PNC Financial Services Group, Inc. (The)

the PNC Financial Services Group. Participating on this call are PNC's Chairman, President, and CEO, Bill Demchek, and Rob Riley, 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 materials are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of April 14th, 2022, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Thanks, Brian, and good morning, everybody. As you've seen, we had a solid start to the year as we grew loans and securities, controlled expenses, and our credit quality reserves and capital levels remain very strong. As we've previously disclosed, non-interest income was below our expectations for the quarter, And while we had expected fees to be down sequentially, reflecting typical first quarter seasonality, the decline actually exceeded normal interest rate volatility. And probably the Russian-Ukraine conflict adversely impacted certain of our capital markets businesses, among other areas. You know, as we look forward, we're clearly in an environment of uncertainty here. We're also in an environment with rising interest rates. which benefit banks with increased loan demand, which benefit banks. And in PNC's case, a business or a bank that never changed its credit box from credit terms got really easy. A business that has a very, or a bank that is a very solid mix of fee-based businesses, and importantly, a bank that has substantially expanded its geographic presence. And I want to hit on that in a second, just as it relates to our progress on BBVA. You know, I would tell you, I just, I couldn't be more proud of what we've been able to accomplish over the, you know, the last about 15 months in total now, but in particular over the last couple of quarters. And we still have a lot of work to do, but to put it in perspective, our staffing is largely complete, and our calling effort particularly versus the fourth quarter, has increased substantially. And our sales and pipelines are robust. Just to give you an idea of the activity behind this, in the legacy BBVA USA geographies, corporate commercial banking calls have doubled since the fourth quarter. And sales have increased almost 50%. Now, as we expected across CNIB, nearly half of these sales are actually non-credit related in the legacy BBVA USA geographies. We switched to the retail side. We're obviously focused on building customer relationships. Just to give you an idea, our sales per branch were approximately 60% higher in March compared to what they were in December, with improvements across mortgages, cards, and referrals to PNC investments. In our asset management group, we're making great progress in strategic investments to hire key people in business development and advisor roles. And importantly, our client opportunity pipelines are really strong. From a balance sheet perspective, we continue to deploy our excess liquidity, as you've seen, with solid loan growth and securities purchases. Spot loans grew $6 billion and a quarter, driven by the commercial side, which saw a nice increase in utilization. In fact, if we exclude the impact of PPP loan forgiveness, spot commercial loans grew $7 billion, the fastest organic quarterly growth we've seen since the commercial defensive draws that we saw at the start of the pandemic. And by the way, we've seen that growth carry into the early part of April. We also remain active on the security side with net purchases of almost $6 billion during the quarter. From a balance sheet perspective, the securities were offset by unrealized losses due to rising interest rates, which Rob's going to discuss in a few minutes. This doesn't impact our regulatory capital or earnings, but during the quarter, we moved approximately $20 billion of our securities available for sale to help the maturity to limit future valuation changes due to interest rates. Importantly, we saw a solid rebound in the yield on our securities. Overall, we believe we are well positioned for the rising interest rate environment to deliver net interest income growth and NIM expansion throughout the year. And finally, during the quarter, we returned about $1.7 billion of capital to shareholders through share repurchases and dividends. And importantly, based on our performance, our strong capital levels, and the Board's confidence in our execution of our strategic priorities, we recently announced a substantial increase to our quarterly dividend of 25 cents per share to $1.50, or 20%. I just want to close by thanking our employees for their hard work and dedication to our customers and communities. Moving forward, as I said, we believe we are well-positioned to continue to grow shareholder value as the economy normalizes and interest rates move higher, and we realize the full potential of the combined PNC and BBVA-USA. Well, then I'll turn it over to Rob for a closer look at our results, and then we'll take your questions.

Thanks, Bill, and good morning, everyone. Our balance sheet is on slide three and is presented on an average basis. During the quarter, loans increased by $2 billion, or 1%. Investment securities grew $6 billion, or 5%. And Federal Reserve cash balances declined $13 billion, or 17%, reflecting higher securities and loan balances, as well as lower borrowed funds. Deposit balances averaged $453 billion and were relatively stable compared to the prior quarter. Our tangible book value was $79.68 per common share as of March 31st, a 15% decline linked quarter, which was entirely driven by mark-to-market adjustments in our securities and swap portfolios as a result of higher interest rates. As a Category 3 institution, we opted out of recognizing AOCI and regulatory capital And as of March 31st, 2022, our CET1 ratio was estimated to be 9.9%. Given our strong capital ratios, we continue to be well positioned with significant capital flexibility. And as Bill just mentioned, our board recently approved a 25 cent increase to our quarterly cash dividend on common stock, raising the dividend to $1.50 per share. Additionally, during the first quarter, we completed share repurchases of $1.2 billion for 6.4 million shares. Slide 4 shows our loans in more detail. Average loans increased $2 billion linked quarter, and on a spot basis, loans grew $6 billion, or 2%. PPP loan balances continued to decline and impacted first quarter growth by approximately $2 billion on both an average and spot basis. Looking at loan growth excluding the impact of PPP loans, average loans increased $4 billion, or 1%. driven by $5 billion of growth in commercial and industrial loans, partially offset by a billion-dollar decline in commercial real estate balances, and average consumer loans were stable linked quarter. On a spot basis, loans grew $8 billion. Commercial loans grew $7 billion, driven by higher utilization, as well as new production within corporate banking and business credit businesses. Notably, in our CNIB segment, the utilization rate increased 85 basis points, and our overall commitments were 2% higher compared to year-end 2021. And consumer loans increased $900 million, as higher mortgage balances were partially offset by lower auto and credit card loans. Moving to slide five, average deposits of $453 billion remained stable compared to the fourth quarter. On the right, you can see total deposits at period end were $450 billion, a decline of $7 billion, or 2% linked quarters. All of the decline was on the commercial side, where deposits were $10 billion lower, primarily driven by seasonal cash deployment. Partially offsetting the commercial decline, consumer deposits increased $3 billion, reflecting seasonally higher balances related to tax refund payments. Overall, our rate paid on interest-bearing deposits remained stable at four basis points. And importantly, we remained poor-funded, with a loan-to-deposit ratio of 65% at the end of the first quarter. Slide six details the change in our average securities and Federal Reserve balances. We've maintained high levels of liquidity over the past year while opportunistically purchasing securities. This trend continued into the first quarter as we added primarily U.S. Treasuries and agency RMBS. As a result, average security balances increased by 5% for $6 billion compared to the fourth quarter of 2021 and now represent 27% of interest-earning assets. Slide 7 highlights the composition of our high-quality securities portfolio, as well as the balance changes from year-end March 31st. During the first quarter, we added to our portfolio with net purchases of approximately $6 billion. However, the increase in rates during the first quarter resulted in higher net unrealized losses of approximately $6 billion, and accordingly, our period end balances remained relatively stable. To moderate the impact of rising rates on security values and correspondingly AOCI, we transferred approximately $20 billion of securities from our available for sale portfolio into held maturity at quarter end. Importantly, fluctuations in AOCI do not have an impact on our earnings. However, we are mindful of the AOC impact on tangible book value, and we'll continue to evaluate potential opportunities for further transfers. Turning to the income statement on slide eight, as you can see, first quarter 2022 reported EPS was $3.23. which included pre-tax integration costs of $31 million. Excluding integration costs, adjusted EPS was $3.29. During the first quarter, integration costs reduced revenue by $16 million and increased expenses by $15 million. First quarter revenue was down $435 million, or 8%, compared with the fourth quarter. Expenses declined $619 million, or 16%, linked quarter, And excluding the impact of integration expenses, non-interest expense declined 7%. The first quarter provision recapture was $208 million, primarily reflecting the impact of improved COVID-19-related economic conditions. And our effective tax rate was 17%. So in total, net income was $1.4 billion in the first quarter. Now let's discuss the key drivers of this performance in more detail. Slide 9 details our revenue trends. Total revenue for the first quarter of $4.7 billion declined $430 million late quarter. Net interest income of $2.8 billion was down $58 million, or 2%. Higher securities and loan balances, as well as increased security yields, were more than offset by a $74 million decline in PPP revenue due to loan forgiveness activity and the impact of two fewer days in the quarter. A net interest margin of 2.28% was up one basis point. As we recently announced and affected for the first quarter, we recategorized the presentation of our non-interest income and provided an update to the related guidance. Consistent with those revisions, first quarter fee income was $1.7 billion, a decline of $296 million, or 15% linked quarter. Looking at the detail of each revenue category, asset management and brokerage fees decreased $8 million, or 2%, reflecting lower average equity marks. Capital markets related fees declined $208 million, or 45%, driven by lower M&A advisory fees, mostly due to elevated fourth quarter transaction levels, but also some delayed transaction activity in the first quarter. Card and cash management revenue decreased $26 million, or 4%, driven by seasonally lower consumer spending activity. Lending and deposit services was essentially stable linked quarter, declining only $4 million. Residential and commercial mortgage non-interest income was $50 million lower, primarily due to decreased commercial mortgage activity. And finally, other non-interest income declined $81 million, primarily due to lower private equity-related revenue, and once again, compares to elevated fourth quarter levels. Turning to slide 10, our first quarter expenses were down by $619 million, or 16% linked quarter. Excluding the impact of integration expenses, Non-interest expense declined $243 million, or 7%. The majority of the decline was in lower personnel expense, primarily reflecting lower incentive compensation. We remain deliberate around our expense management. By year end 2021, we achieved our objective to reduce BBVA USA's annual operating expense run rate by $900 million. And as we previously stated, we have a goal to reduce costs by $300 million in 2022, through our continuous improvement program, and we're confident we'll achieve our full-year target. As you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide 11. Non-performing loans of $2.3 billion decreased $182 million, or 7%, compared to December 31st, and continue to represent less than 1% of total loans. Total delinquencies were $1.7 billion on March 31st, a $286 million decline from year end, reflecting lower consumer and commercial loan delinquencies. The majority of these decreases resulted from our progress in resolving BBVA-USA conversion-related administrative and operational delays. Net charge-offs for loans and leases were $137 million, an increase of $13 million linked quarter. Our annualized net charge-offs to average loans continues to be historically low at 19 basis points. And during the first quarter, we reduced our allowance for credit losses by approximately $300 million, and our reserves now total $5.2 billion for 1.8% of total loans. In summary, PNC reported a solid first quarter, and we're well positioned for the remainder of 2022 as we continue to realize the potential of our coast-to-coast franchise. In regard to our view of the overall economy, we expect strong growth over the course of 2022 resulting in 3.7% average GDP growth. We also expect the Fed to raise rates by an additional cumulative 175 basis points through the remainder of this year to a range of 2% to 2.25% by year-end. And all of this is consistent with the update in our recent 8K filing. Looking at the second quarter of 2022 compared to the first quarter of 2022, we expect average loan balances to be up 2% to 3%. which includes a $1.3 billion decline in PPP loans. We expect net interest income to be up 10 to 12 percent. We expect non-interest income to be up 6 to 8 percent, which results in total revenue increasing 9 to 11 percent. We expect total non-interest expense to be up 3 to 5 percent, and we expect second quarter net charge-offs to be between $125 and $175 million. Considering our reported first quarter operating results, second quarter expectations and current economic forecast for the full year 2022 compared to the full year 2021, we expect average loan growth of approximately 10% and spot loan growth of 5%. We expect total revenue growth to be 9% to 11%. We expect expenses, excluding integration expense, to be up 4% to 6%. And we now expect our effective tax rate to be approximately 19%. And with that, Bill and I are ready to take your questions.