Operator:

Greetings, and welcome to The PNC Financial Services Group Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bryan Gill. Thank you, Bryan, you may begin.

William Demchak :

Thank you, Bryan, and good morning, everyone. As you've seen, we had a strong second quarter, and we generated $1.5 billion in net income, or $3.39 diluted earnings per share. Our results included a gain on a portion of our Visa Class B shares, which was substantially offset by other items in the quarter, including a securities repositioning. Rob is going to provide more details on that Visa gain financial results and outlook in a second, but I'll highlight a few items. First off, net interest income has moved past its trough, and both NII and NIM grew in the quarter. And by the way, this would have occurred independent of the $10 million impact that we got from the securities repositioning. Importantly, we are on a growth trajectory towards expected record NII in 2025. We continue to add new customers and see strong business momentum across our franchise, particularly in the new and expansion markets. [DDA] (ph) growth accelerated in our branches and we continue to add new corporate and commercial banking clients above historical rates. In our retail business, we launched our first new credit card in several years, PNC Cash Unlimited, a highly competitive card that offers 2% back on all purchases. We plan to launch several new cards in the months and year ahead. Average deposits held relatively flat to the first quarter levels, a little bit ahead of our expectations. And our expenses remained well controlled and we generated positive operating leverage during the second quarter. Rob is going to touch on this in a minute, but we have increased our continuous improvement program target for 2024 as expense discipline remains a top priority. The credit environment continues to play out as we have expected, including an increase in charge-offs within the CRE office portfolio, where we remain adequately reserved. Outside of CRE office, credit quality remains relatively stable. Finally, we further strengthen our capital levels during the quarter. Our strong balance sheet allows us to continue supporting our customers and communities, investing in our business and people, and delivering returns for shareholders. Our financial strength and stability are also reflected in the latest results from the Fed stress test in which we maintained our stress capital buffer at the regulatory minimum of 2.5% and importantly for the second year in a row, PNC has had the lowest start to trough capital depletion in our peer group, further demonstrating our best-in-class resiliency. With this in mind, our board recently approved an increase in our quarterly stock dividend by $0.05. In summary, we delivered strong results in the second quarter and are well positioned to drive further growth and expansion into 2025 and beyond. Before I turn it over to Rob, as always, I just want to thank our employees for everything they do for our company and our customers. And with that, I'll turn it over to Rob to take you through the quarter. Rob?

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

William Demchak:

Hey, good morning, Betsy.

William Demchak:

You should think of it as a one-off. I mean, you never say never and I don't know what the future holds, but practically at this point, we don't have to do any restructuring on anything to hit that stated goal of the 2025 record NII.

Betsy Graseck:

Okay, great. And then could you speak to how you're thinking about deposit pricing and levels. I mean, clearly there was tax related outflows and things like that this quarter, and with loan growth being muted, should we be anticipating deposits stable to down, or are you going to be out there trying to get deposit growth, just again, asking from the context of how we should think about deposit pricing as we work through our models? Thanks so much.

Betsy Graseck:

Got it. All right. Thanks so much. Appreciate it.

Operator:

Thank you. Our next questions come from the line of John Pancari with Evercore ISI. Please proceed with your questions.

William Demchak:

Hi, John.

William Demchak:

Well, I could [Multiple Speakers]

William Demchak:

I think that's an important point. That's the big difference in this quarter. We changed our guidance for average loans to be up 1% or approximately 1% for the year, John. As you can see now, down less than 1%. We don't control that. There's a basis for some loan growth in the second half of the year. But the important point is, we've taken it out of our guidance and our NII improved to the better end of the previous guidance, not just due to the securities restructuring, but also the positive deposit dynamics and so forth.

Robert Reilly:

Yes. I mean, right now we're on pace and we continue to -- we expect to continue the pace that we've been on for the first couple of quarters. And as you know, the new rules are still in flux, so there's not finalization there. And then beyond that, I think, a driver will be what happens with loan growth, which would be a factor in terms of that being our highest and best use of our capital. But that'll be a factor in terms of deciding on buybacks. But the important part is that we are buying back shares.

John Pancari:

Got it. Okay, that's helpful. Thanks, Bill.

Erika Najarian:

Hi. Good morning.

Erika Najarian:

Good morning. Going back to Slide 9, I presume that the stabilization in deposit rates fade, which is quite notable as part of the upgrade of the core NII guide, even without the restructuring. And you answered Rob, Betsy's question, I gather, on a balances standpoint, but perhaps give us a sense on how you think deposit rate paid will trend from here and maybe under the scenario of rates staying where we are versus the scenario of what the forward curve is pricing and how quickly you may be able to reprice?

Erika Najarian:

Got it. And my second question is, it refers back to Slide 6 in terms of the forward starters. When I look back at your 10-Q disclosure, it seems like you're largely neutral to interest rates. And I know that you and Bill have talked a lot about the different factors that drive the inflection point in the Nike Swoosh. I'm wondering if the addition of the $18 billion in forward starters with the received fix of $4.31 billion, does that impact the magnitude of the Swoosh for 2025?

Robert Reilly:

Well, my answer to that would not necessarily be the magnitude, but the certainty. So essentially what we've done is locked in some of the swoosh.

Erika Najarian:

Got it. And Bill, I think that's such a good point, because I think when people are taking a fixed asset repricing, sometimes they misthink about the $525 million as opposed to whatever. It could be at four, right, by the end of next year. And to that -- to your point, you've locked in a certainty. Okay. Thank you.

Scott Siefers:

Good morning, everyone. Thanks for taking the question. Rob I was hoping you could maybe touch on sort of major fee components in light of the software expectation. I mean, it sounds like it's just a -- or mostly a function of mortgage, which sort of is what it is. But just curious to hear sort of what do you think is going well? What will need a heavy lift? That kind of thing.

Scott Siefers:

Okay. Perfect. Thank you, Rob. And I wanted to ask a little bit of a kind of fine-pointed one on loan growth. I think, Bill, in your sort of prepared remarks, you noted the introduction of your first new credit card in a while, as well as plans to introduce more. Can you sort of contextualize your aspirations for that business and sort of the path to get there over time?

Scott Siefers:

Okay. All right. Perfect. All right. Thank you guys very much.

Ebrahim Poonawala:

Good morning.

Ebrahim Poonawala:

I guess, maybe, Rob, it looks like you've locked in a lot of asset repricing. As we think about where the NIM should normalize relative to 2.6%, give us a sense, I mean, you probably have this number. Do we hit 3% at some point next year in terms of what the normalized rate would be? And can we get to a 3% plus NIM next year, even with maybe four or five rate cuts?

Ebrahim Poonawala:

Got it. And just one quick one on credit quality. I think I heard Bill say not a whole lot ex-CRE office, but give us a sense if you're seeing any cracks within the C&I customer base from the prolonged period of like just higher for longer rates, just how do you handicap the risk of a downturn or a recession over the coming months or the next year?

Ebrahim Poonawala:

Got it. An outlook for reserves is stable from [indiscernible]

Ebrahim Poonawala:

Got it. Thank you.

Operator:

Thank you. Our next question come from the line of Bill Carcache with Wolfe Research. Please proceed with your questions.

William Demchak:

Sure. We are largely indifferent. I mean, at the very, very margin, we benefit on the Fed cut rates from a floating rate standpoint. Of course, we're exposed to the steepness of the curve because that plays in the how we reprice maturing fixed rate assets and that's a variable. It's a variable for us. It's variable for everybody. It's one of the reasons we lock some of it in. My own belief in our positioning is such that even though we would expect the Fed to cut here. I think in the end, somewhat sticky inflation, the fact that deficits matter, it's going to cause the curve to steepen out. So we locked some of it in. I don't feel terribly worried about the need to lock the rest of it in. I just think we're in a good place. We're going to do fine.

William Demchak:

I mean, just quickly, the movement from -- particularly in office CRE, right, from criticized to nonperforming-related reserving and charge-offs is all going as we've expected. That's the natural progression of that cycle, nothing's changed. We're not surprised by anything. We're reserved for it. Credit quality of corporate America as it relates to at what point do the people who have locked in fixed rates and loan rates start to have to pay more. Ultimately, at the margin is going to impact the way we rate somebody. I think about multifamily is an example where higher rates have hurt coverage ratios. It's not going to cause losses, but it's caused us to downgrade that asset class simply because the excess isn't there. I think it will flow through to corporate America over a period of time as well. But I'm not particularly worried about it.

William Demchak:

Yes, not in the U.S.

Bill Carcache:

Okay. Understood. Thanks, Bill and Rob. Bill, if I could squeeze in one last one for you. I wanted to get your thoughts on the FedNow Instant Payment Services, which has been getting some attention. Is there a fee opportunity there? I guess, what level of engagement are you seeing from PNC customers? Do you see potential for lower cost instant digital payments disintermediating debit? It'd just be helpful to hear your thoughts on the overall risk versus potential benefits of that to PNC.

Bill Carcache:

Thank you for taking my questions.

Ken Usdin:

Hey. Thanks a lot. Good morning. You guys gave us a great table last December with the repricing of fixed assets through 2025. And I'm just wondering, how much carry forward will there also be through 2026? Should we think about that kind of ratably? Obviously, it's been six months since you gave us that slide, but just wondering just how that rolls as we look further ahead. Thanks.

Ken Usdin:

Okay. Yes. That's why I'm asking the building box question as opposed to NII question.

Ken Usdin:

Okay. Understood. And then on the expenses, so you guys have been doing a great job holding the line. And I just wanted to ask like it looks like there's a pretty decent ramp baked into the second half on expenses. And I'm just wondering like what influences that? Because it seems like expenses will be growing faster than revenues in the second half. So -- or certainly faster than fees. So can you just walk through, is that conservatism? Is there some catch-up on investments that you're making? Any context on that? Thanks, Rob.

Ken Usdin:

Okay. Got it. And then, obviously, as that plays forward and if NII is better next year, you can also afford more cost growth, but we'll hear about that later.

Ken Usdin:

Got it. Thank you.

Operator:

Thank you. Our next questions come from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.

Robert Reilly:

Well, sure. So now the question...

Robert Reilly:

Yes. So just to keep with your jeopardy approach there, the question would be what loan growth going to be in the second half. So it did come down.

William Demchak:

I think you're trying to read into this too hard. Look, we're basically on H8, maybe a little soft on consumer because our card book didn't grow. When C&I comes back, traditionally, we'll do better. We've been actually adding DHE. They're just not drawing and we're winning clients. All we did, Mike, was this whole notion of if we're giving guidance on the expectation and some crystal ball that says there's going to be loan growth when thus far, we don't see evidence of it, we just took it out. If it shows up, then it's additive to everything we do. And we certainly aren't underperforming. We're winning clients at a pace that we never have. So it's literally this notion of when do they draw on lines and we just put -- we got tired of talking about it. When they do it, we'll benefit, and it will add to all of those numbers that you're looking at.

William Demchak:

Yes, I don't -- Rob, do you know DHE number?

William Demchak:

We've grown exposures, and we've won clients at a pace well beyond, particularly in the new markets, but overall, well beyond what we've managed to do historically. We ought to and we will produce some of those metrics for you.

Mike Mayo:

And just last follow-up on that because, Bill, you've been around for a while and Rob, the disconnect between what we're hearing and seeing in the capital markets and that activity picking up versus the still subdued loan growth as you say, CapEx and inventory are lower. It just seems CEO confidence is up, people ready to do all sorts of things, yet when the rubber meets the road with you guys, you're just not seeing it that much.

Robert Reilly:

Or maybe a little better.

Mike Mayo:

No, I understand. Underpromise, never deliver, it's what you try to do. It's just -- in the past, you said at this stage of the cycle, and historically, you've seen loan growth come back. So it sounds like this cycle might be -- it might be a little bit different, it might not be.

Mike Mayo:

Got it. Okay.

Matt O'Connor:

Good morning. Bill, I haven't heard you guys talk too much about credit card. You mentioned a new product and some more coming, and just thoughts on kind of the strategy for card going forward, and the targeted customer, and then any interest in acquiring portfolios, which has not really been the radar in the past. Thanks.

Robert Reilly:

Yes, in simple terms, we're just under-penetrated relative to industry averages. Nothing hugely aspirational other than just to have our fair share.

William Demchak:

I'm sorry, I missed the front part of that question.

William Demchak:

What happens with the back half? So the 50% that we did not have the ability to monetize. Well, Visa controls that schedule. Some of it's reliant on the litigation resolution and some of it's reliant on the schedule they've laid out, which is sort of a multi-year exchange. So we'll just continue to monitor it.

Operator:

Thank you. Our next questions come from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your questions.

William Demchak:

Hey, Gerard.

Robert Reilly:

Yeah, that's a good question, Gerard. Ironically, their special servicing balance has actually went down in the quarter, which is a little bit of a head scratcher. We don't think that's necessarily indicative of a trend. We do expect it to continue to go up. But from the start, and I think you've asked this question before, it's been much, much slower in terms of those increases, those balances than you would have expected.

Robert Reilly:

Yes, and that we thought a year ago.

Gerard Cassidy:

Are they seeing any change in the product? Is it still primarily commercial office, or is it moving into any of the product areas?

Gerard Cassidy:

Got it. Okay.

Gerard Cassidy:

Got it. And then just on your commercial real estate in the Slide 15, you give us obviously good detail and you've always told us about this multi-tenant office is the issue. It looks like obviously with 52% criticized, how far are you along in analyzing or reviewing that portfolio? Are you completely through it and now it's going a second time? Or any color there?

Robert Reilly:

Oh, we've analyzed.

Gerard Cassidy:

Very good. And just one last one on this, Bill. Geographically, are you guys finding certain parts of the country weaker than others? I know there's a lot of talk about the big urban markets, Class B and C buildings. How about from your vantage point, what are you guys saying geographically?

Gerard Cassidy:

Got it. Okay.

Gerard Cassidy:

Yes. Got it. Okay. Thank you, guys.

Bryan Gill:

Well, thank you all for joining our call this morning. And if you have any follow-up calls, feel free to reach out to the IR team, and we'd be happy to jump on a call with you.

Robert Reilly:

Thank you.

Operator:

Greetings, and welcome to the PNC Financial Services Group Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bryan Gill. Thank you, Brian. You may begin.

William Demchak:

Thank you, Bryan, and good morning, everyone. In the first quarter, we executed well and delivered solid financial results. We generated $1.3 billion in net income, and adjusting for the FDIC special assessment $3.36 per share. Rob will provide details on our results in a moment, but I'll start with a few thoughts. First, we continue to grow our business. In the first quarter, we added new customers across our segments and increased deposits on a spot basis. We're continuing to invest heavily in our franchise to drive growth and gain share, particularly in our retail banking technology platform or payments businesses and our expansion markets. To that end, in the first quarter, we announced a multiyear investment of nearly $1 billion in our branch network to renovate more than 1,200 locations and open new branches in key locations, including Austin, Dallas, Denver, Houston, Miami and San Antonio. Second, expenses were well managed during the quarter. As we've indicated, expense discipline remains a top priority, and we are on track to maintain stable core expenses in 2024. Third, credit quality remains stable during the quarter. The office portfolio remains an area of focus, but we are adequately reserved overall, and particularly with respect to CRE. We believe our thoughtful approach to managing risk, customer selection and long-term relationship development will continue to serve us well. And fourth, we continue to build on our strong liquidity and capital position during the quarter, providing us with a financial strength and flexibility to help us support our clients grow our businesses and capitalize on future opportunities. In summary, we delivered solid results during the first quarter and positioned ourselves well for the balance of 2024 and beyond. Last month, we launched a brand campaign celebrating our boring approach to banking. Now obviously, we're using humor in the campaign to have a little fun and grab the public's attention. But inside of that humor is honesty about who we are, how we think about risk, and how we run our company. In short, it is everything we do to be steady and predictable. Finally, I just want to thank our employees for everything they do for our customers, for each other, and for all of our stakeholders. And with that, I'll turn it over to rob to take you through the quarter. Rob?

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

William Demchak:

Good morning.

William Demchak:

Sure.

Robert Reilly:

Okay. Yeah. Good morning, Betsy. This is Rob. So in terms of NII and the trajectory that we're on, we knew at the beginning of the year that we would trough around this time in the second quarter and that's what's happening. We expect to grow from that trough level based on the repricing of our fixed rate assets as rates settle down. There is some reliance on the back half for loan growth, but all consistent with our full year guidance. Average loans up 1%.

William Demchak:

I was just going to say that the largest driver is repricing of fixed rate assets. We expect some loan growth, but it's not a heroic number in there. It's simply to roll down of our securities book.

William Demchak:

It's a variety of things. I think the capital markets activity in the first quarter in investment-grade debt put a lot of cash into the system and you just -- you saw companies that could hit that market, pay down revolver. So that was sort of a near term impact to it. There's -- as when we look out, there hasn't been any real inventory build, which I would expect given retail sales. There hasn't been much CapEx and capacity utilization has been holding constant at a pretty high level. So, at some point this needs to turn, but I think the first quarter kind of surprised us. And my best guess was that was on the back of just how liquid the public markets were.

Operator:

Thank you. Our next questions come from the line of John Pancari with Evercore ISI. Please proceed with your questions.

William Demchak:

Hey. John.

Robert Reilly:

John, this is Rob. So I'd say, for the full year, we're still planning and guiding towards stable. In the first quarter, you're right, we're off to a good start, in terms of realizing the expense actions that we took last year and CIP program that we have this year. But it's a little early in the year to roll that all forward. And like I said, we're off to a good start and we're well positioned for stable.

William Demchak:

Bleed is a bad word. The credit action at the moment is in the real estate book and specifically inside of office, consumer at the margin a little bit worse, but there isn't anything systematic going on in C&I that would cause us to have any different expectations of what we see now, and we're reserved for the moment based on our economic forecast.

John Pancari:

Okay. And then just related to that, are you seeing migration in the office book that is surprising, given your forecast on the added, notably to the office reserve, is there anything there that surprised you in terms of your reappraisals or your work on that front?

John Pancari:

Got it. All right. Thanks, Rob.

Matt O'Connor:

Good morning. Looking at Slide 6 here, where you show the runoff of the fixed rate securities and swaps. And any way to size the revenue pickup from this, either anchoring to the forward curve or current rates? You put out some crude analysis that showed about a $2 billion impact and just said it was linear. So half this year, half next, but obviously it's a rough cut at it. So I don't know, if you have any comments on that or frame it on using your estimates. Thanks.

William Demchak:

Matt, I think what everybody's struggling with here is this notion of what's the Fed going to do in the next period of time. Is it new cuts or no cuts or three cuts, and we started out with six cuts.

William Demchak:

Yeah. We did not, but the market did. We know based on forward curve the repricing of our fixed rate assets, the amount of money, incremental money we will earn from that has increased because term rates have increased. At the same time, that the assumption that the Fed will maintain rates here longer causes us to pause on what happens to deposit pricing through time, right? So there's a tradeoff. Higher rates in the long run, obviously help us on our fixed rate assets. Deposit repricing continues on if the Fed holds longer. A much slower pace than it's been in the past, but I think it's -- it would be a bit of a heroic assumption for anybody to say that deposit cost will continue to creep up in the face of a steady Fed. And so that's the trade off in the near term. Longer term, the repricing of the fixed rate assets towards the repricing of deposits. And that's kind of why we say, look, in the second quarter we trough, and then we pick up from there.

William Demchak:

Yeah.

William Demchak:

I mean, the biggest risk would be a massive curve inversion, such that we were repricing fixed rate securities at lower yields than they are today. Well, I mean then what they were three months ago. Our original assumptions in that forecast yields were hundred lower than they are right now. If they were to fall well below that, we would be at risk at that record number, although, still a high number.

Matt O'Connor:

Okay. Thank you very much.

Gerard Cassidy:

Hi, Bill. Hi, Rob.

Robert Reilly:

Hey, Gerard.

William Demchak:

Yes. I think it's both. Yeah. The capital markets activity in the first quarter, we're not -- the private credit side on leverage finance doesn't really impact us, but the public markets were wide open, by the way, our fees were up in that space for serving clients that way, but naturally at the margin that causes our utilization to go down. The other issue you can't ignore, right? But we've seen capital spend and inventory bill be next to nothing, even though capacity utilization is high, retail sales are high. And at some point that's got to give. But I do think there continues to be hesitancy on manufacturers in particular, just in the face of this economy, and I think that's part of it.

Gerard Cassidy:

Very good. And then I know, Rob, I think you touched on, in an answer to a question about the commercial real estate outlook office in particular. And you guys, everything appears to be going in your expectations. What kind of pricing declines in appraisals that have come up and where you've had to reappraise certain properties. Are you seeing price declines 10%, 15% 20% on those appraisals or more, any color there?

Gerard Cassidy:

Okay.

Robert Reilly:

The variance is all over the place. But as a practical matter, if we were underwritten at the start at $0.50 to $0.55 on whatever the appraised value was at that point in time, a big chunk of the book right now is effectively at par, and we look at resolutions that we've gone through. We've had everything from we get out whole to we lose $0.75 on the $1 on a given loan.

Robert Reilly:

So, it's building specific. It's market specific, that's driving this. But loss rates are a lot higher. If you looked at office and said, hey, how much of values fall, it's a lot higher than 15%. Personally across the space, my view is closer to 30 or 40 or even higher.

Robert Reilly:

Well, it's not showing up in appraisals here. We're just seeing it in actual resolution of properties.

Operator:

Thank you. Our next questions come from the line of Dave Rochester with Compass Point. Please proceed with your questions.

William Demchak:

So, I'll let Rob hit deposits in a second. The assumption, I mean we have roll off both fixed rate loans and fixed rate securities. And the yields we assume in our forecast at this point are just forward curve, adjusted from whatever the right spread is of the asset we'd replacing, so like-for-like.

Dave Rochester:

Okay. And then on the loan growth outlook, which you talked about, I guess, on an end to period basis last quarter. Does higher for longer impact that expectation at all and what's your outlook for the longer end of the curve through the year?

Dave Rochester:

Got it. Great. Thanks, guys.

Ebrahim Poonawala:

Good morning. I guess maybe the tenth question on your loan growth outlook for the back half, I think, I guess the macro concern is that higher for longer will eventually tip this economy into a recession. Would love to hear, Bill, Rob your perspective based on what you are hearing from your bankers clients? If we don't get any rate cuts for the year based on what you're seeing, like could we have a blind spot where the economy really kind of tails off, where a lot of these things catch up, we enter some version of a stack ration. Just how do you handicap that downside risk heading into the back half of the year?

Ebrahim Poonawala:

Got it. And you still think soft lending is base case in terms of most likely outcome right now?

Ebrahim Poonawala:

Got it. And separately, one, I think thanks for your advocacy and bank M&A. Just wanted to follow up on the letter you wrote to the OCC. One, are you finding any kind of sympathy within the regulatory apparatus around the case for allowing for larger bank M&A? And is there any possibility that we should deal making pick up ahead of the elections?

Ebrahim Poonawala:

Of deal making picking up ahead of the November elections?

Ebrahim Poonawala:

Got it. And do you see the backdrop conducive for deal making over the coming months, quarters or?

Robert Reilly:

To anything near term for us or the industry.

Robert Reilly:

And we don't control others timing, so that's up to them.

Operator:

Thank you. Our next questions come from the line of Bill Carcache with Wolfe Research. Please proceed with your questions.

William Demchak:

I'm not sure Fed funds versus CPI necessarily has much to do with loan growth. I think loan growth ultimately is driven by the economy, and the economy has been running hotter than most people had assumed. Then it's been running hotter than most people had assumed without big inventory builds. If you look at fourth quarter GDP, there was a drawdown on inventories. Inventories are directly correlated with utilization and loan growth, and CapEx has been muted. So, the economy slows. If the Fed has to slow the economy to a point where it's not a soft landing in order to get inflation under control, that can hurt loan growth. But if the economy is strong, you just saw retail sales, eventually it's going to translate into loan growth, independent of whether or not there's positive real rates.

William Demchak:

Yeah.

Robert Reilly:

Well, as I mentioned our comments on May 3, we'll have the opportunity to monetize 50% of our holdings, which our holdings are roughly $1 billion fix in unrealized gains. And that'll just be capital and we'll look at how we apply everything in terms of our excess capital, but we'll wait until we get the capital to do that.

Robert Reilly:

And monetize half of the 1.6.

Ken Usdin:

Hey, guys. Good morning. Just to follow up on the fee side, I think when you spoke in January, you talked about expected slowness in capital markets in M&A to begin the year. And then, I think you were thinking about a 20% growth overall. Just wondering just how that's looking in terms of the body language you're getting from those middle market clients in Harris Williams? And then also if you have any other color on what you think the other drivers of fees are going to be? Thanks.

Robert Reilly:

Yeah. We had -- so, Ken, to answer your question, we are sticking to the 20% expectation for growth in capital markets year-over-year. Bill is right. First quarter was off elevated at fourth quarter levels. But in terms of the comp, last year in the second and third quarter capital markets was really soft. Harris Williams was really soft. And the pipeline suggests we are not going to repeat that. We'll be well above those levels.

William Demchak:

We have had success over the last year kind of repositioning who and what we are in the market, bringing in new assets. To accelerate that to a level where it becomes a meaningful part of our company, I think, is a bit of a challenge. It's a service to our clients, and we're good at it. But the trends are going the right way.

Ken Usdin:

And one more just follow-up. Is that an area that you could add to organically over time? I know it's tough just because of multiples and whatnot, but you've done it organically, as you just said.

Ken Usdin:

Okay. Got it. Thank you.

Mike Mayo:

Hi. Looks like we're leaning into the expense control this quarter, but I'm just trying to figure out ahead. So you mentioned $750 million of cost savings for this year. How much of that was in the first quarter? But you also mentioned $1 billion of extra spending for branches. How much of that was in the first quarter and how should we think about those offsets? And I know it's a tough fight to get positive optimum leverage this year. Do you feel better or works the same as you did three months ago? Thanks.

Mike Mayo:

Okay. I'll shift gears back. Bill, you were talking about commercial real estate. Look, you reserved 10% for office. And you said the value of the underlying properties are probably down 30% to 40% or more. So I guess that is reflected in your reserving, which I think is more than the average bank. Do you see a difference by, and I know it changes by region and subregion and property and type and all that, but do you see a difference by region, whether it's the big cities? What -- give a little sense of that variance because it's all over the place. You just fill in a few data points around that, that'd be great.

Mike Mayo:

And just one short follow up on that one. The longer rates stay higher, do you expect this to bleed over from office to other areas of commercial real estate?

Mike Mayo:

Great. Thank you.

John McDonald:

Hey, guys. Just wanted to just touch base on how you're thinking about capital build. Obviously, you're building organically, you've got some Visa that will add 14, 15 bps next quarter, I guess. Are you just kind of thinking of gradually kind of building from this? 10% reported and the 8.3% fully loaded to get to 9% or 10% or so over the next year, do a little bit of buybacks. Just kind of what's the plan there?

Robert Reilly:

No. That's fair. And we've got capital flexibility, as you know, John, and that's where you want to be right now with the fluidity of everything.

Robert Reilly:

Yeah. That's right.

John McDonald:

Okay. Thanks, guys.

Bryan Gill:

Well, thank you all for joining the PNC call this morning. And if you have any follow-up questions, please feel free to reach out to the IR team. Take care.

Operator:

Sorry about that. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.

Bryan Gill:

Good morning. And welcome to today's conference call for The PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC. And participating on this call are PNC's Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of January 16, 2023 and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Rob Reilly:

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and is presented on an average basis and compared to the third quarter. Loans were up 2% and averaged $325 billion, which includes the acquired Signature capital commitment loans. Investment securities declined $2 billion or 2%. Cash balances at the Federal Reserve increased $4 billion to $42 billion and deposits increased $1.4 billion and averaged $424 billion. Borrowed funds increased $5 billion to $73 billion, driven by higher FHLB borrowings and parent company senior debt issuances. At year end, P&C was fully compliant with the proposed holding company long term debt requirements. And we expect to reach compliance with the bank level metrics through our normal course of funding well in advance of the phase in period. AOCI improved $2.6 billion to negative $7.7 billion at quarter end, primarily reflecting the impact of favorable interest rate movements during the quarter. Accordingly, tangible book value increased to $85.08 per common share, up 9% linked quarter and 18% compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 9.9% as of December 31st, which increased 10 basis points linked quarter. Our estimated fully phased in expanded risk based CET1 ratio based on the new proposed capital rules would be approximately 8.2% at year end, which is well above our current requirement of 7%. We continue to be well positioned with capital flexibility. During the quarter, we resumed modest share repurchase activity of approximately $100 million or roughly 0.5 million. And when combined with $600 million of common dividends, we returned a total of $700 million of capital to shareholders. Slide 4 shows our loans in more detail. Compared to the third quarter, average loan balances increased 2%, driven by higher commercial loan balances and modest growth in consumer. Commercial loans were $223 billion, an increase of $5 billion, driven by the acquisition of the Signature capital commitment portfolio. Excluding the $8 billion full quarter average impact from the Signature loan portfolio, commercial loans declined $3 billion or 1%, driven by lower utilization and soft loan demand. Consumer loans grew approximately $130 million driven by higher residential mortgage balances, partially offset by lower home equity and credit card balances. And loan yields increased 19 basis points to 5.94% in the fourth quarter. Slide 5 covers our deposits in more detail. Average deposits grew $1.4 billion to $424 billion during the quarter as seasonal growth in commercial deposits was partially offset by a decline in consumer deposits. In regard to mix, consolidated non-interest bearing deposits were 25% in the fourth quarter, down slightly from 26% in the third quarter and consistent with our expectations. We continue to expect the non-interest bearing portion of our deposits to stabilize near current levels. Our current rate paid on interest bearing deposits increased to 2.48% during the fourth quarter, up from 2.26% in the prior quarter. As of December 31st, our cumulative deposit beta was 44% and in line with our expectation for the quarter. As we stated previously, we expect betas to drift modestly higher, while interest rates remain at current level. And our current forecast calls for the first rate cut to occur in mid-2024, at which point, we believe the rate paid on deposits will begin to decline. Slide 6 details our investment security and swap portfolios. Average investment securities of $137 billion decreased 2% as curtailed purchase activity was more than offset by portfolio pay downs and maturities. The securities portfolio yield increased two basis points to 2.59%, reflecting the runoff of lower yielding securities. As of December 31st, the duration of the investment securities portfolio was 4.1 years. Our received fixed swaps pointing to the commercial loan book totaled $33 billion on December 31st. The weighted-average received fixed rate of our swap portfolio increased three basis points to 2.1% and the duration of the portfolio was 2.3 years. AOCI improved by $2.6 billion in the fourth quarter, reflecting lower interest rates. Importantly, as lower rate securities and swaps roll-off, we expect a continued meaningful improvement to tangible book value from AOCI accretion. Turning to the income statement on Slide 7. Fourth quarter net income was $883 million or $1.85 per share, which included pre-tax non-core expenses of $665 million or $525 million after tax related to the FDIC special assessment and the workforce reduction charges incurred in the fourth quarter. Excluding non-core expenses, adjusted EPS was $3.16. Total revenue of $5.4 billion increased $128 million or 2% compared to the third quarter of 2023. Net interest income declined modestly by $15 million. And our net interest margin was 2.66%, a decline of five basis points. Non-interest income increased to $143 million, or 8%. Non-interest expense of $4.1 billion increased $829 million or 26% and included $665 million of non-core expenses. Core non-interest expense was $3.4 billion and increased $164 million or 5%. Provision was $232 million in the fourth quarter and our effective tax rate was 16.3%. Full year 2023 revenue grew 2% compared to 2022. Core non-interest expense was well controlled and grew 1%. Importantly, our disciplined expense management and CIP savings allowed us to deliver modest positive operating leverage and PPNR growth of 2% on an adjusted basis. Turning to Slide 8, we highlight our revenue trends. Fourth quarter revenue was up $128 million, or 2% compared with the third quarter, driven by strong fee income as net interest income of $3.4 billion was down modestly. Fee income was $1.8 billion and increased $99 million or 6% linked quarter. Looking at the detail, capital markets and advisory fees rebounded as expected and increased $141 million, or 84%, driven by higher M&A advisory fees. Asset Management and Brokerage revenue grew $12 million or 3%, reflecting favorable market conditions. And residential and commercial mortgage revenue declined $52 million or 26%, primarily due to a decrease in the valuation of net mortgage servicing rights. Other non-interest income of $138 million increased $44 million or 47% and included favorable valuation adjustments and gains on sales. The fourth quarter also included a $100 million negative Visa fair value adjustment compared to a $51 million negative adjustment in the third quarter. As a reminder, at December 31st, PNC owned 3.5 million Visa Class B shares with an unrecognized gain of approximately $1.5 billion. Turning to Slide 9, our fourth quarter non-interest expense of $4.1 billion was up $829 million and included $665 million of non-core charges. Core non-interest expense of $3.4 billion increased to $164 million, or 5% linked quarter, reflecting higher business activity, seasonality and asset [impairments]. During the quarter, we incurred $42 million of impairment charges, which were largely related to building write-offs. Notably, in 2023, we reduced our non-branch footprint by 2 million square feet, or approximately 17%. For the full year, core non-interest expense of $13.3 billion increased $177 million or 1%. Expense growth was well controlled due in part to the $50 million midyear increase in our CIP goal to $450 million, which we exceeded. As a result, we generated 41 basis points of adjusted positive operating leverage for the full year. Looking forward to 2024, our annual CIP target is $425 million. This program funds a significant portion of our ongoing business and technology investments. And as of year-end, we completed actions related to the workforce reduction that will drive $325 million of cost savings in 2024. Taken together, we're implementing $750 million of expense management actions, all of which are reflected in our 2024 guidance that I will cover in a few minutes. Our credit metrics are presented on Slide 10. While overall credit quality remained strong across our portfolio, we did see a slight uptick in NPLs and delinquencies. Non-performing loans increased $57 million or 3% linked quarter and included a $12 million increase in CRE. Total delinquencies of $1.4 billion increased $97 million, or 8% linked quarter. The increase included seasonally higher consumer delinquencies, the majority of which have already been resolved. Net loan charge offs were $200 and in the fourth quarter and came in at the low end of our expectations. Our annualized net charge-offs to average loans ratio was 24 basis points. And our allowance for credit losses totaled $5.5 billion or 1.7% of total loans on December 31st, stable with September 30th. The CRE office portfolio is where we continue to see the most stress and fourth quarter's net loan charge offs were $56 million. We continue to expect future losses on this portfolio. However, we believe we've adequately reserved for those potential losses. As of December 31st, our reserves on the office portfolio were 8.7% of total office loans and inside of that 12.9% on the multi tenant portfolio. Importantly, our overall CRE office portfolio declined 6% or approximately $550 million linked quarter, reflecting a higher level of payoff. Criticized office loans were flat and nonperforming loans increased 2% linked quarter. Naturally, we'll continue to monitor and review our assumptions to ensure they reflect current market conditions. And a full update of this portfolio is included in the appendix slides. In summary, PNC reported a solid fourth quarter and full year 2023. In regard to our view of the overall economy, we're expecting a mild recession starting in mid-2024 with a contraction in real GDP of less than 1%. We expect the federal funds rate to remain unchanged between 5.25% and 5.5% through mid-2024 when we expect the fed to begin to cut rates. We expect a reduction of 75 basis points in 2024 with a 25 basis point decrease in July, November and December. Looking ahead, our outlook for full year 2024 compared to 2023 results is as follows. We expect spot loan growth of 3% to 4%, which equates to average loan growth of approximately 1%. Total revenue to be stable to down 2%. Inside of that, our expectation is for net interest income to be down in the range of 4% to 5% and non-interest income to be up 4% to 6%, core non-interest expenses to be stable and we expect our effective tax rate to be approximately 18.5%. Our outlook for the first quarter of 2024 compared to the fourth quarter of 2023 is as follows. We expect average loans to be stable, net interest income to be down 2% to 3%, fee income to be down 6% to 8% due to seasonally lower first quarter client activity as well as elevated fourth quarter capital markets and advisory levels. Other noninterest income to be in the range of $150 million and $200 million excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be down 3% to 4%. We expect total core noninterest expense to be down 3% to 4%. We expect first quarter net charge offs to be between $200 million and $250 million. And with that, Bill and I are ready to take your questions.

John McDonald:

I wanted to ask, Rob and Bill, about the loan growth outlook for 2024, the spot guidance of up 3% to 4% seems a bit better than what we're seeing in H8 currently? And I thought you could give some color on the drivers of your outlook there.

John McDonald:

And Rob, on the net interest income guidance, it sounds like you're assuming three rate cuts, a little bit less than what the forward curve has. Just kind of wondering what would be the sensitivity if the forward curve played out and we saw more rate cuts than what you're assuming. Is that helpful to the NII outlook, all else equal or relatively neutral? Could you update us on the sensitivity there, please?

Operator:

Our next question comes from John Pancari with Evercore.

Rob Reilly:

So with capital markets, we did get the rebound that we were expecting in the fourth quarter and the bulk of that is in our Harris Williams, our M&A advisory business. As far as '24 guidance goes, we expect -- the pipelines are good. We expect sort of the fourth quarter and the first quarter of '23 to be the range of what we would see on a quarterly basis going through in 2024. The anomalies were the soft quarters of Q2 and Q3 in 2023. So take a look at the first quarter of '23, the fourth quarter of '23, and that's the range of what we would expect the quarterly run rate to be through '24.

Rob Reilly:

I'll even help you, it's up about 20% year-over-year. I'll save you the math there.

Bill Demchak:

Look, we're fairly neutral to the -- for our NII forecast toward as a function of rate cuts or not. So the outcome ought to be the same.

Bill Demchak:

I think if there's variance anywhere, it's going to be on our assumptions as it relates to deposit betas, the continued shift to interest bearing versus non-interest bearing and ultimately, the steepness of the yield curve, the rates at the long end of the curve as opposed to the front end of the curve. We've tried to be to the best of our ability a little bit on the conservative side of all of those things and we feel pretty good about where our forecast is.

Scott Siefers:

I was hoping you might be able to share just some updated thoughts on sort of where and when NII might bottom and I think perhaps more importantly, magnitude of rebound that it might see thereafter. I know you sort of suggested last month that NII ultimately could be a record in 2025. I guess I'd just be curious for any updated context around your thoughts there.

Scott Siefers:

And then I guess just on the notion of deposit pricing, it sounds like you're expecting deposit cost to ease right around the time the Fed starts cutting. What's your sense for the sort of the pace of deposit betas on the way down vis-a-vis what they were on the way up?

Operator:

Our next question comes from Manan Gosalia with Morgan Stanley.

Rob Reilly:

So I would just say just to follow up on that. So yes, back half of the year. On the commercial side, we see the uptick in the third and the fourth quarter. A big part of that being expected increase in utilization, which is a little bit lower right now and then just some pickup in general economic activity, not a lot, 3% to 4% spot to average up 1%. And then on the consumer, just sort of slow, steady growth, nothing big there, maybe a little bit more in card and auto and a little bit less in resi.

Bill Demchak:

Well, not on charge-offs. We think we're reserved correctly. But you have to remember that as these loans go to NPL and eventually if we have charges against them, we'll charge them off. It won't run through P&L because we've already created a reserve for it, but the work set on actually maturing the loans and dealing with the outcome is yet to come.

Operator:

[Operator Instructions] Our next question comes from Gerard Cassidy with RBC.

Bill Demchak:

We don't compete with them head-to-head with the types of loans that are typically -- and because we don't play that that much in the unsecured leverage space. Most of the decline at Signature we saw was in utilization. As we go forward, more and more of the lending markets are moving into private hands and longer term that is of a concern if they kind of move up scale in what they do. We do serve them. I would say that our client base, just call it, private equity or private managers at large, they're probably our largest clients between what we do with and for them from Harris Williams and Solebury and business credit and treasury management with their portfolio companies and on and on and on. So they are good clients. And I guess, at the margin, we could end up competing with them in certain things.

Bill Demchak:

Yes.

Rob Reilly:

So our position is, we have $1.5 billion in unrealized gains, 3.5 million b-shares. As you pointed out, there's a vote by the Visa shareholders at the end of this month to approve an action to enable the b-holders to monetize maybe up to 50%. So we don't control that. We see when the vote is scheduled, should it be approved, then we'll move forward with our monetization plans that would be allowed under whatever is approved.

Bill Carcache:

Following up on credit, if we play out what the soft landing scenario could look like and the Fed starts cutting rates in mid-24, would you expect to be in a position to possibly start releasing reserves? Or are there sort of likely to still be late cycle concerns that would lead you to want to maintain the reserve levels that you've already established?

Bill Carcache:

And then, Bill, following up on your comment about feeling good about your reserve levels, but that we haven't necessarily seen peak charge-off rates yet. If we were to go down the mild recession scenario path, should we expect there to be some lag between when those charge-offs would actually hit the P&L and when the corresponding reserves would get released, or would the releases kind of occur concurrent with the increase in charge-offs?

Bill Carcache:

Understood…

Bill Demchak:

There always seems to be some confusion on that, but does that make sense?

Bill Demchak:

So it's a mechanical calculation that's dependent on our view of the economy at the time. So if you got to a place where the charge-offs occur and somehow we thought the economy was worse than our current expectation, we would be providing for the remainder of the portfolio at a higher level than we are today, but right now we don't expect that to happen. So if the economy is worse, simply put, if the economy is worse than a mild recession, then you would expect our total reserve to increase.

Bill Carcache:

If I could squeeze in one last one on capital return. I appreciate Slide 19. Can you speak to how you're thinking about that 150 basis point impact from Basel III endgame in light of some of the pushback that it's received? And is that 8.2% a level you feel comfortable running at or would you target a slightly higher buffer? And then sort of underlying all of that, are you thinking -- how are you thinking about buybacks in light of all the moving pieces?

Rob Reilly:

And I would just add to that. You saw we did -- we bought just under $100 million of -- share repurchases in the fourth quarter. In the first quarter, we would expect to do at least that, maybe a little bit more depending on market indications.

Erika Najarian:

I just wanted to ask one follow-up question on NII, if I may. A lot of investors were really excited about the graphic that you put together at Goldman, the Nike Swoosh, if you will, that had sort of the first rate cut embedded under the Nike Swoosh 25 basis points in 3Q '24. And I completely understand this is abstract in a way. But I just wanted to put together everything that you guys said I think it surprises investors that when you overlay the forward curve that it is neutral to this outcome, at least for '24. But just looking back at the slides, Rob, and on Slide 6 of this earnings season, it does seem like a lot of your receipts fixed swaps don't really meaningfully mature until 4Q '24. So I guess, in terms of like the mechanical repricing that you keep talking about, the way to really ask this question is, it sounds like it is possible to have potentially a lower trough than people expected in '24 and still have that record net interest income in '25 because of those fixed rate dynamics, and who knows what can happen on the liability side and the deposit repricing side, if the Fed cuts sooner. But it feels like that swap maturity is part of why that Nike Swoosh could be steeper. Am I thinking about it the right way?

Erika Najarian:

I don't think it's the perfect timing though that investors are worried about in terms of second quarter and third quarter. It's just that your new guidance would imply sort of after the first quarter that your average NII would be like 3%, 3.7% or something like that, right? So to get to a record net interest income, it would have to be a pretty significant progression from there. So that's sort of -- I'm trying to set the stage for you guys to build that bridge, because I think that investors really believe that you can reach that?

Operator:

Our next question comes from Ken Usdin with Jefferies.

Bill Demchak:

I don't know that we had changes this quarter…

Ken Usdin:

No, just did you terminate any swaps this quarter and add any new, and just kind of to remind us of the understanding of what's still yet to go after with the…

Bill Demchak:

I mean I think we're missing your question. What are you trying to get at?

Bill Demchak:

We terminated 3.6 and added some. And just to remind you, when you terminate you basically lock in a loss to the life of the original contract and we'll do that at times simply to reposition where we have exposure.

Rob Reilly:

Ken, just as I said earlier, on the capital markets, a nice rebound in our Harris Williams activity. Pipelines are good, they support year-over-year growth of close to 20%, which is what I mentioned earlier. In terms of the other fee categories, asset management flattish up a bit, that will be market dependent. Card and cash management up low to mid-single digits. Lending and deposit services that will be down mid-single digits, and that's reflective of anticipated lower service charges on deposits. There was a number of items that we did in '23 to reduce overdraft charges for our clients, so that's good for our clients, but that will be some lower fees, about mid-single digit down. And then mortgage outside of hedge gains, flattish, down if you include the hedge gains.

Mike Mayo:

Bill, December 5th, your [earnings] words. I quote skill matters today more than it ever has prior to March and the mini crisis. We knew the technology mattered. We knew scale and brand mattered. We just eliminated tailoring and regulation for all intents and purposes, et cetera, et cetera. You just go on to say that this will never be reversed. Scale is more important than ever. I could give the whole speech, but it was -- it seemed like a passioned speech, more than I've ever heard you say before. So why now? And along those lines, I mean, if you had better scale when you get positive operating leverage in 2024 with a chance you could do that, but I think you're talking further out. I think you're talking about organic and maybe inorganic expansion, but help me out there, if you could.

Mike Mayo:

So what does that mean -- okay, so you've identified the need and desire. So what does that mean, does it mean…

Mike Mayo:

And if you can't get the deals done and you've been opportunistic with National City and et cetera, since then. Organic ubiquity, how can you get there? Do we start seeing you advertise during the Super Bowl, do you double or triple your marketing spend? What do you do then?

Mike Mayo:

Just one follow-up. I got several e-mails from people saying, well, I don't know if I want to own PNC stock because I'm afraid of what kind of deal they might do. What do you say to that?

Operator:

Our next question comes from Ebrahim Poonawala with Bank of America.

Bill Demchak:

I don't think there's a simple answer to that, because I think if you listen carefully to the various speeches that have been done that they'll talk about the recognition of the need for M&A, but they'll also talk about good mergers and bad mergers, good outcomes and bad outcomes along several metrics. So put differently, I think certain deals will get approved and others wouldn't. I think we have proven as an acquirer that we know what we're doing and that the result in institution is, in fact, stronger than the one we might acquire.

Bill Demchak:

It's not -- I mean you see the credit metrics, it's not a concern in terms of customers. We've seen with the margin -- profit margins decrease with certain clients. If you look at soft inputs, surveys and so forth that are coming out of the Fed districts, the economy is definitely weakening, not at a alarming pace. It's kind of what we had expected given how tight the Fed has gotten with monetary policy. So we kind of see a mild recession. We actually see employment remaining strong through that, which ultimately is the thing that keeps the economy from going deeply into recession, just the strength of the labor market and consumer spending. So this is kind of following the path of what we thought for some period of time now.

Rob Reilly:

I was just going to add to that to Bill. So I mean, we can have a slowdown continue and technically hit a recession without adding a whole lot of credit risk or increased credit structure.

Rob Reilly:

Well, I think, obviously, we've been watching that for the better part of the year here in terms of the decline in non-interest bearing in absolute terms and relative percentages. Why we think it's largely happened is because it's been so long. And much of that base is our businesses and individuals that run on non-interest bearing deposits. So they're not necessarily shopping for a higher rate. There's something around the institution in terms of they pay for their services through deposits or on the consumer side, small transaction accounts.

Matt O'Connor:

Just wondering your thoughts on kind of medium term loan growth, a bit of a bigger picture question. You obviously gave details for this year. But as you think out like the next couple of years, are you in the camp that there needs to be some structural deleveraging. So loan growth might be below GDP or where normally it would be or just any thoughts that you have on that?

Matt O'Connor:

And I guess I meant from customers, right? Look, even if rates go down a little bit, they're still structurally a lot higher than they've been for the last almost 15 years. So if you just think about like the lending demand that's out there, obviously, there's lots of factors. But just thoughts on if higher rates structurally have a meaningful impact on that?

Matt O'Connor:

Correct. Right, as you think about corporate borrowers, right, they just can't afford potentially to borrow as much with rates higher. Obviously, the same for consumer mortgage is the most obvious. So thinking more like on the commercial side.

Operator:

Our next question comes from Dave Rochester with Compass Point.

Bill Demchak:

Well, there -- I mean both of those thoughts are consistent. 8.2 is too low, so we're going to grow. Whether we're growing to be in faster compliance or growing because maybe something shows up where we could use some, we're still going to grow and it's going to mute our capital return below it and otherwise might be absent the Basel III endgame changes.

Bill Demchak:

There's too much up in the air. I mean, it's depending what the Fed does, look, they could have to repropose that. It could go through the elections, they could change it materially. We don't know, right? All we know is all else equal, 8.2 is probably too low. We're still burning through our AOCI, we don't think that's going to change. So we stay the course and we'll adapt based on what we learn.

Bill Demchak:

It'd be pretty fast.

Mike Mayo:

Just a follow-up on your commercial loan growth, like why you're punching your weight in the growth rate, and which areas of commercial loan growth? And I know you've deployed teams to all these cities near the Nashville Main Street Bank and you're trying to gain share and all that. Is it that effort the market share by city, is it kind of smaller middle market, is it that effect you talked about scale versus the smaller competitors? I mean how much we put in each bucket as far as your delta versus peer when it comes to commercial loan growth?

Mike Mayo:

Last follow-up. How much faster would your commercial loan growth be if there were no private capital competitors right now?

Rob Reilly:

A structure we [Multiple Speakers] that's it right, that would be the margin. If that wasn't available that would otherwise be a conventional loan.

Vivek Juneja:

Bill, question for you. I mean when -- your deposits at the Fed keeps growing, at what point are you thinking about putting some of that or locking some of the yields on that? What's your thinking there, especially given all your other commentary about rates peaking, mild recession, loan growth, et cetera, triangulating all of those factors?

Vivek Juneja:

And second one, you talked about a lot of companies going into private hands and obviously, that creating competition from private credit for loans. But on the other hand, you've got increasing capital requirements, so which is translating into higher spreads, so as to maintain returns. How do you balance that out, on the one hand, not losing share to the private market and on the other hand, maintaining that? Do you see -- given that, do you see spreads staying high or do you think that turns course the other way?

Operator:

There are no further questions at this time.

Bill Demchak:

Thanks, everybody.

Operator:

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.

Bryan Gill:

Good morning, and welcome to today's conference call for The PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC. And participating on this call are PNC's Chairman, President and CEO, Bill Demchak, and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of October 13, 2023, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Rob Reilly:

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and is presented on an average basis and comparing to the second quarter. Loans were down 2% and averaged $320 billion. Investment securities declined $1 billion or 1%. Cash balances at the Federal Reserve increased $7 billion to $38 billion. Deposits of $423 billion declined $3 billion or 1%. Borrowed funds increased $2 billion, primarily due to senior debt issuances near the end of the second quarter. At quarter-end, AOCI was a negative $10.3 billion compared to a negative $9.5 billion at June 30, reflecting higher interest rates. However, tangible book value increased to $78.16 per common share as retained earnings growth exceeded the negative impact of AOCI. Common dividends in the quarter totaled approximately $600 million. And we remain well capitalized with an estimated CET1 ratio of 9.8% as of September 30, 2023, which increased 30 basis points linked quarter. Slide 4 shows our loans in more detail. Third quarter loans averaged $320 billion and increased $6.5 billion or 2% compared to the same period a year ago, reflecting growth in both commercial and consumer loans. Compared to the second quarter, average loan balances declined 2% as growth in consumer was more than offset by a decline in commercial. Consumer loans grew approximately $500 million, reflecting higher residential mortgage and credit card balances. Commercial loans averaged $218 billion, a decline of $5.5 billion, driven by lower utilization as well as paydowns outpacing new production. Loan yields increased 18 basis points to 5.75% in the third quarter, predominantly driven by the higher rate environment. Slide 5 covers our deposits in more detail. Average deposits decreased $3 billion, or 1%, due to a decline in consumer deposits that was somewhat offset by a growth in commercial deposits. In regard to mix, consolidated noninterest-bearing deposits were 26% in the third quarter, down slightly from 27% in the second quarter, and consistent with our expectations. And we still expect the noninterest-bearing portion of our deposits to stabilize in the mid-20% range. Commercial noninterest-bearing deposits represented 42% of total commercial deposits in the third quarter compared to 45% in the second quarter. And our consumer deposit noninterest-bearing mix remains stable at 10%. Our rate paid on interest-bearing deposits increased to 2.26% during the third quarter, up from 1.96% in the prior quarter. And as of September 30, our cumulative deposit beta was 41%, which was slightly better than our July expectation. Slide 6 details our investment security and swap portfolios. Average investment securities of $140 billion decreased $1 billion, or 1%, as curtailed purchase activity was more than offset by portfolio paydowns and maturities. The securities portfolio yield increased 5 basis points to 2.57%, reflecting new purchase yields of 5.5% and the runoff of lower-yielding securities. As of September 30, the duration of investment securities portfolio was 4.2 years. Our received fixed swaps pointed to the commercial loan book totaled $35 billion on September 30. The weighted average received fixed rate of our swap portfolio increased 34 basis points to 2.07% and the duration of the portfolio was 2.4 years as of September 30. Accumulated other comprehensive loss increased by approximately $800 million in the third quarter as a negative impact of higher rates more than offset paydowns and maturities during the quarter. Importantly, as lower rate securities and swaps roll off, we expect our securities yield to continue to increase, resulting in a meaningful improvement to tangible book value from AOCI accretion. Turning to the income statement on Slide 7. For the first nine months of 2023, revenue grew 5% compared to the same period a year ago, reflecting higher interest rates and business growth. Noninterest expense grew 2% and was well controlled despite a higher FDIC assessment rate and inflationary pressures. As a result, we generated 3% positive operating leverage, and PPNR grew 9%. For the third quarter, net income was $1.6 billion, or $3.60 per share. Total revenue of $5.2 billion decreased $60 million, or 1%, compared to the second quarter of 2023. Net interest income declined $92 million, or 3%. And our net interest margin was 2.71%, a decline of 8 basis points. Noninterest income increased $32 million, or 2%, as higher fee income was partially offset by lower other noninterest income. Third quarter expenses decreased $127 million, or 4% linked quarter. Provision was $129 million in the third quarter. And our effective tax rate was 15.5%, which included a favorable impact of certain tax matters in the third quarter. For the full year, we now expect our tax rate to be approximately 16.5%. Turning to Slide 8, we highlight our revenue trends. Third quarter revenue was down $60 million, or 1%, compared with the second quarter. Net interest income of $3.4 billion decreased $92 million or 3%, as higher yields on interest earning assets were more than offset by increased funding costs. Fee income was $1.7 billion and increased $67 million or 4% linked quarter. The primary driver of the increase in fee income was residential and commercial mortgage revenue, which was up $103 million, the majority of which, or $97 million, was related to an increase in the valuation of net mortgage servicing rights. Partially offsetting this, capital markets and advisory revenue decreased $45 million, or 21%, driven by lower trading revenue. M&A advisory activity continued to remain softer in the third quarter despite robust pipelines. Going forward, we do expect this activity to increase in the fourth quarter, which is included in our guidance that I will cover in a few minutes. Other noninterest income of $94 million declined $35 million linked quarter, driven by lower private equity revenue and included negative Visa fair value adjustments totaling $51 million. As a reminder, at September 30, PNC owned 3.5 million Visa Class B shares with an unrecognized gain of approximately $1.3 billion. Turning to Slide 9, our third quarter expenses were down $127 million or 4% linked quarter, which in part reflected our increased CIP program. And we generated 3% positive operating leverage on both the year-to-date and the linked-quarter basis. Importantly, every expense category remained stable or declined compared to the second quarter of 2023. Our credit metrics are presented on Slide 10. While overall credit quality remains strong across our portfolio, the pressures we anticipated within the commercial real estate office sector have begun to materialize. Non-performing loans increased $210 million, or 11%, linked quarter. The increase was driven by multi-tenant office, CRE, which increased $373 million, but was partially offset by a decline of $163 million in non-CRE NPLs. In regard to the CRE office portfolio, total criticized loans remained essentially flat quarter-over-quarter at 23%. The difference this quarter is the migration of certain multi-tenant office loans to NPL status, which is an expected outcome as we work to resolve the occupancy and rate challenges inherent to this portfolio. Ultimately, we expect future losses on this portfolio, and we believe we have reserved against those potential losses accordingly. As of September 30, our reserves on the office portfolio were 8.5% of total office loans and, inside of that, 12.5% on the multi-tenant portfolio. Naturally, we'll continue to monitor and review our assumptions, especially in the higher rate environment, to ensure they reflect the real-time market conditions. And a full update of the portfolio is included in the appendix slides. Total delinquencies of $1.3 billion increased $75 million, or 6% linked quarter, driven by higher consumer loan delinquencies. Net loan charge-offs of $121 million declined $73 million, or 38% linked quarter. Our annualized net charge-offs to average loans ratio was 15 basis points in the third quarter. And our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on September 30, essentially stable with June 30. Turning to Slide 11. From a capital perspective, we're well positioned with a CET1 ratio of 9.8% as of September 30. This slide illustrates the impact to our capital levels, assuming the Basel III Endgame proposed rules were effective as of September 30. The inclusion of AOCI reduces our ratio by approximately 190 basis points. And the impact of all other proposed Basel III Endgame components are estimated to have an additional negative 40 to 50 basis point impact to our CET1. Taken together, the current Basel III Endgame proposal would increase our risk-weighted assets by approximately 3% to 4%. And our estimated fully phased-in expanded risk-based CET1 ratio would be approximately 7.4%, which is above our current requirement of 7%. In light of the fluidity of the capital proposals, our share repurchase activity remains on pause. We'll continue to evaluate the potential impact of the proposed rules and may resume share repurchases activity depending on market and economic conditions as well as other factors. In regard to the long-term debt proposal, if the rule was effective at the end of the third quarter, our binding constraint would be the long-term debt to risk-weighted assets ratio at both the holding company and the bank level. We estimate our current shortfall at the holding company and the bank to be approximately $1 billion and $8 billion, respectively. And we expect to reach compliance at both the consolidated and bank level through our current funding plan, as well as the restructuring of existing inter-company debt. We acknowledge and want to emphasize that proposals are still in their comment period and the final rules are subject to change. That being said, we're well positioned to comply with the proposals as drafted. Slide 12 provides more detail on the $16 billion portfolio of capital commitment facilities we acquired from Signature Bridge Bank earlier this month. PNC has been active in the capital commitment business for many years. We believe the acquisition will enhance our broader efforts in the private equity sponsor industry. Signature's origination strategy was similar to PNC's, which is focused on building relationships with large and established fund managers. As such, we expect to retain 75% of the portfolio. This acquisition is financially attractive given the purchase price of 99% of par and the high credit quality of the portfolio. Importantly, the transaction does not have a material impact to our capital ratios or tangible book value per share. Slide 13 details our focus on controlling expenses. As Bill mentioned, we remain diligent in our expense management efforts, particularly when considering the current revenue environment. Our Continuous Improvement Program has been in place for over a decade, and through this program we've utilized expense savings to fund our ongoing business growth and technology investments. Over the past 10 years, through CIP, we've identified and completed actions to reinvest $3.7 billion in our company. As you know, we have a 2023 CIP target of $450 million, and we're on track to meet that target. Looking to 2024, even though we've just begun our budgeting process, we do expect a 2024 annual CIP goal of similar magnitude to the 2023 program. Our CIP efforts over the years have allowed us to substantially invest in our company while still delivering low single digit annual expense growth. However, the current environment poses meaningful pressures necessitating expense control measures beyond our annual CIP program. As a result, we took a hard look at our organizational structure and identified opportunities to operate more efficiently through staff reductions, which we began implementing earlier this month. This initiative will decrease the workforce by 4% and is expected to reduce 2024 expenses by approximately $325 million. One-time costs associated with this plan are expected to be approximately $150 million and will be incurred during the fourth quarter of 2023. We believe these actions will position PNC for stronger efficiency going forward. As a result, even though our budgeting cycle isn't complete, we have an objective to keep core expenses stable in 2024, which by definition would exclude the fourth quarter one-time charges. In summary, PNC reported a solid third quarter 2023. In regard to our view of the overall economy, we're expecting a mild recession starting in the first half of 2024, with a contraction in real GDP of less than 1%. We expect the federal funds rate to remain unchanged in the near term between 5.25% and 5.5% through mid-2024 when we expect the Fed to begin cutting rates. Looking ahead, our outlook for the fourth quarter of 2023 compared to the third quarter of 2023 is as follows. We expect average loans to be up approximately 3%, including the acquisition of the Signature Bank capital commitment facilities. Net interest income to be down 1% to 2%. Fee income to be up approximately 1% as increased capital markets activity is expected to more than offset the impact of the elevated MSR hedge gains during the third quarter. Other noninterest income to be in the range of $150 million and $200 million, excluding net securities and Visa activity. We expect total core non-interest expense to be up 3% to 4%, which excludes charges related to the workforce reduction. Additionally, this guidance does not contemplate the pending FDIC special assessment, which could occur during the fourth quarter. And we expect fourth quarter net charge-offs to be between $200 million and $250 million. And with that, Bill and I are ready to take your questions.

John Pancari:

Good morning.

John Pancari:

On the -- just regarding the office increase in non-performers that you discussed a bit, can you just give us a little bit more detail? Is that more indicative of -- did you see an acceleration in the deterioration of these credits that were noteworthy in the quarter and that necessitated the move to non-accrual? Or was this more of a function of an ongoing scrub of your portfolio as you're re-evaluating collateral values or whatnot behind properties? And as you do that as well, can you maybe talk about some of the value depreciation you're beginning to see on some properties that have traded? Thanks.

Rob Reilly:

Just the migration of the past. We do expect losses, as I said in my comments, but we believe that we're appropriately reserved.

John Pancari:

Got it. Okay. Thanks, Bill. And then separately on the expense side, can you really help us think about how the $325 million you expect to fall out of the bottom-line from the headcount rationalization, how that would impact the growth rate that you expect overall for expenses in 2024 versus 2023? How should we think about that growth?

Bill Demchak:

John, the other thing, the reason we kind of put the Continuous Improvement in there is, it's a number that we typically reinvest into our growth businesses in the future of the company. So, that's sort of what's been driving our investment game for the last bunch of years, that continues. What's new is basically dropping the run rate related to personnel and just tightening the ship and what is it a tougher revenue environment.

Rob Reilly:

Oh, sure. That's basically the yield in terms of the portfolio that we purchased. They are short-term, about a year. So, we do expect that $0.10 a share that we talked about in the fourth quarter and then going into '24. But when we get to '24, of course, we'll include that in our full year guidance.

Rob Reilly:

Sure.

Nate Stein:

Hey, guys. This is Nate Stein on behalf of Matt O'Connor. Just one quick follow-up on the expense program. We talked about the $725 million total cost actions. So, outside of the workplace reduction, can you just talk about the -- just the other areas of efficiencies you're investing in? Thanks.

Rob Reilly:

And that's a program that we've had in place, as I mentioned, for several years, and allows us to -- and has allowed us to grow annual expenses in the low single-digit range, even with all those investments. And in point of fact, this year, we're pointing to 1% growth year-over-year '23 over '22, and a large part of that is because of our Continuous Improvement Program.

Bill Demchak:

I didn't -- I'm not sure what anybody else reported. My guess was that the trading line item was better than peer fees. But in our case, the bulk of our capital markets income come from various advisory fees from Harris Williams or Solebury or syndications and so forth. And while the pipelines remain robust, if not at record levels, the activity level, while there's been some green shoots, just hasn't been strong. Eventually it flows through. But we're getting a little tired of predicting when it will be.

Nate Stein:

Thank you.

Scott Siefers:

Good morning, everyone. Thanks for taking the call.

Scott Siefers:

I wanted to ask sort of a broad question -- hey, kind of a broad question on NII. Are we getting to a point where that will start to trough? So, maybe Rob, just sort of some of the puts and takes. It seems like your deposit betas are coming in as expected or better. I know there should be some asset repricing as we look into next year, but some of the larger banks have been sort of vocal about the degree to which they're still over earning on NII, which I think is kind of kept these fears of still bleeding out NII alive sort of industry-wide. Maybe just some thoughts on how you see things playing out for PNC in particular.

Rob Reilly:

Okay.

Rob Reilly:

Yeah. I would just add to that, just observations. Deposits continue to decline. We expected that, but that decline is slowing. Betas have gone up, but the increase has slowed. In fact, in the third quarter, the actuals came in lower than what we expected for the first time since rates have been increasing rapidly. So things have slowed as far as that trajectory is, and then obviously the inflection point issues that Bill just covered are valid.

Rob Reilly:

Yeah, pretty good there, Scott, in terms of credit. So, all of the noise, so to speak, is in the commercial real estate office space that we spoke about. As far as the shared national credit results went, they're complete. They're represented in our numbers. And it was pretty benign in terms of total deals. Upgrades were more than downgrades, but they were a handful of each.

Rob Reilly:

Sure.

Gerard Cassidy:

You guys gave us good color on the burn-off of the securities portfolio. And the question I had is, it looked like this quarter you put more up at the Fed. So, what are you guys doing with the cash flows from the portfolio now in terms of where you're putting it in other securities? And then, second, once the Basel III Endgame is finalized, how do you think you guys will approach in carrying your securities? Will you carry less than available for sale or more? Can you share with us your thoughts there as well?

Rob Reilly:

There's a couple things to add there. One of the uses of cash, Gerard, was the purchase of the Signature loans. So that was our biggest...

Rob Reilly:

Yeah, that was our biggest outlay. And then on the [split] (ph). Bill has it right. Where we are now is probably about where we are plus or minus to your views in terms of what -- but where we got to holding it all to 100% of AFS was the tailoring, which has passed us. So, we're back to sort of the normal [split] (ph).

Bill Demchak:

Yeah, I suppose there could be. I don't know that we've actually seen any. We get pitched by everybody to execute one, which we have no need for.

Bill Demchak:

But the purchase side of that is actually pretty attractive. They're giving away a lot of economics. So, it's actually a good thought. I'll go look around.

Gerard Cassidy:

Yeah. And then specifically, it would be more in the C&I space or consumer? Or do you guys have a preference should they call that phone number, Rob?

Gerard Cassidy:

Got it.

Gerard Cassidy:

Very good. All right. Thank you, gentlemen.

Operator:

[Operator Instructions] Our next question is from the line of Bill Carcache with Wolfe Research. Please go ahead.

Bill Demchak:

I don't know the answer to that. I would tell you, though, the bulk of our stuff, and you see it in our maturity schedules, we're kind of stabilization loans-ish project loans. And so in that instance, the hedge dynamics of somebody would put on that loan, in my experience, would be less than what they would have done on a term, 10-year CNBS alternative. So, my guess is it's not -- I think they're just in trouble for floating rate loans from lease rates going down, from vacancies going up, and from the rehab costs of redoing floors for...

Bill Demchak:

Yeah. Just dropping the value of the buildings.

Bill Demchak:

I think the extend part is possible. I think the pretend part, that doesn't work.

Bill Demchak:

Yeah. We work with borrowers to figure out how to maximize the value of the property because that's ultimately going to maximize the value of our loan. In some instances that means taking the building and selling it. In some instances that means getting more equity capital, extending a loan at a debt service coverage ratio we normally wouldn't under the theory that they can lease it up itself. But each and every one of those decisions is a decision tree based on what's the net present value of what we PNC can get against our loan. In any event, if we do something that is uneconomic relative to the original loan, that shows up in our reserves or charge-offs or so on and so forth. There's no pretend involved.

Bill Demchak:

Yeah, I think. And by the way, this isn't a forecast. I think it's just common sense, right? To the extent that we still have a back book of business as does everybody that hasn't necessarily repriced, and if rates are pinned at 5% forever in time, that beta will continue to go up. It's a function of how high does the Fed go and how long do they stay there. And everybody's been wrong so far. So, yeah, it's a possibility.

Operator:

Our next question is from the line of Peter Troisi with Barclays. Please go ahead.

Rob Reilly:

Yeah. This is Rob. So, good question. So, in regard to the long-term debt, our message is, independent of the rules, as we resume a more conventional funding structure in terms of our debt to our deposits that was pre-COVID, we would be compliant. So that's the takeaway. In regard to how we get there, it's a combination of everything that you outlined. There will be issuances at the holding company as part of our ongoing plan that will then ultimately be papered down to the bank, but there's a lot of moving parts there. The message is we'll get there and we would have gotten there independent of these rules.

Rob Reilly:

Sure.

Bill Carcache:

Yeah, thanks for taking my follow-up. So, Bill, I was hoping you could just share your thoughts on the CFPB's plans to propose an open banking rule. There's a view that open banking essentially forces the industry to hand over the keys to the customer relationship. You've talked in the past about sort of the dynamic of like passwords and all that kind of stuff, but I was just hoping you could speak broadly to that point or that topic.

Bill Carcache:

Okay, that's helpful. I had heard something along the lines of some of the actions they're taking are intended to make it easier for customers to "break up with their banks." And so, I was wondering if there was anything in the language. You mentioned how you're not worried about the ability to shift the relationship...

Bill Carcache:

That's great. Very helpful. Thank you.

Bill Demchak:

Hey, Mike.

Bill Demchak:

Well, none of it's deliberate per se. We've seen some drop in utilization. We've seen a drop in kind of refinance rate as people are -- think about a corporate loan revolver where it's a three-year and every two years you renew it for the next three years. Everybody's kind of extending out under the hope that things are going to get better on spreads. So, there's just been less activity. At the margin, we are extending less credit into credit-only new relationships on the hope that we're going to get fees versus protecting our wallet where we already have a lot of fees and get cross-sell. But that's kind of at the margin thing.

Mike Mayo:

Okay. And you're very clear about the expense guidance and the tough actions you're taking with personnel. Did you give an outlook for operating leverage over next year? Do you think the pace of expense decline will be faster than any decline in revenues? And specifically to the fourth quarter, the SBNY loan acquisition, looks like it adds a couple percent to your fourth quarter NII, but you're guiding down 1% to 2%. So that decline might be a little bit more than some had expected. It's more than you had expected. The quarter decline looks like 2% to 4% in the fourth quarter. Is that math correct? Why is it down maybe more than you thought? And the big question, though, is revenues versus expenses over the next year?

Mike Mayo:

Got it. Okay, thank you.

Operator:

Our next question is from the line of Ken Usdin with Jefferies. Please go ahead.

Bill Demchak:

Yeah. It's de minimis adds of people that we're bringing on. We're already in the business. We have the technology to be in the business. We know the clients. The rundown, we're kind of saying, 75% probably survives. Most of that is simply a function of where we have overlap with clients and the size hold that we want to have for a particular client, we'd syndicate more of it as we kind of right-size our hold. There may be inside of that book of business a handful of people that we would choose not to renew, but their credit quality is pristine. We know we underwrote every fund that is in that. And through time, you would expect that as they mature, we'll renew and some period of time out a couple of years, we'll end up with 75% of the notional that we started with, and you'll have no clue between now and then how much it was.

Ken Usdin:

Yeah, that's a fair point on we won't know. That's what I was trying to ask. The second question is...

Rob Reilly:

It becomes part of our...

Ken Usdin:

Completely understood. The second question I had, Bill, is you mentioned in a higher longer for environment, we got to see what the Fed does in terms of where deposit betas and mix goes. On the asset side, however, though, can you help us understand what happens in terms of fixed rate loan repricing versus -- and how much you might still have left in that versus obviously when we get to a peak in Fed funds, we'll know that the variable rates have -- will have gotten there?

Ken Usdin:

Yeah. No, I totally understand. I would think it would be a net positive as an offset to whatever has happened.

Ken Usdin:

Yeah, that's fair. Okay. Thank you.

Bryan Gill:

Okay. Well, thank you...

Bryan Gill:

Yeah. Thanks for participating. If you have any follow-up questions, please feel free to reach out to the IR team. Thanks.

Operator:

That does conclude the conference call for today, and we do thank you for your participation.

Bryan Gill:

Good morning, and welcome to today's conference call for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of July 18, 2023, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Robert Reilly:

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and we're presenting on an average basis and comparing to the first quarter. Loans were stable at $325 billion. Investment securities declined $2 billion or 2%. Cash balances at the Federal Reserve were $31 billion and decreased $3 billion, deposits of $426 billion declined $10 billion or 2%. Borrowed funds increased $3 billion. As an aside, since 2021, we've been deliberate in issuing TLAC compliant debt. So we're confident we'll meet the upcoming TLAC requirements through our normal course of funding. At quarter end, AOCI was a negative $9.5 billion, and tangible book value was $77.80 per common share, an increase of 5% compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 9.5% as of June 30, 2023, which increased 30 basis points linked quarter. We returned approximately $700 million of capital to shareholders in the quarter, which included $600 million of common dividends and approximately a $100 million of share repurchases or 1.1 million shares. And as Bill just mentioned, our Board recently approved a $0.05 increase to our quarterly cash dividend on common stock, raising the dividend to a $1.55 per share. Our recent CCAR results underscore the strength of our balance sheet. And as previously announced, our current stress capital buffer of 2.9% will improve to the regulatory minimum of 2.5% for the four quarter period beginning in October 2023. Due to the expected issuance by the Federal banking agencies of proposed rules to adjust the Basel III capital framework, share repurchase activity in the third quarter is expected to remain modest. We will continue to monitor this and may adjust share repurchase activity as appropriate. Slide 4 shows our loans in more detail. Second quarter loans averaged $325 billion and increased $20 billion or 6% compared to the same period a year ago. This growth reflected strong loan demand during the back half of 2022 and our ability to capitalize on opportunities in our expanded franchise. Average loan balances were stable linked quarter as growth in consumer was offset by a decline in commercial, with commercial balances reflecting generally weaker demand. Consumer loans grew $400 million compared to the first quarter, reflecting higher residential mortgage, credit card and auto balances. Commercial loans averaged $223 billion in the second quarter, a decline of $1 billion, as limited new production was more than offset by paydowns. Loan yields increased 28 basis points to 5.57% in the second quarter, predominantly driven by the higher rate environment. Slide 5 covers our deposits in more detail. Deposits declined 2% on both a spot and average basis linked quarter, reflecting the continuing pressure of quantitative tightening and increased spending activity as well as consumer tax payments. Deposits continue to move from non-interest bearing to interest bearing accounts. As expected, the mix shift is being driven by commercial deposits. In the second quarter, commercial non-interest bearing deposits represented 45% of total commercial deposits compared to 47% in the first quarter. Our consumer deposit non-interest bearing mix has been stable remaining at 10%. On a consolidated basis, our level of non-interest bearing deposits was 27% in the second quarter, down slightly from 28% in the first quarter consistent with our expectations, and we still expect the non-interest bearing portion of our deposits to stabilize in the mid 20% range. Our rate paid on interest bearing deposits increased to 1.96% during the second quarter, up from 1.66% in the prior quarter. And as of June 30, our cumulative deposit beta was 39%. Looking forward, we expect the Federal Reserve to raise the benchmark rate by 25 basis points in July. We believe this will put additional pressure on betas. And as a result, we expect our third quarter and year end cumulative betas to be 42% and 44% respectively. Slide 6 details our investment securities and swap portfolios. Average investment securities of $141 billion decreased $2.4 billion or 2%, as limited purchase activity during the quarter was more than offset by portfolio paydowns and maturities. The securities portfolio yield increased 3 basis points to 2.52%, reflecting the runoff of lower yielding securities. And as of June 30, the duration of the investment securities portfolio was 4.2 years. Our received fixed swaps pointed to the commercial loan book totaled $40 billion at the end of the second quarter. The weighted average received fixed rate of our swap portfolio increased 25 basis points linked quarter to 1.73%, and the portfolio duration was 2.3 years as of June 30. During the second quarter, our accumulated other comprehensive loss increased by $400 million. Paydowns and maturities were in line with our expectations, but were more than offset by the negative impact from higher than expected rates throughout the quarter. Notwithstanding this AOCI impact, our tangible book value increased 1% to $77.80 compared to March 31. Importantly, as lower rate securities and swaps roll off, we expect our securities yields to continue to increase, resulting in a meaningful improvement to tangible book value from AOCI accretion. Turning to the income statement on Slide 7. For the first half of 2023, revenue grew 11% compared to the same period a year ago, reflecting higher interest rates and overall business growth. Non-interest expense grew 4% and was well controlled despite a higher FDIC assessment rate and inflationary pressures. As a result, PPNR grew 24%. For the second quarter, net income was $1.5 billion or $3.36 per share. Total revenue of $5.3 billion decreased $310 million or 6% compared to the first quarter of 2023. Net interest income declined 75 million or 2%, and our net interest margin was 2.79%, a decline of 5 basis points. Non-interest income declined $235 million or 12%, driven by both lower fee income and other non-interest income, which included Visa fair value adjustments of a negative $83 million that I will discuss in a moment. Second quarter expenses increased $51 million or 2% linked quarter. Provision was $146 million in the second quarter, reflecting portfolio activity and changes in macroeconomic variables, and our effective tax rate was 15.5%, which included the favorable impact of certain tax matters in the second quarter. Turning to Slide 8, we highlight our revenue trends. Second quarter revenue was down $310 million or 6% compared with the first quarter. Net interest income of $3.5 billion decreased $75 million or 2%, with higher yields on interest earning assets were more than offset by increased funding costs and lower loan and security balances. Fee income was $1.7 billion and decreased $106 million or 6% linked quarter. The primary driver of the decline in fee income was residential and commercial mortgage revenue, which was down $79 million. Inside of that $58 million was related to lower net valuation of mortgage servicing rights. Beyond that, capital markets and advisory revenue decreased $49 million or 19% driven by lower merger and acquisition advisory fees and loan syndication revenue. Going forward, we expect this activity to meaningfully increase in the second half of the year, which is included in our guidance that I will cover in a few minutes. Partially offsetting these declines was a $38 million or 6% increase in card and cash management fees, reflecting seasonally higher consumer transaction volumes, and increased treasury management product revenue. Other non-interest income of $129 million declined 50% linked quarter driven by lower private equity revenue and included negative Visa fair value adjustments related to litigation, escrow funding, and other valuation changes totaling $83 million. Turning to Slide 9, our second quarter expenses were up $51 million or 2% linked quarter and remain well controlled. The growth was primarily due to a $35 million increase in marketing expense reflecting seasonality. Personnel expense increased by $20 million or 1%, which included the full quarter impact of annual employee merit increases. Every other expense category remained stable or declined compared to the first quarter of 2023. As Bill mentioned, we remain diligent in our expense management efforts, particularly when considering the current revenue environment. At the beginning of the year, we set a continuous improvement program goal of $400 million. Recently, we've identified initiatives that support increasing our CIP by an additional $50 million, raising our full year target to $450 million. Further, we'll continue to look for additional efficiencies during the remainder of 2023, and importantly, as we begin to plan for 2024. Our credit metrics are presented on Slide 10, our credit quality remains strong, and notably, the leading indicators for credit quality continue to perform well. Non-performing loans were down $97 million or 5% and continue to represent less than 1% of total loans and total delinquencies of $1.2 billion decreased $114 million or 9% linked quarter. Net charge offs of $194 million were stable linked quarter. Our annualized net charge offs to average loans ratio was 24 basis points in the second quarter, and our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on June 30, essentially stable with March 31. While overall credit quality remains strong across our portfolio, the office category within commercial real estate continues to be a key area of concern. As expected, we saw increases in charge offs related to office during the quarter. However, the portfolio metrics remain largely similar to those presented in our comprehensive view last quarter. Naturally, we'll continue to monitor and review our assumptions to ensure they reflect real time market conditions and a full update is included in the appendix slides. In summary, PNC reported a solid second quarter 2023. In regard to our view of the overall economy, we're expecting a mild recession starting in early 2024 with a contraction in real GDP of less than 1%. Our rate path assumption includes a 25 basis point increase in the Fed funds rate in July. Following that, we expect the Fed to pause rate actions until March 2024 when we expect the Fed to begin to cut rates. Looking ahead, our outlook for the third quarter of 2023 compared to the second quarter of 2023 is as follows

John Pancari :

On the fee income side, if you could just maybe elaborate a little bit on your -- change in your expectation to down 2% to 4% for the year. I know it represents a change in your view on capital markets as well as the impact of Visa. But I know you indicated you expect a meaningful increase in capital markets in the back half. So maybe if you could kind of talk about what's impacting that and maybe help size it up a bit?

John Pancari :

Okay. All right. That's helpful. And then separately on the capital return side, I know you indicated that you expect buybacks trending somewhat minimal. So just pending Basel III, is that mean perhaps in that million range? Or is there another way to think about that? And then separately, maybe, Bill, if you can talk about any thought around M&A appetite, both on the nonbank side and the bank side?

Bill Demchak:

I think on the M&A side, we continue to look, as we have done for the last several years. It's small things that might augment our client offerings, the volume of things that are being shown to us has actually probably increased. Our appetite to do them has probably decreased a little bit at the margin. Larger things are going to be kind of a function of the environment and what the regulatory landscape looks like. But all else equal, we would be interested in expanding our franchise.

David George :

Kind of a big picture question for both Bill and Rob. I wanted to get a sense as to how you're thinking about managing the balance sheet today, given where the cost of new money is relative to a year ago with loans and securities down a bit. I would guess, economics and perhaps some capital relief are driving some of that, but I'm curious as to how you're thinking about balancing spread revenue growth relative to managing the balance sheet for returns. I assume you're continuing to run the bank at the same ROE targets you always have. But I'm curious, conceptually, guys how you're thinking about that dynamic.

Robert Reilly :

I'd just add to that is -- so we ran for many years substantially asset sensitive, and that's changed. So we're slightly asset sensitive but really neutral right now.

Erika Najarian :

I guess the first question here, and I just want to emphasize this and this squares with your 10-Q disclosure, you mentioned a neutrally positioned balance sheet. So as we think about that exit run rate that is implied for your guidance on net interest income of about $3.25 billion for the fourth quarter of '23. Without taking into account balance sheet growth, it sounds like if we do get the rate cuts that the market is expecting that the -- you're going to be able to stay within that range of $3.2 billion, $3.25 billion, again, excluding any assumed growth?

Erika Najarian :

Got it. And -- thank you so much for all the disclosure on Slide 6. I'm wondering when do you think is the time to start thinking about adding and protecting from that downside risk with regards to maybe adding new received fixed swaps at obviously a higher floor than where they're coming off of? And what's the pricing like for those securities for those swaps rather?

Operator:

[Operator Instruction] Our next question is coming from the line of Scott Siefers with Piper Sandler.

Bill Demchak:

Sure. I follow the question. I mean the basic -- our deposit outflows, I guess, maybe I'll answer it this way, are largely following the expectations I think you'd see across the industry with QT. Inside of that, we try to keep our client base and price them competitively, and you're seeing that in the mix shift from noninterest-bearing to interest-bearing and the increase in the beta. We're not out chasing, trying to do broker deposits or big CD pushes or something to boost deposits, if that's kind of where your question was going.

Scott Siefers :

Yes. No, I mean you hit on it. I guess, I probably could have worded it better. But if I look at your cumulative beta assumption is lower than some others, but it seems sort of realistic also just within the sort of confines of what you're actually experiencing. So I was just curious about how the competitive dynamic sort of weighed in there, and I think you touched on it, so I appreciate that.

Robert Reilly :

100%.

Robert Reilly :

Maybe a little better.

Scott Siefers :

Okay. Perfect. And I was hoping we could peel back a little more into the sort of the expected capital markets recovery. I guess as I look at from a top level, if there are sort of three big chunks in the capital markets, DCM, seems like it's sort of fine ECM, maybe is found firmer footing, but M&A is the piece that's still sort of in a logjam. I guess maybe as you think about the nuance for that recovery in the back half of the year, just what are the main drivers that you see?

Operator:

Our next question is coming from the line of Mike Mayo with Wells Fargo.

Bill Demchak:

Thanks for the question, Mike. The short answer is we are going to push harder on it. The practical answer is, I'm not entirely sure that the benefits of what we will be doing will show up in the run rate in '23. If you look at our costs, right? We're basically down in every category other than personnel. And we're going to have to take a hard look at where we can generate savings in this company without cutting the potential for growth and the opportunity we continue to see in our growth markets and just business activity. But we're going to look at that really hard. I'm just not sure it shows up in.

Michael Mayo :

All right. Well, one follow-up then as we -- how does this set you up for 2024? I guess, is it too early to say? And just in general, you guys have been -- you and the industry, it's been about six to nine months of negative downward guidance. Is loan spreads for you guys one quarter, higher interest rates than others, capital markets a little bit this quarter. And these are factors outside of your control, at least those are. Do you think you're level-setting enough now? Are we there? Or there's still more risk to the downside than to the upside?

Robert Reilly :

Well, I would say you sort of talked about it. I mean, the disruption has been largely driven by the rate environment and the volatility in the rate environment that not only affects our earning assets and our deposits, but also some of our interest rate-sensitive fees. So all the changes there are a function of the extraordinary change in the rates. Are we in the later innings of that? I think probably, but hard to be accurate exactly.

Betsy Graseck :

Two questions. One is I know we talked earlier about demand for loans, not that great. But I'm most -- I'm also wondering, is there a credit box widening event that -- or process we should be thinking about, given that credit quality is so good?

Robert Reilly :

Yes. I think it issue right now it's kind of pretty straightforward. The companies who otherwise in the normal cycle would be out refinancing and perhaps increasing lines are holding off under some assumption that credit is going to get cheaper, either through rate or through spread. And so there's a backlog building. I don't -- I think we wait for that market to come to us. I don't think there's a big appetite on anyone's part to go out and go with a loss-leading price, particularly given the funding markets today. So I think it will be slow for a while until people are kind of forced into this new environment and new pricing and then you'll see growth.

Bill Demchak:

I don't know the exact quote, but we put the ratio out there for a while. And while I'm not sure the ratio this quarter would qualify for the full 100%, but it's very close. And historically, it's been over the full 100% even though we're measured at the 70% threshold.

Bill Demchak:

Yes.

Robert Reilly :

Yes. No, no, no. Thanks for asking that, Betsy. So no, the FDIC assessment that I was referring to was the one that was announced last year that went into place at the beginning of this year, '23. It doesn't relate to the special assessment that's being contemplated for the Silicon Valley Bank and Signature Bank, which we expect to be finalized sometime in the second half. So our guidance does not include that.

Robert Reilly :

Well, we'd be expensing it, but we need to understand what that number is.

Ebrahim Poonawala :

I have a couple of follow-up questions. One, I think you talked about interest in expansion, I guess, as it pertains to M&A. When you talk to investors and bank management teams, it appears that there are three hurdles to that. One is, lack of policy alignment in D.C., mark-to-market purchase accounting and then the macro. Bill, if you had to rate them, which of these three is the biggest hurdle to figure a little bit of consolidation in the sector?

Bill Demchak:

But the mark-to-market is the primary challenge.

Bill Demchak:

So a couple of things. I want to go back to your comment on -- just quickly on we've got to wait for rates to go lower. You don't necessarily need rates to go lower. You need the existing book to pull the par, right? One of the -- so for example, our securities book because of short duration will pull the par very quickly. Others, some have long book, some have short books, so it will vary across the industry. The issue of deposit betas, if the Fed just freezes and stays there for a long period of time, you would have deposit beta creep. We're at the margin, there would be competition for deposits as long as Q2 was ongoing. And you'd see some bleed to the upside. I don't know how large that would be. It's -- we're kind of assuming some of that in our guidance. But I think that's a real issue, and we've seen it in past history when the Fed was done.

Operator:

And our last question in the queue is a follow-up question coming from the line of Mike Mayo with Wells Fargo.

Bill Demchak:

Well, I'll give you the official Rob answer, which is we are appropriately reserved.

Bill Demchak:

We're -- at this point, I think we have our unemployment assumptions somewhere over 5%, which bluntly looks like it's going to be pretty tough to get there in my own view. I think the soft landing feels right, and we'll reflect on that as time comes. We're not even in a soft landing. I'd remind you that a large amount of the reserves we have appropriately are focused towards commercial real estate office specifically. And I think even with the soft landing, that asset category is going to have trouble.

Robert Reilly :

Yes, we're 7.4% on the office book.

Robert Reilly :

I'm sorry, on the -- so the office book, inside of the office book, the multi-tenant piece, which is where we have the biggest concern is close to 11%.

Operator:

We have no further questions.

Bill Demchak :

Thanks, everybody.

Operator:

That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

Bryan Gill :

Good morning, and welcome to today's conference call for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of April 14, 2023, and PNC undertakes no obligation to update them. Now I'd like to turn the call over to Bill.

Robert Reilly :

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average basis. Loans for the first quarter were $326 billion, an increase of $3.6 billion or 1% linked quarter. Investment securities were relatively stable at $143 billion. Cash balances at the Federal Reserve averaged $34 billion and increased $4 billion during the quarter. Deposits of $436 billion grew on both a spot and average basis linked quarter. Average borrowed funds increased $4 billion, which reflected fourth quarter 2022 activity as well as senior note issuances in January of this year. At quarter end, our tangible book value was $76.90 per common share, an increase of 7% linked quarter and we remain well capitalized with an estimated CET1 ratio of 9.2% as of March 31, 2023. During the quarter, we returned $1 billion of capital to shareholders which included $600 million of common dividends and approximately $370 million of share repurchases or 2.4 million shares. Due to market conditions and increased economic uncertainty, we expect to reduce our share repurchase activity in the second quarter. And of course, we'll continue to monitor this and may adjust share repurchase activity as appropriate. Slide 5 shows our loans and deposits in more detail. During the first quarter, loan balances averaged $326 billion, an increase of $4 billion or 1%, largely reflecting the full quarter impact of growth in the fourth quarter of 2022. Deposits averaged $436 billion in the first quarter, increasing $1.3 billion. We continue to see a mix shift from noninterest-bearing to interest-bearing, and I will cover that in more detail in a few minutes. Our rate paid on interest-bearing deposits has increased to 1.6% during the first quarter from 1.07% in the fourth quarter of 2022. And as of March 31, our cumulative deposit beta was 35%. Turning to the income statement on Slide 6. As you can see, first quarter 2023 reported net income was $1.7 billion, or $3.98 per share. Total revenues of $5.6 billion decreased to $160 million compared to the fourth quarter of 2022. Net interest income decreased $99 million or 3% primarily driven by 2 fewer days in the quarter and higher funding costs, partially offset by higher yields on interest-earning assets. Our net interest margin of 2.84%, declined 8 basis points reflecting the increased funding costs, I just mentioned. Noninterest income also declined 3% or $61 million as growth in asset management and brokerage was more than offset by a general slowdown in capital markets activity as well as seasonally lower consumer transaction volumes. First quarter expenses declined $153 million or 4% linked quarter, even after accounting for the increase to the FDIC's deposit assessment rate which equated to $25 million. Provision was $235 million in the first quarter and included the impact of updated economic assumptions as well as changes in portfolio composition and quality. And our effective tax rate was 17.2%. Turning to Slide 7. We highlight our revenue and expense trends. As a result of our diversified revenue streams and expense management efforts, we generated positive operating leverage of 2% linked quarter and 15% compared to the same period a year ago. And as we previously stated, we have a goal to reduce costs by $400 million in 2023 through our continuous improvement program, and we're confident we will achieve our full year target. And as you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 8. Nonperforming loans remained stable at $2 billion and continue to represent less than 1% of total loans. Total delinquencies of $1.3 billion declined $164 million or 11% linked quarter. Notably, the delinquency rate of 41 basis points is our lowest level in over a decade. Net charge-offs were $195 million, a decrease of $29 million linked quarter. Our annualized net charge-offs to average loans ratio was 24 basis points in the first quarter and our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on March 31, essentially stable with year-end 2022. Before I provide an update on our forward guidance, as Bill mentioned, we want to take a deeper dive into some of the key balance sheet items that are top of mind in the current environment related to deposits, securities and swaps, capital and liquidity and the impact of potential regulatory changes. And finally, office exposure within our commercial portfolio. In our view, we believe we're well positioned across all these key areas of focus. Turning to Slide 10. Our $437 billion deposit base is broken down between consumer and commercial categories to give you a view of the composition and granularity of the portfolio. At the end of the first quarter, our deposits were 53% consumer and 47% commercial. Inside of our $230 billion of consumer deposits, approximately 90% are FDIC insured. The portfolio is very granular with an average account balance of approximately $11,500 across nearly 20 million accounts throughout our coast-to-coast franchise. Our $207 billion of commercial deposits are 20% insured, but importantly, approximately 95% of the total balances are held in operating and relationship accounts. These include deposits held as compensating balances to pay for treasury management fees, escrow deposits at Meadowlands loan services and broader relationship accounts, all of which tend to provide more stability than deposit-only accounts. Importantly, we have approximately 1.4 million commercial deposit accounts, representing a diverse set of industries and geographies. Turning to Slide 11. We highlight our mix of noninterest-bearing and interest-bearing deposits. Our consumer deposits, noninterest-bearing mix has been stable, remaining at 10% compared to the same period a year ago. The commercial side is where we expected to see a continued shift from noninterest-bearing into interest-bearing deposits as rates have risen and that has played out, albeit at a somewhat faster pace than we had expected. The commercial noninterest-bearing portion of total deposits was 45% as of March 31, down from 58% a year ago. Importantly, commercial noninterest-bearing include the compensating balances and Meadowlands deposits, I mentioned previously, which provides support to this mix through time. On a consolidated basis, our level of noninterest-bearing deposits was 27% at the end of the first quarter of 2023, down from 33% a year ago. PNC has historically operated with a higher percentage of noninterest-bearing deposits relative to the banking industry due in part to the strength of our treasury management business and granular deposit base. As a result, we expect our noninterest-bearing portion of deposits to continue to exceed industry averages, and approach the mid-20% range by year-end 2023. In addition to our mix shift, we have seen a faster increase in our deposit cost this year as the Federal Reserve has continued to raise short-term interest rates. Slide 12 shows our recent trends and our current expectations for deposit betas through the end of 2023. The increase in our current deposit beta expectations are largely driven by recent events that have increased the intensity and focus on rates paid and ultimately, has added incremental pricing pressure sooner than we previously expected. We expect the Federal Reserve to raise the benchmark rate by 25 basis points in May. This, coupled with heightened competition for deposits, has accelerated our expectations to the level and pace of beta increase and we now expect to reach a terminal beta of 42% by year-end. Slide 13 details our investment securities and swap portfolios. Our securities balance averaged $143 billion in the first quarter and were relatively stable linked quarter. The yield on our securities portfolio increased 13 basis points to 2.49%, as we continue to replace runoff at higher reinvestment rates. Yields on new purchases during the quarter exceeded 4.75%. Our portfolio is high quality and positioned with a short duration of 4.3 years, meaningfully shorter than many of our peers. Approximately 2/3 of our securities are recorded as held to maturity and 1/3 is available for sale. Average security balances represent approximately 28% of interest-earning assets. Our received fixed swaps pointed to the commercial loan book remained largely stable at $42 billion in notional value and 2.25-year duration. At the end of the first quarter, our accumulated other comprehensive loss improved by $1.1 billion or 10% to $9.1 billion, driven by the impact of lower interest rates during the quarter and normal accretion as the securities and swaps pulled apart. Slide 14 highlights the pace of expected security and swap maturities as well as the related AOCI runoff. By the end of 2024, we expect about 26% of our securities and swaps to roll off. This will drive increases in our securities and commercial loan yields as well as meaningful tangible book value improvement as we expect approximately 40% AOCI accretion by the end of year 2024. Slide 15 highlights our strong liquidity position. Our strong liquidity coverage ratios continued to improve in the first quarter and exceeded regulatory requirements throughout the quarter. Our cash balance is at the Federal Reserve totaled $34 billion, and we maintained substantial unused borrowing capacity and flexibility through other funding sources. includes a required statutory daily liquidity coverage ratio assessment as well as a monthly net stable funding ratio calculation. In addition, we performed monthly internal liquidity stress testing that covers a range of time horizons as well as systemic and idiosyncratic stress scenarios. Our mix of borrowed funds to total liabilities has historically averaged approximately 17% and reached an unprecedented low level of 6% in 2021. On March 31, our mix was 12% and we expect to move closer to the historical average over time. In light of the current environment, we anticipate that we will be subject to a total loss absorbing capacity requirement in some form and at some point, with a reasonable phase-in period. Importantly, as our borrowed funds continue to return to a more normalized level, we would expect to be compliant through our current issuance plans under existing TLAC requirements. Slide 16 shows our solid capital position with an estimated CET1 ratio of 9.2% at quarter end. As a Category 3 institution, we don't include AOCI in our CET1 ratio, but I understand why there is focus on this ratio with the inclusion of AOCI. As of March 31, 2023, our CET1 ratio, including AOCI, was estimated to be 7.5%, which remains above our 7.4% required level, taking into account our current stress capital buffer. However, we also believe it's important to take a look at the balance sheet positioning of the bank from a market value of equity perspective. similar to our understanding of Basel IRRBB rules. Market value of equity doesn't truly get reflected on the balance sheet today due to generally accepted accounting principles, which results in a skewed approach about valuing certain items primary on the asset side. While AOCI take into account the current valuation of the securities and certain portions of our swap portfolios, it does not account for the valuation of the deposit book which can be a meaningful offset in a rising interest rate environment. In fact, looking at PNC's change in market value of equity over the past year, the increase in the market value of our deposits and the rapidly rising interest rate environment has significantly outpaced all unrealized losses on the asset side of the balance sheet, including securities and fixed rate loans. Total market value of equity increased substantially in the rising rate environment, and further, our duration of equity is now essentially 0 and well positioned in the current environment. Importantly, our models use conservative assumptions regarding estimates for betas, mix, balances, we also recognized early on that large inflows of deposits during the pandemic were driven by a combination of QE and fiscal stimulus, which were likely to be short-lived. Recall our Fed balances peaked in the first quarter of 2021 around $86 billion. As a result, we modeled an economic value associated with those deposits at a fraction of the value of core deposits. Turning to Slide 17. I I wanted to spend a few minutes talking about our commercial real estate portfolio. While credit quality is strong across the majority of our CRE book, office is a segment receiving a lot of attention in this environment due to the shift to remote work and higher interest rates. So we thought it would be worthwhile to highlight our exposure and our position with this portfolio. At the end of the first quarter, we had $8.9 billion or 2.7% of our total loans in our office portfolio. Turning to Slide 18. You can see the composition of this portfolio, which is well diversified across geography, tenant type and property classification. Reserves against these loans, which we have built over several quarters, now totaled 7.1%, a level that we believe adequately covers expected losses. In regard to our underwriting approach, we adhere to conservative standards, focused on attractive markets and work with experienced well [indiscernible]. The office portfolio was originated with an approximate loan to value of 55% to 60% and a significant majority of those properties are defined as Class A. We have a highly experienced team that is reviewing each asset in the portfolio to set appropriate action plans and test reserve adequacy. We don't solely rely on third-party appraisals, which will naturally be slow to adjust to the rapidly shifting market conditions. Rather, we are stress testing property performance to set realistic expectations. To appropriately [sensitize] our portfolio, we significantly discounted net operating income levels and property values across the entire office book. Additionally, tenant retention, build-out costs and concession levels are all updated to accurately reflect market conditions. Credit quality in our office portfolio remains strong today with only 0.2% of loans delinquent, 3.5% nonperforming and a net charge-off rate of 47 basis points over the last 12 months. Along those lines, we continue to see solid performance within the single tenant, medical and government loans, which represent 40% of our total office portfolio. These have occupancy levels above 90% and watch list levels of 3% or less. Where we do see increasing stress and a rising level of criticized assets, is in our multi-tenant loans, which represents 58% of our office portfolio. Multi-tenant loans are currently running in the mid-70% occupancy range. watchless levels are greater than 30% and and 60% of the portfolio is scheduled to mature by the end of 2024. In the near, this is our primary concern area as it relates to expected losses and by extension, comprises the largest portion of our office reserves. Multi-tenant reserves on a stand-alone basis are 9.4%. Obviously, we'll continue to monitor and review our assumptions to ensure they reflect real-time market conditions. For each of the key areas of focus, I just discussed, we believe we are well positioned. And Slide 9 summarizes our balance sheet strength during this volatile time. Our deposits are up, our capital and liquidity positions are strong, and our overall credit quality is solid. In summary, PNC reported a strong first quarter '23. In regard to our view of the overall economy, we are expecting a recession starting in the second half of 2023, resulting in a 1% decline in real GDP. Our rate path assumption includes a 25 basis point increase in the Fed funds rate in May. Following that, we expect the Fed to pause rate actions until early 2024, when we expect a 25 basis point cut. Looking ahead, our outlook for full year 2023 compared to 2022 results is as follows

Betsy Graseck:

First off, I just want to say, your slide deck is phenomenal. I just -- you answered so many of the questions that I had coming into this, I felt like you were reading my mind ahead of this call.

Betsy Graseck:

No, it was great. You guys -- this is a great job. I have 2 questions. One is on the beta, the deposit beta, when you're talking about the 42%, obviously, that is aligned with the outlook that you just expressed for interest rate movements. I guess I wanted to just understand how you're thinking about the flex between deposit beta and deposit growth because part of me says, "Hey, I could have expected even more deposit growth than you gave me QQ and is there a rate paid element to that, that maybe you're holding back on and that's why the deposits weren't maybe as high as what some folks like me had hoped.

Betsy Graseck:

Yes. No, QQ definitely, and I would expect after all of the banks finish reporting, we can have a better conversation on this. I was just wondering if you felt that if you had a slightly higher rate paid, would you have pulled in more? And I suppose the way you answered that question is you don't feel the need to. So that's great. And then just separately, as a fallout of what has happened with [C&IB] signature, et cetera, do you feel like there's any need at all to reassess the duration of the commercial operating account deposit liability, life. Is that something that having seen what happened at [C&IB, ]you would want to take a closer look at? Or do you feel like it's just such a different animal given what you outlined on Slide 10 with the granularity you've got.

Robert Reilly :

And deposits that are spread out over diverse industries and diverse geographies.

Robert Reilly :

And the nature of the clients.

Operator:

Our next question from the line of Mike Mayo with Wells Fargo Securities.

William Demchak:

I think, Mike, part of the issue that we face here is you have an interest rate forward curve that's suggesting cuts out there. So if you believe that betas would be less. We kind of think the Fed's going to hold through the year and cut next year. Personally, I think they might hold longer than that. So everybody's NII guide is going to be all over the place depending on what they actually think the Fed is doing as we go into this -- the back of this year. Separately, we have seen just this heightened awareness of interest rates and what you do with deposits on the back of the banks have failed. You've seen the growth in the government money funds on the back of the Fed's reverse repo facility, which is a real thing. As long as they allow that to keep growing, they're at the market deposits, but they're basically getting drained from the banking system and making liquidity more expensive. So that's -- we took all that into account and said, "Look, if rates are higher for longer, if the Fed keeps draining deposits through its reverse repo facility, smaller banks really need to pay up super high rates to fund their balance sheets. It's going to be painful for us, and that's what we put in our guide. That may or may not happen.

Mike Mayo :

And the one other point you guys have made is that either NII will be better or you might have to -- you might get to release some of your credit reserves. Have you seen any improvement in that loan pricing commensurate with some of the standards and the capital markets, your pricing for risk a lot more in the lending markets, you have not been pricing for risk and you brought that up before. Are you seeing that at all or still not yet?

Operator:

Our next question comes from the line Gerard Cassidy with RBC.

William Demchak:

I don't know what it is they might do. There's a lot of talk around should they eliminate the available for sale, opt in or opt out for the AOCI for banks our size and they may well do that. Part of me though, the reason we put economic value of equity in our presentation is, as soon as you start isolating specific fixed rate assets and ignore others. So what do you do with fixed rate whole loan mortgages, what do you do with held, it's all the same stuff. It's an accounting entry. And so I would hope that they would have a more holistic look as they do in Europe on measuring balance sheet risk to interest rates. I don't know where that's going to end up. And whatever it is they do is going to take a period of time. TLAC, I think, is a certainty at this point. It's a function of how much it will be and whether it's varied as a function of size and complexity a bank.

Gerard Cassidy:

Go ahead, Rob.

William Demchak:

By the way, the issue, it's just -- it's worth mentioning basic interest rate risk management and the test around liquidity that banks go through, I mean, we did this, we run this stuff every single day with all sorts of different scenarios and the regulators require us to and we get measured on it [indiscernible]. I don't even know who was looking at these other banks. It's -- so to come in and say we ought to do more. We're already doing it is, I guess, my point.

William Demchak:

A couple of comments. If you look back through our history, when we enter new markets, this is particularly through factor [PwC] and what we've seen with BBVA. We tend to grow loans at a pace in the new markets that would be above what you would expect as a long-term trend. And then over time, we cross-sell into those new relationships. So almost think of it as it's kind of advertising dollars she otherwise participate in a deal and I hope that you're going to get TM revenue and other things. What we'll see going forward is the cross-sell under the new relationships we've established. The ability to continue to grow loans at that pace should we choose to is probably still there? Do you get paid for it today the way you did when rates were much lower that's a tougher question. Now, the whole reintermediation in the banks from capital markets. I've heard some of that, by the way, the other way. All else equal, I suspect the long-term trend will be less in the banking system and more out of the banking system over a long, long period of time, notwithstanding what happens in the near future.

John Pancari :

And I agree on the slide deck, Very, very helpful detail. On the deposit front, just a couple of additional bit of detail, the beta expectation of terminal be 42% looks a little bit more conservative than the group and probably appropriately so. So it's good to see it. Can you maybe give us how that breaks down by way of commercial deposit beta expectation at this point versus consumer.

John Pancari :

Okay. That's helpful. Also on the deposit front, if I could also a little more detail on the amount of inflows that you may have seen during the March time period around the failures. Can you maybe quantify the amount and if you expect any outflow of any of those inputs that you saw?

William Demchak:

The only thing I'd say, we actually opened in March, twice the number of accounts in our C&IB franchise that we would otherwise open in a month. So away from the deposits that came in, we actually got a bunch of clients. The deposits will stay and get mixed, some will go, but we grew our account portfolio pretty substantially in one month.

William Demchak:

It's a good question, and I haven't seen them, but it's worth. I don't know we put in the deck or not, but we underwrite to what 55 to 60.

William Demchak:

And all of that stuff is stale and all the appraisals that you get are stale. And so in effect, what we end up doing is you assume that less leases renew than you otherwise would in a normal cash flow analysis. You dropped that pretty materially. You assume that lease rates, all else equal, are going to go down and then you have to put in the rehab costs to re-lease it. And then you discounted at a lower rate. So we've done all that building by building and then taking reserves against final kind of point make you think about Rob's number, it was at 9.6% we have against.

William Demchak:

Effectively, you're saying, all right, I can have 20% of Class A office default and lose $0.50 on the dollar on a portfolio that was originally underwritten at 60%. That's a pretty severe outcome.

William Demchak:

We -- look, we know how to do this, but we've been in the business for a long time. We have all the resources and have seen the activity in [Meadowlands]. We know all the borrowers were with. And we think we've laid it out pretty clearly. We're going to have charge-offs, but we've...

William Demchak:

Where they're coming from and we've built the reserves.

Bill Carcache :

Bill and Rob, I wanted to follow up on the deposit beta commentary. Rob, you mentioned that mid-20% noninterest-bearing deposit mix that's implicit I believe, in your 42% terminal beta assumption. It looks like that would get you back to pre-COVID levels on Slide 11, I think. How are you thinking about the risk that that noninterest-bearing mix will continue to fall, not just the pre-COVID levels but potentially even lower. Perhaps some have talked about.

Bill Carcache :

Understood. And then separately, following up on your commentary around potential regulatory uncertainty. In light of bars, your recent Senate testimony, I was hoping you could address broadly how you're all thinking about the levers at your disposal to the extent that the regulatory environment grows more challenging, certainly, your -- it seems like you're well positioned, but in terms of levers, whether it's RWA growth, buyback, dividend, if you could just frame how you think about those to the extent that it does get more challenging?

Robert Reilly :

And that would largely be in the obvious areas of capital and liquidity where we're strong.

Scott Siefers :

So you reduced the full year '23 loan growth expectation a bit. I was wondering if you could comment for a second on how much of that is sort of lower either existing or anticipated demand? And how much is you guys just sort of being more conservative about where you hope to kind of direct your capital liquidity.

Robert Reilly :

And that spread issue that we talked about that we think that we should be paid more for the risk.

William Demchak:

I'm not sure. We haven't seen anything with our legacy clients in terms of behavior. Now they've -- we've seen money go into sweep accounts, government funds from corporates and individuals largely is a function of rate. I don't know that it has anything to do with diversification. As you go for smaller banks, I suppose that could become an issue depending on how much visibility there is into that particular bank's balance sheet, but we just haven't seen any of that.

Ken Usdin:

I just want to dig on the guidance a little bit. the second quarter guidance is clear for the revenue step down. And kind of that implies in the full year guide that second half revenue is pretty equal to first half revenue. I'm just wondering if you can kind of maybe give us some NII versus fees? And are you expecting any just better stability or increase as you go through the year perhaps in fees versus what might happen in NII?

Ken Usdin:

Okay. And within that, can I question, your Harris Williams business has just been a great one over the years. In this environment, obviously, M&A is slower, but is there also -- is there any sense or chance that also like midsized companies have to do a rethink here? I'm just kind of wondering just where you think the pipelines and outlook are for that business specifically?

Ken Usdin:

Rob, one on your footnote on your beta slide says that you don't include time deposits in your beta count. So we generally to assume that the beta on time deposits is obviously very high, just given what we know to the early point that Phil made about industry funding costs.

Operator:

[Operator Instructions]. Next question from the line [indiscernible] with Point72.

Robert Reilly :

I'm sorry. I'm sorry, I didn't follow all of that.

Robert Reilly :

So the 2.7% -- it's been pretty steady. So it's been a small percentage of our total commercial real estate hasn't changed nor do we expect it, certainly not to go up.

Unidentified Analyst:

Alan Davis here from NatWest Markets. Just a very quick question and echo what everybody said that the disclosure and information here is fantastic. With all the market noise that went on after SEB, and I totally get the difference, and I totally agree with what you're saying about the accounting standards and so on. Nevertheless, there's a lot of keen interest in the unrealized losses on the hold-to-maturity portfolio. Are you able to provide any color or guidance there? I don't think all of that would be in AOCI. Is there anything that you can help guide me with in that regard.

Robert Reilly :

$3.5 billion.

Operator:

We have no further questions on the front line.