regulated, large financial institution is a lot of work. The Board's Nominating and Governance Committee reviews the director compensation program annually. Its review is informed by a benchmarking study completed by an independent third party, which confirms that our Board's pay is reasonable and appropriate.

Okay. The next question asked about the qualifications of the director nominees and whether PNC has ever considered implementing a restriction on how long Board members can serve?

We recognize the value of a Board that is diverse in perspective and experience. We understand that diverse Boards lead to better decisions and outcomes for our stakeholders. In developing the slate of director nominees, the Board's Nominating and Governance Committee evaluates the potential directors for diversity, perspective, experience, knowledge, education, age and skills. The committee evaluates diversity in a broad sense, recognizing the benefits of demographic and cognitive diversity and the breadth of diverse background, skills and experiences directors bring to the Board. The Committee considers the company's strategy and industry trends when anticipating the skills the Board will need in the future. As the financial services industry has evolved, so has our Board. Our slate of director nominees include senior leaders with substantial expertise in technology, cybersecurity, financial services, regulatory affairs, risk management, operations and strategic planning, finance and accounting, marketing and branding, ESG matters, talent management and succession planning. Of our 13 director nominees, all 13 have valuable senior leadership experience. 12 are independent, 4 are women and 3 bring racial diversity to the Board. Our Board has a mandatory retirement age of 72. The average tenure of our directors is currently about 5 years, and all but 2 of the directors being considered for election today have joined the Board since our 2015 Annual Meeting of Shareholders. Additionally, the entire Board is elected each year. We have no staggered elections. The election of directors is subject to a majority voting requirement. Any director who does not receive a majority of the votes cast in an uncontested election must tender his or her resignation with the Board.

Okay. Bill, your next question ask you to discuss why you feel comfortable with one individual serving as Chairman of the Board as well as CEO.

Thank you. First off, I'd remind you that the Board's leadership includes a strong lead independent director. That said, PNC has had a long and successful track record under the leadership of the CEO, who also serves as Board Chair. This leadership structure has worked well for us going back many decades.

Okay. The next question relates to proposal #2. Can you discuss the selection of the independent registered public accounting firm? And why the same firm has been chosen consistently for years?

So under the Audit Committee's charter, the committee is responsible for the selection, appointment, the compensation, retention and oversight of our independent auditor. The committee evaluates, monitors and reports to the Board regarding the independent's qualifications and performance of the independent auditor and the lead audit partner. The committee approves all audit engagement fees and terms associated with the retention of the independent auditors. The Audit Committee has selected PwC as our independent auditor for 2022. And making this selection, the committee carefully considered, among other things, PwC's qualifications of performance, the quality and candor of its communications with the committee and PNC, its independence, objectivity and professional skepticism. The committee presented its conclusions regarding PwC to the Board, and the Board voted unanimously to recommend that shareholders vote to ratify the Committee's selection of PwC for 2022. The committee and the Board believe that the continued retention of PwC is in the best interest of PNC.

Okay. We have no further questions related to the proposals.

Thank you, Bryan. So all proposals are now formally before the meeting, and I declare the polls to be open. Shareholders who have not voted or wish to change their vote may do so now clicking on the Vote Here button on the virtual meeting portal and following the instructions. Shareholders who have sent in proxies or voted by phone or Internet do not need to take any further action, unless they want to change the vote. We will pause briefly to allow the voting to occur. [Voting]

Please continue to hold on while we get any final votes. [Voting]

All right. I declare the polls to be closed, and I'd like to call upon the corporate secretary to report the preliminary voting results.

Thank you, Bill. The judge of election has provided a preliminary report to me, which certifies that a majority of the votes cast were for the election of all 13 director nominees, for the ratification of the selection of PricewaterhouseCoopers, for the advisory approval of the compensation of PNC's named executive officers, and against the shareholder proposal regarding a report on risk management in the nuclear weapons industry. I will file the preliminary report with the records of this meeting. And the final vote tally will be disclosed on a Form 8-K that PNC will file with the SEC.

Thank you, Alicia. Subject to certification of the final voting results by the judge of election, I declare that the 3 management proposals have been approved, and the shareholder proposal has not been approved. This concludes the formal business of the meeting. I declare that the annual meeting is adjourned. With the close of the business portion of today's meeting, I'll offer just a few remarks on our 2021 and first quarter 2022 results, and then address a few of the key initiatives that we're currently executing to position our company for the future, while supporting all of our constituents. 2021 was a pivotal year for PNC. We made remarkable progress in growing our business, particularly through our acquisition and successful integration of BBVA USA. The combination of our 2 companies made us a coast-to-coast franchise and strategically positioned us for long-term, sustained growth. Through the acquisition, we gained 2.6 million customers, 9,000 employees and more than 600 branches. None of this would have been possible without our technology, which I will talk about in a few minutes. In addition, our employees rose to the challenge and brought our 2 organizations together. Some moved into new roles and others took on additional work sets, all while continuing to execute on our strategic priorities. I'd like to thank my 60,000 colleagues for the way they delivered for our customers, our communities and ultimately, for all of you. In return, I'm proud of how we supported our employees. There's been massive change in how we work and what our employees want. And while we pride ourselves on being an employer of choice, we know that we need to do more to attract and retain talent. In addition to increasing our minimum wage by 20% and introducing paid family leave and other benefits last year, we continue to evaluate compensation and provide flexibility. We're also focused on re-recruiting our own people, treating our employees, like we would a candidate. It's important that we communicate to them what's great about PNC and back it up with concrete actions, like promotions and opportunities for growth and development. It's imperative that we do right by our employees who work incredibly hard to do right by us. Our accomplishments last year were also reflected in our financial results. We had a solid year amid a challenging operating environment, with net income of $5.7 billion. While BBVA USA impacted our operating results, we saw strong organic, noninterest income growth. This helped us generate record revenue of $19.2 billion, and our credit quality and capital positions remained outstanding. Moving on to first quarter 2022 results. We had a good start to the year and reported net income of $1.4 billion. During the quarter, we grew loans and securities and controlled expenses. Our credit quality, reserves and capital levels remain strong. One area to highlight is loan growth. This quarter's growth was notably strong, and it was the first quarter since the onset of the pandemic that we saw meaningful upward movement in both loan utilization and new production. Based on our performance, our strong capital levels and the Board's confidence in our execution of our strategic priorities, we announced on April 1 a substantial increase to our quarterly dividend of $0.25 or 20% per share. And we have continued to execute on our strategic priorities, including building out our new markets. While we still have a lot of work to do, we've made remarkable progress, and I'm thrilled with what we've been able to accomplish. Our teams are in place. Our call volume is up, and our sales and pipelines are robust. We've deployed our regional president model across the footprint and are embedding ourselves in the communities, consistent with our national Main Street approach. All of this, our acquisition, our national Main Street Bank model and our consistent execution of our priorities positions us to grow and deliver shareholder value. Through time, our go-to-market approach and thoughtful acquisitions have served us well, and we have generated significant shareholder returns and value across a variety of measures. As we move forward, we are well positioned. The combination of rising interest rates and accelerating loan growth will benefit the entire industry. However, PNC will further benefit from our entrance into new markets, our solid mix of fee-based businesses and our strong credit culture. This combination will allow us to generate meaningful shareholder returns going forward. It's important that I acknowledge the impact of our technology investments, which allowed us to announce, close and integrate BBVA USA into our business in less than 11 months. Our technology investments also allowed us to lead the way in implementing an elegant solution to overdrafts. Our introduction of Low Cash Mode has fundamentally changed the way overdrafts are being handled across our industry for the better. I want to take a moment to talk about our community focus as well as our commitment to environmental, social and governance issues, which have become increasingly important across the banking industry and to our regulators. Last year, we announced a 4-year $88 billion community benefits plan. Since then, we've intensified our focus on several key areas, including supporting homeownership among minority and low and moderate income borrowers. Since the beginning of this year, we've issued $3.8 billion in loans and investments, including $2.9 billion in home lending, $633 million in small business lending and $246 million to community development financing. At the same time, we continue to play a role in the transition to a low-carbon economy. We've enhanced our reporting by aligning with the recommendations of the Task Force for Climate-Related Financial Disclosures and committed to mobilizing $20 billion in support of environmental finance. In addition, we've joined the Partnership for Carbon Accounting Financials, which is working to develop an approach to measure and disclose financial emissions. Importantly, we also enhanced our ESG governance. Last year, we created a new model that ensures that each Board Committee has direct oversight of the ESG issues under its purview. This model strengthens the Board's existing corporate responsibility oversight, which has been in place since 2016. Further, we're financing our clients' sustainable operations, purchasing renewable energy -- or sorry, whether we're financing our clients' sustainable operations, purchasing renewable energy or monitoring the SEC's proposed rulemaking on climate disclosures, we continue to engage with our stakeholders. We're listening to their feedback and taking steps to do what's right by them for a company in the world we live in. Notwithstanding the many changes that we navigated last year, we did what we said we were going to do by focusing on the things that were within our control and by positioning our company for long-term growth. I want to thank all of our employees who, once again, delivered for our customers, our communities and one another and made our progress possible. I also want to thank retiring Board member, Chuck Bunch, who, over the course of nearly 15 years on our Board, has made remarkable contributions to the strategic direction and success of our company. And finally, I want to thank you, our shareholders, for your support, and most importantly, your trust. I will now pause to allow for questions from our shareholders in the remaining time allocated for this meeting. I will respond personally or designate another person to respond to questions we receive that are appropriate for discussion. As a reminder, if multiple questions are submitted on the same topic, we will summarize them and respond collectively. We'll make every effort to address questions and comments that are consistent with the regulations for conduct. We will not respond to questions that were already addressed in today's presentation. If you have a question about a matter of concern to you individually and not a general concern to our shareholders, please contact our Investor Relations team through our website, pnc.com. We've allocated an hour for the meeting, including questions. We'll address as many questions as possible. And again, we've received several questions submitted through our virtual meeting portal prior to today's meeting, and we'll take on those first.

Okay. Bill, your -- we received a question asking if we are considering a stock split. Why or why not? Then, if yes, what time our conditions would you like to see before taking that action?

We're not considering a stock split. It's a question that comes up, I think, every year on the back of continued success or appreciation in our share price. Practically, all that does is increase cost for the company in that we're now listing costs and taking care of a greater number of shares. It doesn't actually do anything for the performance of the company or change the economics of the company. So we're not considering it.

Thanks, Bill. The next question asked you to discuss PNC's current minimum hourly pay rate. And have you discussed increasing this amount?

It's a good question. As I noted before, we raised our pay rate -- minimum pay rate last year from $15 to $18. And of course, that increase has caused increases -- throughout, in effect, an accordion increase through layers above it. And that $18 itself is a number that is adjusted depending -- adjusted upwards, if necessary, depending on the cost of the individual market where people operate. Having said all that, we're watching this market carefully. Our -- it's important to us that we remain an employer of choice. It's important to us that we have low turnover so that people can learn their jobs and take care of our customers. And so we're going to watch this carefully in what continues to be a very competitive market for people.

Okay. Thank you. We received a question that asked you to discuss how the great resignation has impacted PNC's workforce, and discuss P&C's plan to retain and attract talent given the significant turnover experienced in the past year.

Look, it kind of goes back to part of my answer on the first question. We have not been immune to the great resignation. And our turnover last year was above our historical norms, but certainly below some of the trends you're seeing in the industry. Importantly, our turnover on what we call our highly rated employees, while up, is still quite low. Notwithstanding that, we need to work on re-recruiting our employees and making sure that we have and could show them a good career path that is rewarding to them in all ways. It's also important to note that notwithstanding the turnover in the market and the degree of difficulty of hiring people in this market, we've actually managed to hire more people than we've lost through the start of this year. In short form, we've actually increased our head count through the first quarter of this year.

Thank you. The next question is regarding the format of the annual meeting in the future. Specifically, will you continue to host your annual meetings virtually? Or can we expect them to return to an in-person format?

I asked myself that same question. We made the decision to go virtual this year when Omicron was spiking, and we were worried about what the environment would look like. And we continue to go through these periods of uncertainty, which means that I don't have a solid answer to this question. We're going to look at the environment, and we'll make decisions as we go forward. But for this year, I think we made the right decision, and we'll keep looking. And hopefully, for the country and us, we'll be able to operate in a place where everybody can ultimately get back together again.

Okay, thanks. The next shareholder question would like you to discuss PNC's exposure to the Russia-Ukraine conflict. And specifically, do you have any business in Russia? Or do any of your customers? And have you contributed in any way to helping Ukraine?

First, I ought to just lead off by acknowledging the tragedy that is occurring at the moment in Ukraine and the millions of lives that have been disrupted and the thousands, thousands of lives that have been lost. We have contributed in a dollar sense to the situation in Ukraine through our foundation with donations to both the American Red Cross and World Central Kitchen. And then we've also set up a matching program for our employees. As it relates to exposure, we don't have any direct exposure in -- to Ukraine and Russia. We are -- we have indirect exposure through nothing else through the potential for economic slowdown in certain of our clients who do business in those regions who could be impacted. And then obviously, as a company, we're going to comply with all applicable sanction programs, and we'll continue to assess the conflict that has evolved with respect to our actions and reactions.

Okay. Your next question asked, does PNC's commitment to ESG pose any risk to prospective borrowers and customers? So in the future, will an ESG score be used to discriminate or deem certain stakeholders as unworthy?

No.

Okay. That was pretty clear. At this time, we have no further questions.

Well, thank you all for your questions. Again, if you have additional questions or your question wasn't answered, you can reach out to Investor Relations group through our corporate website. And thank you all for attending and for your interest in PNC.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.