PNC Financial Services Group, Inc. (The)

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 Domchek, 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 July 15, 2022, and P&C 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 strong second quarter highlighted by 9% revenue growth and solid positive operating leverage resulting in PPNR growth of 23%. We maintained strong credit quality and fees rebounded from the first quarter, driven primarily by capital markets activity, including Harris-Williams, and continued growth in card and cash management. Strong loan growth and rising rates helped us to increase both net interest income and net interest margin meaningfully. Loan growth was driven by CNI, where new production increased significantly and utilization returned to near pre-pandemic levels. Consumer loans also grew, driven by mortgage and home equity. Higher rates continued to adversely impact the unrealized value of our securities book. In response, we continued to reposition the portfolio during the quarter, resulting in 60% of our securities portfolio now being held and held to maturity. We returned $1.4 billion of capital to shareholders during the quarter through share repurchases and dividends. Looking forward, there is uncertainty in the environment we're operating in, including the impact of higher rates, supply chain disruptions and inflation. But regardless of the path ahead macroeconomically, we believe having a strong balance sheet, a solid mix of fee-based businesses, continued focus on expense management and differentiated strategies for organic growth will continue to provide the foundation for our success. And our focus is on executing the things we can control and not getting distracted by what is beyond our control. Along those lines, we delivered well on our strategic priorities in the quarter, including the build-out of our new BBVA and expansion markets, modernizing our retail banking technology platform, bolstering our asset management offering, and building differentiated and responsible capabilities for our retail and commercial customers in the payment space. As I've talked about recently at conferences, our performance in the BBVA markets has exceeded our own expectations. On slide three, you can see that the strong growth we've generated in these markets across customer segments. In corporate banking, we've seen sales increase 40% link quarter and maintained a 50% non-credit mix of sales since conversion. We've seen similar growth within commercial banking where sales in the BBVA USA markets are up 32% link quarter and non-credit sales to total sales have been approximately 55% since conversion. In retail banking, we've experienced a notable increase in sales for both small businesses and consumers of 16% and 22%, respectively. And we continue to invest in AMG, and a big part of that is building a strong customer-focused team that can deliver our brand across our footprint. We have built good momentum in our recruiting efforts over the past few quarters, hiring advisors across all areas of the business to help deliver for our clients. I'll close by thanking our employees for their hard work and dedication to our customers and communities. Moving forward, we believe that we're well-positioned to continue to grow shareholder value.

And with that, I'll turn it over to Rob for a closer look at our results, and then we'll take your questions. Well, thanks, Bill, and good morning, everyone.

Our balance sheet is on slide four and is presented on an average basis. During the quarter, loan balances averaged $305 billion, an increase of $14 billion, or 5%. Investment securities grew approximately $1 billion, or 1%. And our average cash balances at the Federal Reserve declined $23 billion. Deposit balances averaged $447 billion, a decline of $7 billion, or 2%. Our tangible book value was $74.39 per common share as of June 30th, a 7% decline linked quarter, entirely AOCI-driven as a function of higher rates. And as of June 30, 2022, our CET1 ratio was estimated to be 9.6%. Given our strong capital ratios, we continue to be well positioned with significant capital flexibility. During the quarter, we returned $1.4 billion of capital to shareholders through $627 million of common dividends and $737 million of share repurchases for 4.3 million shares. Our recent CCAR results underscore the strength of our balance sheet and support our commitment to returning capital to our shareholders. As you know, our stress capital buffer for the four-quarter period beginning in October 2022 is now 2.9%, and our applicable ratios are comfortably in excess of the regulatory minimums. Earlier this year, our Board of Directors authorized a new repurchase framework, which allows for up to 100 million common shares. of which approximately 59% were still available for repurchase as of June 30th. This allows for the continuation of our recent average share repurchase levels in dollars, as well as the flexibility to increase those levels should conditions warrant. Slide five shows our loans in more detail. During the second quarter, we delivered solid loan growth across our expanded franchise, particularly when compared to 2021 growth rates. 2021, as you know, was characterized by low utilization levels, PPP loan forgiveness, and in P&C's case, a repositioning of certain acquisition-related portfolios. Loan balances averaged $305 billion, an increase of $14 billion, or 5%, compared to the first quarter, reflecting growth in both commercial and consumer loans. Commercial loans, excluding PPP, grew $13 billion, driven by higher new production as well as utilization. Included in this growth was approximately $5 billion related to high-quality, short-term loans that are expected to mature during the second half of the year. Notably, in our CNIB segment, the utilization rate increased more than 120 basis points, and our overall commitments were 5% higher compared to the first quarter. PPP loan balances declined $1.2 billion, and at the end of the quarter were less than $1 billion. Consumer loans increased $2 billion as higher mortgage and home equity balances were partially offset by lower auto loans. And loan yields increased 10 basis points compared to the first quarter, driven by higher interest rates. Slide 6 highlights the composition of our deposit portfolio, as well as the average balance changes linked quarter. We have a strong core deposit base, which is two-thirds interest-bearing and one-third non-interest-bearing. Within interest-bearing, 70% are consumer, And within non-interest-bearing, 50% are commercial compensating balances and represent stable operating deposits. At the end of the second quarter, our loan-to-deposit ratio was 71%, which remains well below our pre-pandemic historic average. On the right, you can see linked quarter change in deposits in more detail. Deposits averaged $447 billion in the second quarter, a decline of nearly $7 billion, or 2% linked quarter. Commercial deposits declined $8 billion, or 4%, primarily in non-interest-bearing deposits due to movement to higher yielding investments and seasonality. Average consumer deposits increased seasonally by $2 billion, or 1%. Overall, our rate paid on interest-bearing deposits increased eight basis points length quarter to 12 basis points. Deposit betas have lagged early in the rate-rising cycle, but we expect our deposit betas to accelerate in the third quarter and throughout the remainder of the year, given our increased rate forecast. And as a result, we now expect our betas to approach 30% by year-end, compared to our previous expectation of 22%. Slide 7 details our securities portfolio. On an average basis, our securities grew $800 million, or 1%, during the quarter, representing a slower pace of reinvestment in light of the rapidly rising interest rate environment. The yield on our securities portfolio increased 25 basis points to 1.89%, driven by higher reinvestment yields, as well as lower premium amortization. On a spot basis, our securities remained relatively stable during the second quarter, as net purchases were largely offset by net unrealized losses on the portfolio. As Bill mentioned, in total, we now have 60% of our securities and held to maturity as of June 30th. which will help mitigate future AOCI impacts from rising interest rates. Net pre-tax unrealized losses on the securities portfolio totaled $8.3 billion at the end of the second quarter. This includes $5.4 billion related to securities transferred to held to maturity, which will accrete back over the remaining lives of those securities. Turning to the income statement on slide eight, as you can see, second quarter 2022 reported net income was $1.5 billion, worth $3.39 per share, which included pre-tax integration costs of $14 million. Excluding integration costs, adjusted EPS was $3.42. Revenue was up $424 million, or 9%, compared with the first quarter. Expenses increased $72 million, or 2%, resulting in 7% positive operating leverage linked quarter. Provision was $36 million, and our effective tax rate was 18.5%. Now let's discuss the key drivers of this performance in more detail. Slide 9 details our revenue trends. Total revenue for the second quarter of $5.1 billion increased 9%, or $424 million linked quarter. Net interest income of $3.1 billion was up $247 million, or 9%. The benefit of higher yields on interest-earning assets and increased loan balances was partially offset by higher funding costs. And as a result, net interest margin increased 22 basis points to 2.5%. Second quarter fee income was $1.9 billion, an increase of $211 million, or 13% linked quarter. Looking at the detail of each category, asset management and brokerage fees decreased $12 million, or 3%, reflecting lower average equity markets. Capital market-related fees rebounded as expected and increased $157 million, or 62%, driven by higher M&A advisory fees. Card and cash management revenue grew $51 million, or 8%, driven by higher consumer spending activity and increased treasury management product revenue. Lending and deposit services increased $13 million, or 5%, reflecting seasonally higher activity and included lower integration-related fee waivers. Residential and commercial mortgage non-interest income was essentially stable linked quarter as higher revenue from commercial mortgage banking activities offset lower residential mortgage loan sales revenue. Finally, other non-interest income declined $34 million and included a $16 million visa negative fair value adjustment related to litigation escrow funding and derivative valuation changes. Turning to slide 10. Our second quarter expenses were up by $72 million, or 2% linked quarter, driven by increased business activity, merit increases, and higher marketing spend. These increases were partially offset by seasonally lower occupancy expense and lower other expense. We remain deliberate around our expense management, and as we've 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. Overall, we saw broad improvements across all categories. Non-performing loans of $2 billion decreased $252 million, or 11%, compared to March 31st, and continue to represent less than 1% of total loans. Total delinquencies were $1.5 billion on June 30th, a $188 million decline linked quarter, reflecting lower consumer and commercial loan delinquencies, which included the resolution of acquisition-related administrative and operational delays. Net charge-offs for loans and leases were $83 million, a decrease of $54 million linked quarter, driven by lower consumer net charge-offs, primarily within the auto portfolios. Our annualized net charge loss to average loans continues to be historically low at 11 basis points. And during the second quarter, our allowance for credit losses remained essentially stable, and our reserves now total $5.1 billion, or 1.7% of total loans. In summary, PNC reported a solid second quarter, and we're well positioned for the second half 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 the pace of economic growth to slow over the remainder of 2022, resulting in 2% average annual real 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 3.25% to 3.5% by year end. Looking at the third quarter of 2022 compared to the second quarter of 2022, We expect average loan balances to be up 1% to 2%. We expect net interest income to be up 10% to 12%. We expect non-interest income to be down 3% to 5%, which results in total revenue increasing 4% to 6%. We expect total non-interest expense to be stable to up 1%. And we expect third quarter net charge-offs to be between $125 million and $175 million. Considering our reported operating results for the first half of 2022, third quarter expectations, and current economic forecasts for the full year 2022 compared to the full year 2021, we expect average loan growth of approximately 13% by an 8% loan growth on a spot basis. We expect total revenue growth to be 9% to 11%. Our revenue outlook for the full year is unchanged from the guidance we provided in April. However, relative to our expectations at that time, we now expect more net interest income from higher rates offset by somewhat lower fees. 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.

Thank you. At this time, if you would like to ask a question, Please press the number 1 followed by the 4 on your telephone keypad. Please hold while we compile the Q&A roster. And our first question comes from Gerard Cassidy with RBC. Please proceed.

Good morning, guys. How are you?

Hey, good morning, Gerard.

Rob, can you elaborate a little further on the deposit beta change? Is it purely just the rate of change in interest rates going up so fast, or is there a deposit mix that's also influencing your new outlook for the beta?

Oh, yeah. Hey, good morning, Gerard. Yeah, probably both, but a little bit more of the former. We're just at that point now where we're seeing rates rising to the point where the betas are becoming active. They were not that active on the consumer side, a little bit on the commercial side in the first quarter, and that's picked up a bit. More on the commercial side, as we expected, and in our case, you know, it's our non-operating deposits. That explains the decline there in the second quarter. So, you know, betas are beginning to move. We expected that, and we're ready for it.

Very good. Credit quality, obviously, was quite strong for you folks, similar to the prior quarter. And, Bill, I don't know. I know there's a lot of uncertainty out there with what's going on in the world, but it just seems that, for your company at least, you are so well positioned from a credit quality standpoint. And are we just going to go off a cliff or something at the end of the year with, you know, some sort of big recession that has frightened everybody about, credit quality for banks in general? And any elaboration on your outlook on credit and the outlook for the economy?

Yeah, look, I don't think there's any cliff involved. You know, I do think that the trouble ahead lies, you know, somewhere in the middle of next year, you know, not any time in the next six months. But what you're seeing inside of our credit book You've got to remember that during this period of time, we continue to kind of run off a higher risk book from BBVA, and our loan growth is largely in higher quality names. So, you know, the overall quality of our book actually improves quarter on quarter. you know, eventually that has to stop. And eventually, I think the Fed has to slow, you know, the economy to a pace to get inflation under control. And I think that's going to be harder to do than the market currently assumes. And I think it's going to take longer than the market currently assumes. And when that happens, we're going to see credit costs go up, you know, at least back to what we would call normalized levels. But I don't think You know, I don't see any particular bubbles inside of the banking system as it relates to credit. I think you're just going to see a slow grind with credit losses increasing over time as we get into this slowdown.

And some normalization. I'm sorry, what was that, Rob? I'm sorry?

I was saying, and Bill mentioned it, Gerard, just some normalization, which is inevitable.

Yes, no, agreed. Thank you, guys.

Sure.

And our next question comes from Bill Karkashi with Wolf Research. Please proceed.

Thanks. Good morning, Bill and Rob. There was a time where you talked about increasing the mix of your securities given all the liquidity in the system. But as the Fed engages in QT and with the strong loan growth that you're seeing, could we see you go the other way and perhaps increase redeploy some of your securities portfolio paydowns to fund more of your growth such that you actually remix more, a larger mix of your assets towards loans?

You know, I think over time that is probably likely if we continue to see loan growth the way we do. But you shouldn't mix security balances with the way we think about fixed rate exposure hedging our deposits. Securities are one way we do that. Swaps are another way. And then, of course, our fixed rate assets themselves. And then inside of that, the duration of the securities we buy. So long story short, the balances probably decline. But we're sitting in a period of time right now where we're very asset sensitive. You'll notice our balances basically stayed flat through the course of the quarter as we kind of purposely watch and let things roll off here. given our view on what we think longer-term rates are going to ultimately do. So balances could go down just as a matter of sort of algebra in the balance sheet, but our ability to invest in rising rates is still there in a large way.

Yeah, that's right. Well, the context, Bill, as you know, the context of your question is historically pre sort of the In rapid increase in liquidity over the last couple of years, we did run about 20% of our securities to our earning assets. We raised that because of all the liquidity in the system. So we're still pretty high on a historical basis, but as Bill Demchik just said, that's not likely to change anytime soon.

That's very helpful. Thank you. And separately, as the Fed proceeds through the hiking cycle at some point, I think as you've both alluded to in your comments, that's going to presumably slow the pace of growth. But you're taking your loan growth guidance higher for the years. Maybe could you speak to how much of that improved outlook is idiosyncratic? Because it certainly does sound like you're expecting a deceleration at some point at the macro level.

A lot of it just comes from our ability to win new business. Utilization rates have largely approached where we were, I think, Rob, pre-pandemic at this point. So there's a little bit of room there. But these new markets and just our ability to win new business, and by the way, new business that is 50% fee-based, is pretty strong. And we feel confident we'll be able to continue to do that, independent of what happens in the economy.

Yeah, and I would just add to that. In terms of the loan growth outlook for the 12 months, we're up a bit, mostly because of the outperformance in the first half relative to our expectations. So that's sort of truing up, so to speak.

Got it. And if I could squeeze in one last one. You know, I think it's interesting, Bill, to think about your commentary around the normalization of credit as the Fed – proceeds through its hiking cycle and sort of we think about the long and variable lags between monetary policy and when that ultimately starts to show up in credit. And then we sort of juxtapose that with what's happening with reserve rates, which it's notable that for most of your peers, they've drifted below their day one levels. And I know for you guys, there's the BBVA deal and lots of other moving parts, but that 1.65 seems relatively conservative. How are you thinking about the trajectory of that from here in the context of, you know, the thought process you just laid out of the Fed hiking cycle eventually leading to credit normalization probably as we get into maybe the middle of next year or somewhere in that time frame?

That's an impossible question to answer given the dynamics of CECL. But, you know, you should assume, you know, we assume that all else equal, credit quality is going to deteriorate at some pace. you know, from here through the next two years. I just don't think it's going to be all that dramatic. You know, and it almost has to be a true statement given the charge-off levels we've been seeing.

Right. Well, and I would add to that, you know, our reserve levels are above our day one CECL, even adjusted for the BBVA acquisition. We're appropriately reserved. Now, and feel good about it.

Very helpful. Thank you for taking my questions.

And our next question comes from the line of Ken Usden with Jefferies. Please proceed.

Hey, guys. Just wanted to just ask to dissect a little bit. Rob, you mentioned that your outlook for NII is a little bit better. Your outlook for fees is a little softer. The NII one I think we get, just wondering if you can help us understand now what kind of curve you're building in, and is it more just that uptick of rates that offsets that new 30% beta outcome?

Yeah, that's right. Good morning, Ken. Yeah, that's exactly right. So, you know, higher rate environment, NII, and the balances that we've generated contribute to the improved NII look. And then you sort of referenced it in terms of the fees, mostly in terms of our full year expectations compared to what we thought at the beginning of the year and last quarter, some softer on AMG and mortgage. as you would expect with the equity markets performing like they are for AMG and interest rates on the mortgage side. So it's sort of the trade-off of the higher rates.

Got it right. Sorry, I missed your three and a quarter, three and a half comment from earlier. So thank you. And then just on the fee side then, you had a really good bounce back as you expected, especially in that capital market. So what's changed there in terms of what you're seeing as far as the outlook on the fee side?

So on the fee side, again, for the full year, most of the change relative to our full year expectations is within AMG and mortgage. On capital markets, you recall we had a soft first quarter relative to our expectations. We did see the bounce back in the second quarter, so we're back in position with our full year expectations. And the second half obviously remains to be seen.

Okay. And if I could just sneak one more in, you know, you mentioned, Bill, you mentioned all the different ways that you can, you know, get exposure to variable rates and such. I'm just wondering, how are you guys thinking about just SWAP's portfolio? You had done some ads in terms of protecting and, you know, managing the near-term upside versus the potential of what happens down the road, you know, based on Fed Funds futures curve expectations and your general view of the economy. Thanks, guys.

We don't think about the swaps book separate from our basic investing and fixed rate exposure. You know, where we sit across the securities book and swaps and everything we do fixed rate, you know, we're looking at a curve now where I kind of think the year end rates in my own mind are probably largely right. But I think there's a I think the assumption that the Fed is going to start easing in the spring of next year is absurd. which means we're holding off at this point because we think there's still value to be had in the longer end of the curve as people come to the realization that inflation isn't as easy to tame as people might assume, and separately that the Fed isn't going to immediately cut simply because the economy slows if inflation is still running hot. So we're going to sit pat, but we don't think swaps – are one thing and bonds are another. We just, we look at our interest rate exposure. We're very asset sensitive. We have an opportunity to deploy in multiple places. We're just not doing it. We basically let everything run down thus far this year.

Understood. Okay. Thank you.

And our next question comes flying of Erica Nigerian with UBS. Please proceed. Hi, good morning.

I'm sure this is the question that Ken asked, but I just wanted to clarify the loan growth expectation rose. You know, the performance has been spectacular. The revenue, the revenues didn't move, even though we had the higher loan growth and the higher rate outlook. And that's because of the higher beta assumed and also lower fees, Rob?

Well, in part. I think the earlier question, and you might have missed it, Erica, was the improved outlook for the full-year loan growth. The answer was most of that was a true-up to our outperformance in the first half. So we grew loans faster than we thought we would in the first six months, which is great. So we true-up that full-year expectation. So all of that is built into the full-year guidance.

Part of the impact that we're seeing in NII And NIM is actually on our loan yields, where the quality of our book, it improves fairly substantially. We put a lot of very high-grade stuff on, and spreads have actually come in quarter on quarter. So when we look at, you know, the out forecast on NII, together with loan growth, which will be pretty healthy, we have in there, you know, embedded in there this notion of that spreads are tighter than they were is we basically improved the quality of the books. That's another component. That's right.

Got it.

And just as a follow-up question, how should we think about deposit growth from here? Bill, I think you've been the one that has been vocal about the notion that if loan growth is positive, deposit growth should be positive. How should we weigh that relative to you know, probably your willful desire to work out the non-operating deposits out of your balance sheet and, you know, and QT?

Yeah, well, it's a good question. And, you know, and the answer to that remains to be seen a little bit. We've clearly seen, you know, the larger corporates move liquidity out of the banking system into the, you know, into money markets, government money markets. And I think, You know, as we go forward, the combination of QT from the Fed and what they do with their repo facility is going to drive some of the yields available in those funds, which in turn is going to drive how much of that sits on banks' balance sheets or not. Outside of those deposits, it's more about a rate-paid game. And I think deposits kind of, you know, inside of the retail space and the smaller bin market commercial space, I think deposits actually grow simply because of the loan volume. But the mixed shift that we've seen in commercial from a little bit less non-interest bearing into interest bearing, that game's going to play out. So thus far, I mean, if you look at the total liquidity in the system, it really hasn't moved. And of course, the Fed hasn't really started their QT program yet. What we've seen is a movement of liquidity from banks into money funds as money fund yields started to grow. So this is going to take a while to play out.

Yeah, and our expectations, Eric, are generally stable. But as Bill pointed, the mix could be different. And an open question on the non-operational deposits, which we'll either do or not do.

Yeah, a big part of what we've seen go thus far are kind of deposits that we don't really care about. They were, you know, we kind of call them surge deposits internally, which were non-core clients, you know, parking liquidity that now have kind of gone into funds. and importantly are, by definition, low margin.

Got it. And my last question, you know, Bill, you said earlier you don't really see any bubbles within the banking system. I think a lot of investors are more concerned about what's outside of the banking system. And interestingly, I'm sure you know this statistic very well, you know, corporate lending in terms of the bank share of it has declined to 16%. I guess my question to you is, You know, do you see an opportunity as rates rise and, you know, the economy slows down? You know, is some of that market share available back to banks in terms of what's happened in the private market? You know, or was that never credit that you wanted to do anyway? And don't you have a unit within PNC that does third-party recoveries, you know, in terms of, you know, if you have, you know, corporate defaults? You could be a third-party recoverer, if that's the term.

Yeah, well, first, I want to see the audit on only 16% of corporate credit being inside of banks, but I'm sure there's some way you can get there. Maybe the other way, right. Yeah, no, as credit outside of the banking system melts, we play in that in two ways. One is, you know, if it's in the real estate space, we do that inside of our special servicing arm in Midland. Two is we are very good at working corporate credits, and we wouldn't be afraid of buying portfolios of troubled assets. And three, and I think this is what you're referring to, is in our asset-based lending group, we play the role of senior lender on a very secured basis for, you know, and basically the agent for the entire capital structure. And as pieces below us struggle, the fee opportunity for us to work those loans out on behalf of the B lenders is quite high. Furthermore, we continue to be approached by multiple B lenders to basically run their books as they look at what's coming their way. Thus far, we haven't agreed to do any of that, and were we to do it, I think it would be quite lucrative.

And we've done that in the past.

Yeah.

Got it. All right. Thank you.

Sure.

And our next question comes from Mike Mayo with Wells Fargo Securities. Please proceed.

Hi. Can you hear me?

Yep.

Good morning.

Okay. Great. I guess all these questions get down to NIM. So are you forecasting deposits to run off for the year? Because you've mentioned betas are starting to move, and I missed the updated guidance because you're guiding for good NII growth. So how much deposit runoff are you assuming there or deposit growth?

I can jump on that, and we covered some of that, Mike. Generally speaking, and we recognize the fluidity, for the second half, we're calling for stable deposits. Some mixed change between non-interest bearing and interest bearing. Also, an open question in terms of non-operational deposits and what betas are required for that and whether we choose to keep those or not. So that all remains to be seen. But the outlook is stable. And then we do expect to expand.

And you talk about tighter loan yield spreads just because you're going up in quality. are you getting rewarded for this more uncertain outlook? I mean, capital markets, you know, some assets are pricing in near recession levels, but I feel like the lending markets are not doing the same. And are you getting more spread for the added chance of a recession?

It depends on the lending sector. So we are, for example, an asset-based... You know, straight spreads on high-rated stuff has kind of stabilized. A lot of what we're seeing is just a mix shift in the quality of our book, not a change in the market in terms of spread. Where I think the market continues to be irrational is on the consumer side. You know, so auto lending seems, you know, in our view to be a little bit of a bubble. You know, and some of the things we're still seeing. being done on the consumer side. But on the corporate side and the real estate side, you know, the shift is moving back towards the banks in terms of our ability to negotiate and get spread and get covenants and get structure. Just not a dramatic shift the way you've seen in some of the headline stuff and capital markets related issues.

So you're getting some of that.

So can you put this in context? This looks like the past is commercial loan growth and in 14 years and we haven't had a cycle like this and in quite some time. And, um, you know, I guess I'm repeating where I think what you've said in the past, it's inventory, it's, um, greater utilization, it's capital expenditures, it's working capital, some business from capital markets back to the bank. Um, did I, did I miss anything there?

No, I mean, thank you for reminding me. I mean, that's what happened, right? We've had inventory built in CapEx and a little volume back to the banks, and boom, you get big loan growth.

Yeah, and particularly on the utilization, which has grown.

But that's coming off of their inventory built, which, yeah.

The one I didn't mention that some other banks have mentioned, you did not, so I don't want to leave the witness here. but in terms of gaining share from non-banks, because you're seeing some non-bank entities not on as solid footing as they were in the past. Are you gaining share from them? Do you expect to gain share from them? Are there opportunities to do so? Are you shifting resources? I get it. You're the National Main Street Bank. You're in 30 MSAs. You have a lot on your plate to try to gain share in all those markets. Meanwhile, you have some verticals where you might be able to gain share. What are you doing to try to capitalize on that.

Yeah, Mike, most of those players play in a risk bucket that we don't like to play in, right? So the exception to that is in our asset-based lending book where borrowers who might have been able to do a cash flow loan with a BDC at one point are now going to come back to the banks and do it asset-based, right? But, you know, on the consumer side, the guys who are out there playing subprime consumer or, you know, even in the leveraged lending side, cash flow unsecured, we just don't have a big book of business there, nor do we want one.

Okay. And last one, just on CECL, you didn't, I mean, you beat on credit. Your credit is great. You've always been high quality. You proved it through the global financial crisis. We get it. but with all this talk about a recession out there, doesn't that give you cover to go ahead and increase reserves? Like I get it. You're above day one Cecil, but what, why not just take more reserves out of conservatism?

Well, it's, it's, it's no, you know, we have a model and we run by a model, so we're not, we're not allowed, we're not allowed to just, you know, as much as I'd like to sometimes put my thumb on the scale. We're not, we don't, we don't do that.

We don't do that. You know, Cecil is a model driven approach and, uh, As you pointed out, Mike, we're above our day one. We're appropriately reserved in a relative to our book.

Okay, thank you.

And our next question comes from John Pencary with Evercore ISI. Please proceed.

Morning, guys. Morning, John. On the back to the commercial loan growth topic. I'm sorry if I missed the detail on it. But I know you mentioned the 5 billion in high quality short term loans that were brought on that you expect to mature in the second half. Can you give a little bit of color on on that on those balances and what drove it and and maybe a little bit in terms of outlook? Could you see additional flows in that type of lending as well? Thanks.

We'd like to see additional flows in that type of lending. It's kind of, you know, that was client, a handful of clients, but client-specific timing issues that, you know, we were able to serve client needs and, you know, they're big balances and they're going to run off.

And we'd like to do that.

Yeah. If it happens again, that's great. But, you know, these were specific ones we called out both because of their size and and also because there are lower spreads in the rest of the book, and that had some impact on the loan yield this quarter.

Okay, and then also related to that, in what areas do you expect that you could see some moderation in commercial loan demand as we do get some slowing in economic activity if the Fed succeeds here with the tightening?

But, you know, eventually what you're going to see, we've seen utilizations go up as people have built inventories. Now, that will reverse itself as we get into a slowdown and people struggle to move inventories. You know, they'll peak and then they'll grind it to a halt. But, you know, I think that's going to end up being the driver. We'll continue to go work and gain share. And ultimately, you know, against the money we put out, we look at what happens to utilizations. And utilizations... will start to drop through a slowdown. You know, peak early into it and then slow down as they try to free up working capital.

Okay, got it. Thanks, Bill. And then back to the Lomas Reserve front. I hear you again in terms of the adequacy of your reserves. In your scenarios, did your economic scenarios that you run that support CECL, did they get worse at all versus last quarter? How did that change? And then separately, did you have any reallocations within the reserve that were noteworthy, like coming from commercial going into consumer? Could you maybe talk about that? So just trying to get a better feel of your confidence.

Without getting into the details of CECL, I would tell you that within our overall provision, we added two reserves as a function of the scenarios we run.

Yeah, I mean, it's pretty stable, John. So no big mix changes, no big dollar changes. The percentage came down a little bit just because of largely the high credit quality, large underwritings we just spoke about, improving the mix. So, you know, pretty much unchanged. Got it. Okay, thanks, Ron.

Okay.

Well, no, so go ahead and clarify that in terms of the dollar amounts and the stable. But inside of that, you know, obviously our scenarios build in some worsening concepts, but there's QFRs as part of that process that offset that. So end of the day, stable.

Got it. Okay. All right. Thanks, Rob. Sure.

And our next question comes from Abraham Poonawalla with Bank of America. Please proceed.

Good morning.

Good morning. I guess just one follow-up, Rob. In terms of as we think about the outlook for deposit betas and margins, if the Fed stops at the end of the year, you talked about the deposit beta and deposit growth expectations in the back half, but give us a sense of the asset sensitivity profile of the balance sheet in a world where the Fed stops hiking, the 210 remains inverted for 6 to 12 months, and as Bill alluded to, we may not get cuts as quickly. In that backdrop, do you still expect the margin to drift higher, or do we start seeing some liability sensitivity where deposits are repricing higher, but you're not seeing the benefit on the asset side?

Yeah, yeah. We don't give explicit NIM outlooks, but I would say your question is when does NIM peak? we see NIMS continuing to expand and peaking in 23. So with everything that you described, we still see upside in NIMS.

Got it. So safe to assume that even in a backdrop where the Fed stops hiking, the NIMS should still at least drift higher a bit for a few more quarters. So point noted.

Yeah, possibly. And again, in sort of that context, we're talking about 23 then, 2023. 2023, yeah.

Yeah, and I didn't mean to pin you down or ask for 23 guidance. I'm just trying to conceptually think if we go into this period where we've not been, where the curve remains flat to inverted for a while, what that does to the name, and it's not unique to you, but I appreciate the color. That's right.

You have to, you know, the number of pieces that are moving inside of that, you know, even let's assume they get out there and they just freeze and you have a small inversion in the curve and you sit there. In that instance, betas probably don't move from wherever they were post the last hike. Instead, what you're going to see is an increase in fixed-rate asset yields that basically roll off from very low yields into higher yields, and then the upside to the extent we want to deploy at that point. So you see a gain in yields inside of the security book in a static environment simply because everything that was purchased with 1.5% handles rolls off.

Yeah, that's right. That's why we're still some ways from the peak.

That's fair. I appreciate the perspective. And on the lending side, I just wanted to follow up on two things. One, do you have a sense of where customers are in terms of rebuilding inventories? That's been a big driver of growth for the last two to three quarters. But compared to pre-pandemic, are customer inventories back to those levels? Like, how would you frame that? And secondly, would love to hear your thoughts about just outlook for the commercial real estate market in this backdrop, especially if we get a recession. You've been cautious in the past, so would love to hear your thoughts.

The inventory question's all over the place, because you have a bunch of customers who have more inventory than they want. And you have others who are still struggling to build inventory to keep up with supply because of continued supply chain disruption. So I don't know that there's a simple answer on inventories. Real estate, with the exception of the slow burn on office, where we continue to be worried, we continue to see slow deterioration, we think we're really well-reserved, but Absent that kind of slow burn, the rest of it continues to kind of do okay to improve. And I think that holds, even at least in the slowdown that's in the back of my mind. Again, I just don't see some big spike into a really ugly recession. So we have our eye on real estate. We have exposure into the office space that we're reserved against. It's kind of doing what we expect it. And beyond that, we're not particularly worried about it.

And your point, we're well-reserved. And multifamily, which is the biggest component of that, is very strong.

Got it. And just one quick one. Sorry if I missed it. Did you talk about the pace of buybacks, how we should think about that in the back half of the year?

I did in my opening comments. We're going to continue buying back shares roughly at the average rate of what we've been doing the last couple of quarters.

No, thanks for taking my questions.

Sure.

Our next question comes from Matt O'Connor with Deutsche Bank. Please proceed.

Good morning. You know, as we think about loan loss reserves and call it a moderate recession, how high or how much add do you think you have to do? I think for COVID, It was around two and a half billion X the day one seasonal impact, but obviously there's been mixed shifts, the BBVA deal, and a lot of factors. But as you guys run your stress test, what would cumulative reserve bill be for a moderate recession?

No way to answer that.

Yeah, I was going to say, the bill said there was an earlier impossible question. Yeah, that one might be number two.

But Matt, I mean, remember that reserve billed in in covet right the scenarios we were running you know i don't remember off the top of my head but this is jack unemployment to 15 percent or higher gdp to my you know we're not this has nothing to do with that right we're going to go to go into a slowdown and we're going to see an increase in reserves at some point but they're not even going to be related to the thing we saw You know, when COVID hit, it took the economy down. Yeah, just in terms of size. So you almost have to take that whole example set and remove it from the framework of how you think about provisions going forward.

Right. So it seems like you're implying, and we've heard it from some others, that it should be a lot less. But I guess we'll see.

No, no, no. I can't imagine. Yeah, yeah, right. Think about what those forecasts were. Do you remember? They were unemployment going to 15% to 20%. I don't think there's anybody out there who thinks we have to crater the economy by that amount to get inflation under control. That was a... You know, look, there could be some world event that causes that, but it's not going to be a function of the Fed raising rates and slowing the economy to get inflation under control.

Yeah, agreed. I mean, obviously, that's what the market is so worried about. And it's just interesting, you know, if you put it relative to capital, even if you did what you did for COVID, it's only 50 basis points of capital. So.

Look, you're bringing up, this whole issue is the issue I think that investors just have completely wrong about the banking system right now. If you look at the market cap that's been pulled out of the banking system and take your worst case reserve bill and charge us through some cycle, it's just wildly wrong. We'll have increased losses, but relatively, you know, not to that extent. Not to, you know, anything close like what we put in during COVID. And more importantly, you know, I think there's a growth opportunity through a mild downturn for us, just given the way we run our business and the business that'll come back into the banking systems and out of the capital markets. So I'm personally confused about all the concern that sits out there on banking reserves in the coming recession and the impacts on the profitability of banks. It'll hurt a little bit.

Well, and to your point, if it's being extrapolated from COVID scenarios.

That's a data point that needs to be removed.

And then just the flip side, you've got a little over $8 billion of losses in OCI. Obviously, a lot of that comes back over time, the part that's related to the bond book. You know, just give us a rule of thumb, like how much of that accretes back each year if rates stay here on the kind of the medium, longer-term part of the curve.

Well, the held to maturity accretes back independent of rates at this point. I don't know if you guys know this.

Have we disclosed that, Brian? It's a couple hundred million.

Yeah. I mean, you know, the way we kind of think about it internally, given how much we moved, is we ought to have pulled a par on the held to maturity book, adding to our capital base at a pace that largely hedges us against further declines in AOCI and the available for sale book, depending how much of a spike their rates are versus the roll down. But we feel pretty good about the mix we have at this point. And obviously, it's not impacting our capital flexibility. you know, vis-a-vis the way we look at AOCI inside a regulatory capital.

Yeah, I guess what I was asking is, like, if we just think over the next few years, right, like all that OCI essentially gets reversed back as the bonds mature.

Yeah, that's right.

You're saddled with $8 billion of losses, like a lot of banks, you know, having to drag and just wondering, you know, what's a good rule of thumb? Does that $8 billion come back kind of maybe $1.5, $2 billion a year, something like that?

I mean, we've got a duration in the book of 4.7 years or something.

Well, the short answer is approximately $200 million a quarter, a billion a year. So that's the number you're looking for. But, you know, that's the right neighborhood.

Sorry, that's out of the held to maturity. Held to maturity. Yeah, the held to maturity. You have a separate AOCI loss available for sale. Which is dependent on rates. Right. Okay, thank you. Sure.

As a reminder, to register for a question, please press the 1 followed by the 4. And our next question comes from Betsy Grasick with Morgan Stanley. Please proceed.

Hi, thanks. Just one follow-up on that. On the AFS book, I guess the underlying question is, is the duration roughly the same as the HTM book? I get that, you know, rates will move that mark around, but Let's say rates never change. Is it the same duration as HTM?

Yeah, roughly. Yeah, roughly.

Yeah, yeah, yeah. Okay. And then just separately, I know there's a lot of questions earlier about deposits, et cetera, and I'm just wondering, your loan-to-deposit ratio I think today is around 70%, maybe 71%, and in 4Q19 it was at 83%. So there's lots of room there in the LDR. I'm wondering how you think about it. Are you happy to – go back to 83 in the near term, or is there, you know, a trajectory or a pace that you're comfortable with?

Look, if it's high quality, we'd love to go back to 83. You know, if it's in our risk box and coupled with, you know, client relationships where we have really strong cross-sell, that'd be a great outcome.

Well, and that also relates to the deposit pricing and what we choose to do. Right. So, yeah, you're right. We have room and flexibility there. as we go through these increased betas and, you know, a growing loan environment.

Right. So part of the question is just trying to get a sense as to the pace of LDR increase. You know, you kind of control with the deposit pricing. Right. So, you know, you could let a lot more run off before you start to... Yeah, that's my point.

That's the flexibility. So we can, and we can view... you know, these deposits in terms of whether we want to pay for them or not.

I don't think, I mean, look, our intention here is to keep deposits and grow deposits if we can without having to be aggressive on rate. It's very simple. And inside of that, we'd like to grow loans. And if we manage to do the two things there and grow loan to deposits to 83%, we'll be making a boatload of money given the fee mix we get when we grow loans. That's a good position.

That'd be a great thing to be able to do and we're going to work on it. Yeah, well, I mean, I guess part of the question is, you know, you don't have to be more competitive on deposit rate right now. You could wait a few more quarters and, you know, then move. Yeah, that's what I said. Okay.

All right. Thank you. Sure.

Our next question comes from Mike Mayo with Wells Fargo Securities. Please proceed.

Hi, I wanted to follow up just because, Bill, you seem so adamant that the market cap that's been taken out of your stock far exceeds credit loss hits that you have in a scenario. So a personal question, you've owned a lot of stock for a long time. You have a lot of skin in the game. At what point would you put more skin in the game and buy some shares? We haven't seen that. I think, by any bank CEO. And if you think this is such a dislocation and you think it's so unlikely to have some kind of deep recession, global financial crisis, pandemic sort of situation, have you thought about that?

I mean, would you do that?

You know, I think about it all the time. I don't know when I go into details on my own financial situation, but it's... I see a lot of value there. It's interesting. We've had a bunch of senior execs actually enroll in our employee stock purchase plan, which maybe is a simple way for me to get a few shares here and there. But look, I think there's a lot of value. I don't know that you're going to see me make a giant purchase because, as you said, I own a lot of stock and it's most of my net worth.

It's just an extra tone for the top, but I guess you said it on the call. Just one more time on that question. Again, you have this disconnect between pricing the capital markets with some other areas and your own expectations. So what you were saying before is that the power or the control has gone back to the banks or the borrower in terms of terms and structure. Maybe not the same degree of pricing, though. And I'm just it's that pricing element that, you know, it's tough for you or anyone to really know how much you should be pricing these loans if you think we might be going into a recession. So how do you get to that level?

Look, it's pricing ultimately is market driven. And it's, you know, I would expect for a given credit quality, we're going to see small backup. Of course, pricing is is also based on a grid. So as we go into a slower economy and people run another turn of leverage given their performance, we'll see jumps in spreads that's built into the existing contract because spreads are performance-based in a lot of the loans that we do. So we'll get there. More important to us, Mike, is the cross-sell that we ultimately get. At the end, loan pricing, as long as we get good structure, pricing's important, but pricing along with the majority of the TM relationship and capital markets business really ups the return that you get from that client relationship.

There's a structure component. There's a lot of good companies out there that don't have structures that we would lend into that They could change that.

And then I guess one more. In terms of your 30 MSAs, your newer markets, your BBVA markets, do you have any metrics on what market share you have there versus your legacy franchise? Because that would size the opportunity.

It's small.

Big opportunity. The opportunity is big. So big that we don't need to worry about that right now.

We just need to do more. Okay. All right. Thanks a lot.

There are no further questions.

Thanks, everybody. Thank you.

Thank you. That does conclude the call for today. We thank you for your participation and ask that you disconnect your lines. Have a great day. Thank you. Thank you. you Thank you. Thank you.

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 Domchek, 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 July 15, 2022, and P&C 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 strong second quarter highlighted by 9% revenue growth and solid positive operating leverage resulting in PPNR growth of 23%. We maintained strong credit quality and fees rebounded from the first quarter, driven primarily by capital markets activity, including Harris-Williams, and continued growth in card and cash management. Strong loan growth and rising rates helped us to increase both net interest income and net interest margin meaningfully. Loan growth was driven by CNI, where new production increased significantly and utilization returned to near pre-pandemic levels. Consumer loans also grew, driven by mortgage and home equity. Higher rates continued to adversely impact the unrealized value of our securities book. In response, we continued to reposition the portfolio during the quarter, resulting in 60% of our securities portfolio now being held and held to maturity. We returned $1.4 billion of capital to shareholders during the quarter through share repurchases and dividends. Looking forward, there is uncertainty in the environment we're operating in, including the impact of higher rates, supply chain disruptions, and inflation. But regardless of the path ahead macroeconomically, we believe having a strong balance sheet, a solid mix of fee-based businesses, continued focus on expense management, and differentiated strategies for organic growth will continue to provide the foundation for our success. And our focus is on executing the things we can control and not getting distracted by what is beyond our control. Along those lines, we delivered well on our strategic priorities in the quarter, including the build-out of our new BBVA and expansion markets, modernizing our retail banking technology platform, bolstering our asset management offering, and building differentiated and responsible capabilities for our retail and commercial customers in the payment space. As I've talked about recently at conferences, our performance in the BBVA markets has exceeded our own expectations. On slide three, you can see that the strong growth we've generated in these markets across customer segments. In corporate banking, we've seen sales increase 40% link quarter and maintained a 50% non-credit mix of sales since conversion. We've seen similar growth within commercial banking where sales in the BBVA USA markets are up 32% link quarter and non-credit sales to total sales have been approximately 55% since conversion. In retail banking, we've experienced a notable increase in sales for both small businesses and consumers of 16% and 22%, respectively. And we continue to invest in AMG, and a big part of that is building a strong customer-focused team that can deliver our brand across our footprint. We have built good momentum in our recruiting efforts over the past few quarters, hiring advisors across all areas of the business to help deliver for our clients. I'll close by thanking our employees for their hard work and dedication to our customers and communities. Moving forward, we believe that we're well-positioned to continue to grow shareholder value.

And with that, I'll turn it over to Rob for a closer look at our results, and then we'll take your questions. Well, thanks, Bill, and good morning, everyone.

Our balance sheet is on slide four and is presented on an average basis. During the quarter, loan balances averaged $305 billion, an increase of $14 billion, or 5%. Investment securities grew approximately $1 billion, or 1%. And our average cash balances at the Federal Reserve declined $23 billion. Deposit balances averaged $447 billion, a decline of $7 billion, or 2%. Our tangible book value was $74.39 per common share as of June 30th, a 7% decline linked quarter, entirely AOCI-driven as a function of higher rates. And as of June 30, 2022, our CET1 ratio was estimated to be 9.6%. Given our strong capital ratios, we continue to be well positioned with significant capital flexibility. During the quarter, we returned $1.4 billion of capital to shareholders through $627 million of common dividends and $737 million of share repurchases for 4.3 million shares. Our recent CCAR results underscore the strength of our balance sheet and support our commitment to returning capital to our shareholders. As you know, our stress capital buffer for the four-quarter period beginning in October 2022 is now 2.9%, and our applicable ratios are comfortably in excess of the regulatory minimums. Earlier this year, our Board of Directors authorized a new repurchase framework, which allows for up to 100 million common shares. of which approximately 59% were still available for repurchase as of June 30th. This allows for the continuation of our recent average share repurchase levels in dollars, as well as the flexibility to increase those levels should conditions warrant. Slide five shows our loans in more detail. During the second quarter, we delivered solid loan growth across our expanded franchise, particularly when compared to 2021 growth rates. 2021, as you know, was characterized by low utilization levels, PPP loan forgiveness, and in P&C's case, a repositioning of certain acquisition-related portfolios. Loan balances averaged $305 billion, an increase of $14 billion, or 5%, compared to the first quarter, reflecting growth in both commercial and consumer loans. Commercial loans, excluding PPP, grew $13 billion, driven by higher new production as well as utilization. Included in this growth was approximately $5 billion related to high-quality, short-term loans that are expected to mature during the second half of the year. Notably, in our CNIB segment, the utilization rate increased more than 120 basis points, and our overall commitments were 5% higher compared to the first quarter. PPP loan balances declined $1.2 billion, and at the end of the quarter were less than $1 billion. Consumer loans increased $2 billion as higher mortgage and home equity balances were partially offset by lower auto loans. And loan yields increased 10 basis points compared to the first quarter, driven by higher interest rates. Slide 6 highlights the composition of our deposit portfolio, as well as the average balance changes linked quarter. We have a strong core deposit base, which is two-thirds interest-bearing and one-third non-interest-bearing. Within interest-bearing, 70% are consumer, And within non-interest-bearing, 50% are commercial compensating balances and represent stable operating deposits. At the end of the second quarter, our loan-to-deposit ratio was 71%, which remains well below our pre-pandemic historic average. On the right, you can see linked quarter change in deposits in more detail. Deposits averaged $447 billion in the second quarter, a decline of nearly $7 billion, or 2% linked quarter. Commercial deposits declined $8 billion, or 4%, primarily in non-interest-bearing deposits due to movement to higher yielding investments and seasonality. Average consumer deposits increased seasonally by $2 billion, or 1%. Overall, our rate paid on interest-bearing deposits increased 8 basis points length quarter to 12 basis points. Deposit betas have lagged early in the rate-rising cycle, but we expect our deposit betas to accelerate in the third quarter and throughout the remainder of the year, given our increased rate forecast. And as a result, we now expect our betas to approach 30% by year-end, compared to our previous expectation of 22%. Slide 7 details our securities portfolio. On an average basis, our securities grew $800 million, or 1%, during the quarter, representing a slower pace of reinvestment in light of the rapidly rising interest rate environment. The yield on our securities portfolio increased 25 basis points to 1.89%, driven by higher reinvestment yields, as well as lower premium amortization. On a spot basis, our securities remained relatively stable during the second quarter, as net purchases were largely offset by net unrealized losses on the portfolio. As Bill mentioned, in total, we now have 60% of our securities and held to maturity as of June 30th. which will help mitigate future AOCI impacts from rising interest rates. Net pre-tax unrealized losses on the securities portfolio totaled $8.3 billion at the end of the second quarter. This includes $5.4 billion related to securities transferred to held to maturity, which will accrete back over the remaining lives of those securities. Turning to the income statement on slide eight, as you can see, second quarter 2022 reported net income was $1.5 billion, worth $3.39 per share, which included pre-tax integration costs of $14 million. Excluding integration costs, adjusted EPS was $3.42. Revenue was up $424 million, or 9%, compared with the first quarter. Expenses increased $72 million, or 2%, resulting in 7% positive operating leverage linked quarter. Provision was $36 million, and our effective tax rate was 18.5%. Now let's discuss the key drivers of this performance in more detail. Slide 9 details our revenue trends. Total revenue for the second quarter of $5.1 billion increased 9%, or $424 million linked quarter. Net interest income of $3.1 billion was up $247 million, or 9%. The benefit of higher yields on interest-earning assets and increased loan balances was partially offset by higher funding costs. And as a result, net interest margin increased 22 basis points to 2.5%. Second quarter fee income was $1.9 billion, an increase of $211 million, or 13% linked quarter. Looking at the detail of each category, asset management and brokerage fees decreased $12 million, or 3%, reflecting lower average equity markets. Capital market-related fees rebounded as expected and increased $157 million, or 62%, driven by higher M&A advisory fees. Card and cash management revenue grew $51 million, or 8%, driven by higher consumer spending activity and increased treasury management product revenue. Lending and deposit services increased $13 million, or 5%, reflecting seasonally higher activity and included lower integration-related fee waivers. Residential and commercial mortgage non-interest income was essentially stable linked quarter as higher revenue from commercial mortgage banking activities offset lower residential mortgage loan sales revenue. Finally, other non-interest income declined $34 million and included a $16 million visa negative fair value adjustment related to litigation escrow funding and derivative valuation changes. Turning to slide 10. Our second quarter expenses were up by $72 million, or 2% linked quarter, driven by increased business activity, merit increases, and higher marketing spend. These increases were partially offset by seasonally lower occupancy expense and lower other expense. We remain deliberate around our expense management, and as we've 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. Overall, we saw broad improvements across all categories. Non-performing loans of $2 billion decreased $252 million, or 11%, compared to March 31st, and continue to represent less than 1% of total loans. Total delinquencies were $1.5 billion on June 30th, a $188 million decline linked quarter, reflecting lower consumer and commercial loan delinquencies, which included the resolution of acquisition-related administrative and operational delays. Net charge-offs for loans and leases were $83 million, a decrease of $54 million linked quarter, driven by lower consumer net charge-offs, primarily within the auto portfolio. Our annualized net charge loss to average loans continues to be historically low at 11 basis points. And during the second quarter, our allowance for credit losses remained essentially stable, and our reserves now total $5.1 billion, or 1.7% of total loans. In summary, PNC reported a solid second quarter, and we're well positioned for the second half 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 the pace of economic growth to slow over the remainder of 2022, resulting in 2% average annual real 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 3.25% to 3.5% by year end. Looking at the third quarter of 2022 compared to the second quarter of 2022, We expect average loan balances to be up 1% to 2%. We expect net interest income to be up 10% to 12%. We expect non-interest income to be down 3% to 5%, which results in total revenue increasing 4% to 6%. We expect total non-interest expense to be stable to up 1%. And we expect third quarter net charge-offs to be between $125 million and $175 million. Considering our reported operating results for the first half of 2022, third quarter expectations, and current economic forecasts for the full year 2022 compared to the full year 2021, we expect average loan growth of approximately 13% and 8% loan growth on a spot basis. We expect total revenue growth to be 9% to 11%. Our revenue outlook for the full year is unchanged from the guidance we provided in April. However, relative to our expectations at that time, we now expect more net interest income from higher rates offset by somewhat lower fees. 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.

Thank you. At this time, if you would like to ask a question, Please press the number one, followed by the four on your telephone keypad. Please hold while we compile the Q&A roster. And our first question comes from Gerard Cassidy with RBC. Please proceed.

Good morning, guys. How are you?

Hey, good morning, Gerard.

Rob, can you elaborate a little further on the deposit beta change? Is it purely just the rate of change in interest rates going up so fast, or is there a deposit mix that's also influencing your new outlook for the beta?

Oh, yeah. Hey, good morning, Jared. Yeah, probably both, but a little bit more of the former. We're just at that point now where we're seeing rates rising to the point where the betas are becoming active. They were not that active on the consumer side a little bit on the commercial side in the first quarter, and that's picked up a bit. More on the commercial side, as we expected, and in our case, you know, our non-operating deposits, that explains the decline there in the second quarter. So, you know, betas are beginning to move. We expected that, and we're ready for it.

Very good. Credit quality, obviously, was quite strong for you folks, similar to the prior quarter. And Bill, I don't know. I know there's a lot of uncertainty out there with what's going on in the world, but it just seems that for your company, at least, you are so well positioned from a credit quality standpoint. And are we just going to go off a cliff or something at the end of the year with some sort of big recession that has frightened everybody about credit quality for banks in general? And any elaboration on your outlook on credit and the outlook for the economy?

Yeah, look, I don't think there's any cliff involved. You know, I do think that the trouble ahead lies, you know, somewhere in the middle of next year, you know, not any time in the next six months. But what you're seeing inside of our credit book, you got to remember that during this period of time, we continue to kind of run off a higher risk book from BBVA and our loan growth is largely in higher quality names. So The overall quality of our book actually improves quarter on quarter. Eventually, that has to stop. And eventually, I think the Fed has to slow the economy to a pace to get inflation under control. And I think that's going to be harder to do than the market currently assumes. And I think it's going to take longer than the market currently assumes. And when that happens, we're going to see credit costs go up, at least back to what we would call normalized levels. But I don't think You know, I don't see any particular bubbles inside of the banking system as it relates to credit. I think you're just going to see a slow grind with credit losses increasing over time as we get into this slowdown.

And some normalization. I'm sorry, what was that, Rob? I'm sorry?

I was saying, and Bill mentioned it, Gerard, just some normalization, which is inevitable.

Yes, no, agreed. Thank you, guys. Sure.

And our next question comes from Bill Karkashi with Wolf Research. Please proceed.

Thanks. Good morning, Bill and Rob. There was a time where you talked about increasing the mix of your securities given all the liquidity in the system. But as the Fed engages in QT and with the strong loan growth that you're seeing, could we see you go the other way and perhaps increase redeploy some of your securities portfolio paydowns to fund more of your growth such that you actually remix more, a larger mix of your assets towards loans?

You know, I think over time that is probably likely if we continue to see loan growth the way we do. But you shouldn't mix security balances with the way we think about fixed rate exposure hedging our deposits. Securities are one way we do that. Swaps are another way. And then, of course, our fixed rate assets themselves. And then inside of that, the duration of the securities we buy. So long story short, the balances probably decline. But we're sitting in a period of time right now where we're very asset sensitive. You'll notice our balances basically stayed flat through the course of the quarter as we kind of purposely watch and let things roll off here. given our view on what we think longer-term rates are going to ultimately do. So balances could go down just as a matter of sort of algebra in the balance sheet, but our ability to invest in rising rates is still there in a large way.

Yeah, that's right.

Well, the context, Bill, as you know, the context of your question is historically pre sort of the In rapid increase in liquidity over the last couple of years, we did run about 20% of our securities to our earning assets. We raised that because of all the liquidity in the system. So we're still pretty high on a historical basis, but as Bill Demchik just said, that's not likely to change anytime soon.

That's very helpful. Thank you. And separately, as the Fed proceeds through the hiking cycle at some point, I think as you've both alluded to in your comments, that's going to presumably slow the pace of growth. But you're taking your loan growth guidance higher for the years. Maybe could you speak to how much of that improved outlook is idiosyncratic? Because it certainly does sound like you're expecting a deceleration at some point at the macro level.

A lot of it just comes from our ability to win new business. Utilization rates have largely approached where we were, I think, Rob, pre-pandemic at this point. So there's a little bit of room there. But these new markets and just our ability to win new business, and by the way, new business that is 50% fee-based, is pretty strong. And we feel confident we'll be able to continue to do that, independent of what happens in the economy.

Yeah, and I would just add to that. In terms of the loan growth outlook for the 12 months, we're up a bit, mostly because of the outperformance in the first half relative to our expectations. So that's sort of truing up, so to speak.

Got it. And if I could squeeze in one last one. You know, I think it's interesting, Bill, to think about your commentary around the normalization of credit as the Fed is proceeds through its hiking cycle and sort of we think about the long and variable lags between monetary policy and when that ultimately starts to show up in credit. And then we sort of juxtapose that with what's happening with reserve rates, which it's notable that for most of your peers, they've drifted below their day one levels. And I know for you guys, there's the BBVA deal and lots of other moving parts, but that 1.65 seems relatively conservative. How are you thinking about the trajectory of that from here in the context of, you know, the thought process you just laid out of the Fed hiking cycle eventually leading to credit normalization probably as we get into maybe the middle of next year or somewhere in that timeframe?

That's an impossible question to answer given the dynamics of CECL. But, you know, you should assume, you know, we assume that all else equal, credit quality is going to deteriorate at some pace you know, from here through the next two years. I just don't think it's going to be all that dramatic. You know, and it almost has to be a true statement given the charge-off levels we've been seeing.

Right. And I would add to that, you know, our reserve levels are above our day one CECL, even adjusted for the BBVA acquisition. We're appropriately reserved. Now, and feel good about it.

Very helpful. Thank you for taking my questions.

And our next question comes from the line of Ken Usden with Jefferies. Please proceed.

Hey, guys. Just wanted to just ask to dissect a little bit. Rob, you mentioned that your outlook for NII is a little bit better. Your outlook for fees is a little softer. The NII one I think we get, just wondering if you can help us understand now what kind of curve you're building in, and is it more just that uptick of rates that offsets that new 30% beta outcome?

Yeah, that's right. Good morning, Ken. Yeah, that's exactly right. So higher rate environment, NII, and the balances that we've generated contribute to the improved NII look. And then you sort of referenced it in terms of the fees, mostly in terms of our full year expectations compared to what we thought at the beginning of the year and last quarter, some softer on AMG and mortgage. as you would expect with the equity markets performing like they are for AMG and interest rates on the mortgage side. So it's sort of the trade-off of the higher rates.

Got it right. Sorry, I missed your three and a quarter, three and a half comment from earlier. So thank you. And then just on the fee side then, you had a really good bounce back as you expected, especially in that capital market. So what's changed there in terms of what you're seeing as far as the outlook on the fee side?

So on the fee side, again, for the full year, most of the change relative to our full year expectations is within AMG and mortgage. On capital markets, you recall we had a soft first quarter relative to our expectations. We did see the bounce back in the second quarter, so we're back in position with our full year expectations. And the second half obviously remains to be seen.

Okay. And if I could just sneak one more in, you know, you mentioned, Bill, you mentioned all the different ways that you can, you know, get exposure to variable rates and such. I'm just wondering, how are you guys thinking about just SWAP's portfolio? You had done some ads in terms of protecting and, you know, managing the near-term upside versus the potential of what happens down the road, you know, based on Fed funds futures curve expectations and your general view of the economy. Thanks, guys.

We don't think about the swaps book separate from our basic investing and fixed rate exposure. You know, where we sit across the securities book and swaps and everything we do fixed rate, you know, we're looking at a curve now where I kind of think the year end rates in my own mind are probably largely right. But I think there's a I think the assumption that the Fed is going to start easing in the spring of next year is absurd. which means we're holding off at this point because we think there's still value to be had in the longer end of the curve as people come to the realization that inflation isn't as easy to tame as people might assume, and separately that the Fed isn't going to immediately cut simply because the economy slows if inflation is still running hot. So we're going to sit pat, but we don't think swaps – are one thing and bonds are another. We just, we look at our interest rate exposure. We're very asset sensitive. We have an opportunity to deploy in multiple places. We're just not doing it. We basically let everything run down thus far this year.

Understood. Okay. Thank you.

And our next question comes from Erica Najarian with UBS. Please proceed. Hi, good morning.

I'm sure this is the question that Ken asked, but I just wanted to clarify the loan growth expectation rose. You know, the performance has been spectacular. The revenue, the revenues didn't move, even though we had the higher loan growth and the higher rate outlook. And that's because of the higher beta assumed and also lower fees, Rob?

Well, in part. I think the earlier question, and you might have missed it, Erica, was the improved outlook for the full-year loan growth. The answer was most of that was a true-up to our outperformance in the first half. So we grew loans faster than we thought we would in the first six months, which is great. So we drew up that full-year expectation. So all of that is built into the full-year guidance.

Part of the impact that we're seeing in NII And NIM is actually on our loan yields, where the quality of our book, it improves fairly substantially. We put a lot of very high-grade stuff on, and spreads have actually come in quarter on quarter. So when we look at, you know, the out forecast on NII, together with loan growth, which will be pretty healthy, we have in there, you know, embedded in there this notion of that spreads are tighter than they were, is we basically improved the quality of the books. That's another component. That's right.

Got it.

And just as a follow-up question, how should we think about deposit growth from here? Bill, I think you've been the one that has been vocal about the notion that if loan growth is positive, deposit growth should be positive. How should we weigh that relative to you know, probably your willful desire to work out the non-operating deposits out of your balance sheet and, you know, and QT?

Yeah, well, it's a good question. And, you know, and the answer to that remains to be seen a little bit. We've clearly seen, you know, the larger corporates move liquidity out of the banking system into the, you know, into money markets, government money markets. And I think, You know, as we go forward, the combination of QT from the Fed and what they do with their repo facility is going to drive some of the yields available in those funds, which in turn is going to drive how much of that sits on banks' balance sheets or not. Outside of those deposits, it's more about a rate-paid game. And I think deposits kind of, you know, inside of the retail space and the smaller bin market commercial space, I think deposits actually grow simply because of the loan volume. But the mixed shift that we've seen in commercial from a little bit less non-interest-bearing into interest-bearing, that game's going to play out. So thus far, if you look at the total liquidity in the system, it really hasn't moved. And of course, the Fed hasn't really started their QT program yet. What we've seen is a movement of liquidity from banks into money funds as money fund yields started to grow. So this is going to take a while to play out.

Yeah, and our expectations, Eric, are generally stable. But as Bill pointed, the mix could be different. And an open question on the non-operational deposits, which we'll either do or not do.

Yeah, a big part of what we've seen go thus far are kind of deposits that we don't really care about. They were, you know, we kind of call them surge deposits internally, which were non-core clients, you know, parking liquidity that now have kind of gone into funds. and importantly are, by definition, low margin.

Got it. And my last question, you know, Bill, you said earlier you don't really see any bubbles within the banking system. I think a lot of investors are more concerned about what's outside of the banking system. And interestingly, I'm sure you know this statistic very well, you know, corporate lending in terms of the bank share of it has declined to 16%. I guess my question to you is, You know, do you see an opportunity as rates rise and, you know, the economy slows down? You know, is some of that market share available back to banks in terms of what's happened in the private market? You know, or was that never credit that you wanted to do anyway? And don't you have a unit within PNC that does third-party recoveries, you know, in terms of, you know, if you have, you know, corporate defaults? You could be a third-party recoverer, if that's the term.

Yeah, well, first, I want to see the audit on only 16% of corporate credit being inside of banks, but I'm sure there's some way you can get there. Maybe the other way, right. Yeah, no, as credit outside of the banking system melts, we play in that in two ways. One is, you know, if it's in the real estate space, we do that inside of our special servicing arm in Midland. Two is we are very good at working corporate credits and we wouldn't be afraid of buying portfolios of troubled assets. And three, and I think this is what you're referring to, is in our asset-based lending group, we play the role of senior lender on a very secured basis for, you know, and basically the agent for the entire capital structure. And as... pieces below us struggle, the fee opportunity for us to work those loans out on behalf of the B lenders is quite high. Furthermore, we continue to be approached by multiple B lenders to basically run their books as they look at what's coming their way. Thus far, we haven't agreed to do any of that, and were we to do it, I think it would be quite lucrative.

And we've done that in the past.

Yeah.

Got it. All right. Thank you.

And our next question comes from Mike Mayo with Wells Fargo Securities. Please proceed.

Hi. Can you hear me? Yep. Good morning.

Okay. Great. I guess all these questions get down to NIM. So are you forecasting deposits to run off for the year? Because you've mentioned betas are starting to move, and I missed the updated guidance. Because you're guiding for good NII growth, so how much deposit runoff are you assuming there are deposit growth?

I can jump on that, and we covered some of that, Mike. Generally speaking, and we recognize the fluidity, for the second half we're calling for stable deposits, Some mixed change between non-interest bearing and interest bearing. Also, an open question in terms of non-operational deposits and what betas are required for that and whether we choose to keep those or not. So that all remains to be seen. But the outlook is stable. And then we do expect to expand.

And you talk about tighter loan yield spreads just because you're going up in quality. are you getting rewarded for this more uncertain outlook? I mean, capital markets, you know, some assets are pricing in near recession levels, but I feel like the lending markets are not doing the same. And are you getting more spread for the added chance of a recession?

It depends on the lending sector. So we are, for example, an asset-based... you know, straight spreads on high-rated stuff has kind of stabilized. A lot of what we're seeing is just a mix shift in the quality of our book, not a change in the market in terms of spread. Where I think the market continues to be irrational is on the consumer side. You know, so auto lending seems, you know, in our view to be a little bit of a bubble. You know, and some of the things we're still seeing being done on the consumer side. But on the corporate side and the real estate side, you know, the shift is moving back towards the banks in terms of our ability to negotiate and get spread and get covenants and get structure. Just not a dramatic shift the way you've seen in some of the headline stuff and capital markets related issues.

So you're getting some of that.

So can you put this in context? This looks like the past is commercial loan growth and in 14 years and we haven't had a cycle like this and in quite some time. And, um, you know, I, I guess I'm repeating where I think what you've said in the past, it's inventory, it's, um, greater utilization, it's capital expenditures, it's working capital, some business from capital markets back to the bank. Um, did I, did I miss anything there?

No, I mean, thank you for reminding me. I mean, that's what happened, right? We've had inventory built in CapEx and a little volume back to the banks, and boom, you get big loan growth.

Yeah, and particularly on the utilization, which has grown.

But that's coming off of their inventory built, which, yeah.

The one I didn't mention that some other banks have mentioned, you did not, so I don't want to leave the witness here. but in terms of gaining share from non-banks, because you're seeing some non-bank entities not on as solid footing as they were in the past. Are you gaining share from them? Do you expect to gain share from them? Are there opportunities to do so? Are you shifting resources? I get it. You're the National Main Street Bank. You're in 30 MSAs. You have a lot on your plate to try to gain share in all those markets. Meanwhile, you have some verticals where you might be able to gain share. What are you doing to try to capitalize on that.

Yeah, Mike, most of those players play in a risk bucket that we don't like to play in, right? So the exception to that is in our asset-based lending book where borrowers who might have been able to do a cash flow loan with a BDC at one point are now going to come back to the banks and do it asset-based. But, you know, on the consumer side, the guys who are out there playing subprime consumer or, you know, even in the leveraged lending side, cash flow unsecured, we just don't have a big book of business there, nor do we want one.

Okay. And last one, just on CECL, you didn't, I mean, you beat on credit. Your credit is great. You've always been high quality. You proved it through the global financial crisis. We get it. but with all this talk about a recession out there, doesn't that give you cover to go ahead and increase reserves? Like I get it. You're above day one Cecil, but what, why not just take more reserves out of conservatism?

Well, it's, it's, it's no, you know, we have a model and we run by a model, so we're not, we're not allowed, we're not allowed to just, you know, as much as I'd like to sometimes put my thumb on the scale.

We're not, we don't, we don't do that. We don't do that. Uh, you know, Cecil is a model driven approach and, uh, As you pointed out, Mike, we're above our day one. We're appropriately reserved in a relative to our book.

Okay, thank you.

And our next question comes from John Pencary with Evercore ISI. Please proceed.

Morning, guys. Morning, John. On the back to the commercial loan growth topic. I'm sorry if I missed the detail on it. But I know you mentioned the 5 billion in high quality short term loans that were brought on that you expect to mature in the second half. Can you give a little bit of color on on that on those balances and what drove it and and maybe a little bit in terms of outlook? Could you see additional flows in that type of lending as well? Thanks.

We'd like to see additional flows in that type of lending. It's kind of, you know, that was client, a handful of clients, but client-specific timing issues that, you know, we were able to serve client needs and, you know, they're big balances and they're going to run off.

And we'd like to do that.

Yeah. If it happens again, that's great. But, you know, these were specific ones we called out both because of their size and and also because there are lower spreads in the rest of the book, and that had some impact on the loan yield this quarter.

Okay, and then also related to that, in what areas do you expect that you could see some moderation in commercial loan demand as we do get some slowing in economic activity if the Fed succeeds here with the tightening?

But, you know, eventually what you're going to see, we've seen utilizations go up as people have built inventories. Now, that will reverse itself as we get into a slowdown and people struggle to move inventories. You know, they'll peak and then they'll grind it to a halt. But, you know, I think that's going to end up being the driver. We'll continue to go work and gain share. And ultimately, you know, against the money we put out, we look at what happens to utilizations. And utilizations... Will start to drop through a slowdown. You know, peak early into it and then and then slow down and say they try to free up working capital.

Okay, got it. Thanks, Bill. And then back to the most reserved from I hear you again in terms of of the the adequacy of your reserves. In your scenarios did your economic scenarios that you run that support Cecil did they get worse at all versus last quarter? How did that change? And then separately, did you have any reallocations within the reserve that were noteworthy, like coming from commercial going into consumer? Could you maybe talk about that? So just trying to get a better feel of your confidence.

Without getting into the details of CECL, I would tell you that within our overall provision, we added two reserves as a function of the scenarios we run.

Yeah, I mean, it's pretty stable, John. So no big mix changes, no big dollar changes. The percentage came down a little bit just because of largely the high credit quality, large underwritings we just spoke about, improving the mix. So, you know, pretty much unchanged. Got it.

Okay, thanks, Ron.

Thank you. Well, no, so I'll clarify that. In terms of the dollar amounts and the stable, but inside of that, you know, obviously our scenarios build in some worsening concepts, but there's QFRs as part of that process that offset that. So end of the day, stable.

Got it. Okay. All right. Thanks, Ron. Sure.

And our next question comes from Abraham Poonawalla with Bank of America. Please proceed.

Hey, good morning.

I guess just one follow-up, Rob. In terms of as we think about the outlook for deposit betas and margins, if the Fed stops at the end of the year, you talked about the deposit beta and deposit growth expectations in the back half, but give us a sense of the asset sensitivity profile of the balance sheet in a world where the Fed stops hiking, the 210 remains inverted for 6 to 12 months, and as Bill alluded to, we may not get cuts as quickly. In that backdrop, do you still expect the margin to drift higher, or do we start seeing some liability sensitivity where deposits are repricing higher, but you're not seeing the benefit on the asset side?

Yeah, yeah. We don't give explicit NIM outlooks, but I would say your question is when does NIM peak? We see NIMs continuing to expand and peaking in 23. So with everything that you described, we still see upside in NIMs.

Got it. So safe to assume that even in a backdrop where the Fed stops hiking, the NIM should still at least drift higher a bit for a few more quarters. So point noted.

Yeah, possibly. And again, in sort of that context, we're talking about 2023 then. 2023, yeah.

And I didn't mean to pin you down or ask for 2023 guidance. I'm just trying to conceptually think if we go into this period where we've not been, where the curve remains flat to inverted for a while, what that does to the NIM. And it's not unique to you, but I appreciate the color.

You have to, you know, the number of pieces that are moving inside of that, you know, even let's assume they get out there and they just freeze and you have a small inversion in the curve and you sit there. You know, in that instance, betas probably don't move from wherever they were post the last hike. And instead, what you're going to see is a increase in fixed rate asset yields that basically roll off from very low yields into higher yields. And then the upside to the extent we want to deploy at that point. So you see a gain in yields inside of the security book in a static environment simply because everything that was purchased with 1.5% handles rolls off.

Yeah, that's right. That's why we're still some ways from the peak.

That's fair. Appreciate the perspective. And on the lending side, just wanted to follow up on two things. One, do you have a sense of where customers are in terms of rebuilding inventories? That's been a big driver of growth for the last two to three quarters. But compared to pre-pandemic, are customer inventories back to those levels? How would you frame that? And secondly, would love to hear your thoughts about just outlook for the commercial real estate market in this backdrop, especially if we get a recession. You've been cautious in the past, so would love to hear your thoughts.

The inventory question is all over the place because you have a bunch of customers who have more inventory than they want. And you have others who are still struggling to build inventory to keep up with supply because of continued supply chain disruption. So I don't know that there's a simple answer on inventories. Real estate, with the exception of the slow burn on office, where we continue to be worried, we continue to see slow deterioration, we think we're really well-reserved. But absent that kind of slow burn, the rest of it continues to kind of do okay to improve. And I think that holds, even at least in the slowdown that's in the back of my mind. Again, I just don't see some big spike into a really ugly recession. So we have our eye on real estate. We have exposure into the office space that we're reserved against. It's kind of doing what we expected. And beyond that, we're not particularly worried about it.

Yeah, and your point, we're well-reserved. And multifamily, which is the biggest component of that, is very strong.

Got it. And just one quick one. Sorry if I missed it. Did you talk about the pace of buybacks, how we should think about that in the back half of the year?

I did in my opening comments. We're going to continue buying back shares roughly at the average rate of what we've been doing the last couple of quarters.

Noted. Thanks for taking my questions.

Sure.

Our next question comes from Matt O'Connor. It was Deutsche Bank. Please proceed.

Good morning. You know, as we think about loan loss reserves and call it a moderate recession, how high or how much add do you think you have to do? I think for COVID, it was around $2.5 billion X the day one seasonal impact. But obviously, there's been mixed shifts, the BBVA deal, and a lot of factors. But as you guys run your stress test, you know, what would cumulative reserve bill be for a moderate recession? No way to answer that.

Yeah, I was going to say, the bill said there was an earlier impossible question. Yeah, that one might be number two.

But, Matt, I mean, remember that reserve bill in COVID, right? The scenarios we were running, you know, I don't remember off the top of my head, but it was jack unemployment to 15% or higher. GDP to, you know, we're not, this has nothing to do with that. Right, we're going to go into a slowdown and we're going to see an increase in reserves at some point, but they're not even going to be related to the thing we saw, you know, when COVID hit the economy down. Yeah, just in terms of size. So you almost have to take that whole example set and remove it from the framework of how you think about provisions going forward.

Right, so it seems like you're implying, and we've heard it from some others, that it should be a lot less, but... I guess we'll say.

No, no, no. I can't imagine. I mean, you know, only if you're – think about what those forecasts were. I mean, do you remember? They were unemployment going to 15% to 20%. Yeah, I mean, it was – you know, I don't think there's anybody out there who thinks we have to crater the economy by, you know, by that amount to get inflation under control. That was a – You know, look, there could be some world event that causes that, but it's not going to be a function of the Fed raising rates and slowing the economy to get inflation under control.

Yeah, agreed. I mean, obviously, that's what the market is so worried about. And it's just interesting, you know, if you put it relative to capital, even if you did what you did for COVID, it's only 50 basis points of capital. So.

Look, you're bringing up... This whole issue is the issue, I think, that investors just have completely wrong about the banking system right now. If you look at the market cap that's been pulled out of the banking system and take your worst-case reserve build and charge-offs through some cycle, it's just wildly wrong. We'll have increased losses, but relatively... Not to that extent. Not to anything close like what we put in during COVID. And more importantly, I think there's a growth opportunity through a mild downturn for us. Just given the way we run our business and the business that will come back into the banking systems and out of the capital markets. I'm personally confused about all the concern that sits out there on banking reserves in the coming recession and the impacts on the profitability of banks. It'll hurt a little bit, but... Well, and to your point, if it's being extrapolated from COVID scenarios... Yeah, that's a data point that needs removed.

And then just the flip side, you've got a little over $8 billion of losses in OCI. Obviously, a lot of that comes back over time, the part that's related to the bond book. You know, just give us a rule of thumb, like how much of that accretes back each year if rates stay here on the kind of the medium, longer-term part of the curve.

Well, the health of maturity accretes back independent of rates at this point. I don't know if you guys know that.

Have we disclosed that, Brian? It's a couple hundred million. Yeah.

I mean, you know, the way we kind of think about it internally, given how much we moved, is we ought to have pulled a par on the held to maturity book, adding to our capital base at a pace that largely hedges us, you know, against further declines in AOCI and the available for sale book, depending how much of a spike their rates are, you know, rates are versus the roll down. But we feel pretty good about the mix we have at this point, and obviously it's not impacting our capital flexibility. you know, vis-a-vis the way we look at AOCI inside a regulatory capital.

Yeah, and I guess what I was asking is, like, if we just think over the next few years, right, like all that OCI essentially gets reversed back as the bonds mature.

That's right.

You are saddled with $8 billion of losses, like a lot of banks, you know, having to drag and just wondering, you know, what's a good rule of thumb? Does that $8 billion come back kind of maybe $1.5, $2 billion a year, something like that?

I mean, we've got a duration in the book of 4.7 years or something.

Well, the short answer is approximately $200 million a quarter, a billion a year. So that's the number you're looking for. But, you know, that's the right neighborhood.

Sorry, that's out of the held to maturity. Held to maturity. Yeah, the held to maturity. You have a separate AOCI loss available for sale. Which is dependent on rates. Right. Okay, thank you. Sure.

As a reminder to register for a question, please press the 1 followed by the 4. And our next question comes from Betsy Grasick with Morgan Stanley. Please proceed.

Hi, thanks. Just one follow-up on that, on the AFS book. I guess the underlying question is, is the duration roughly the same as the HTM book? I get that, you know, rates will move that mark around. Let's say rates never change. Is it the same duration as HTM?

Yeah, roughly. Yeah, roughly.

Yeah, yeah, yeah. Okay. And then just separately, I know there's a lot of questions earlier about deposits, et cetera, and I'm just wondering, your loan-to-deposit ratio I think today is around 70%, maybe 71%, and in 4Q19 it was at 83%. So there's lots of room there in the LDR. I'm wondering how you think about it. Are you happy to – go back to 83 in the near term, or is there, you know, a trajectory or a pace that you're comfortable with?

Look, if it's high quality, we'd love to go back to 83. You know, if it's in our risk box and coupled with, you know, client relationships where we have really strong cross-sell, that'd be a great outcome.

Well, and that also relates to the deposit pricing and what we choose to do. Right. So, yeah, you're right. We have room and flexibility there. as we go through these increased betas and, you know, a growing loan environment.

Right. So part of the question is just trying to get a sense as to the pace of LDR increase. You know, you kind of control with the deposit pricing. Right. So, you know, you could let a lot more run off before you start to... Yeah, that's my point.

That's the flexibility. So we can, and we can view... you know, these deposits in terms of whether we want to pay for them or not.

I don't think, I mean, look, our intention here is to keep deposits and grow deposits if we can without having to be aggressive on rate. It's very simple. And inside of that, we'd like to grow loans. And if we manage to do the two things there and grow loan-to-deposit to 83%, we'll be making a boatload of money given the fee mix we get when we grow loans. So it's a good position.

That'd be a great thing to be able to do and we're going to work on it. Yeah, well, I mean, I guess part of the question is, you know, you don't have to be more competitive on deposit rate right now. You could wait a few more quarters and, you know, then move. Yeah, that's what I said. Okay.

All right. Thank you. Sure.

Our next question comes from Mike Mayo with Wells Fargo Securities. Please proceed.

Hi, I wanted to follow up just because, Bill, you seem so adamant that the market cap that's been taken out of your stock far exceeds credit loss hits that you have in a scenario. So a personal question, you've owned a lot of stock for a long time. You have a lot of skin in the game. At what point would you put more skin in the game and buy some shares? We haven't seen that. I think, by any bank CEO. And if you think this is such a dislocation and you think it's so unlikely to have some kind of deep recession, global financial crisis, pandemic sort of situation, have you thought about that?

I mean, would you do that?

You know, I think about it all the time. I don't know when I go into details on my own financial situation, but it's... I see a lot of value there. You know, it's interesting. We've had a bunch of senior execs actually enroll in our employee stock purchase plan, which maybe is a simple way for me to get a few shares here and there. But, look, I think there's a lot of value. I don't know that you're going to see me make a giant purchase because, as you said, I own a lot of stock and it's most of my net worth.

It's just an extra tone for the top, but I guess you said it on the call. Just one more time on that question. Again, you have this disconnect between pricing the capital markets with some other areas and your own expectations. So what you were saying before is that the power or the control has gone back to the banks or the borrower in terms of terms and structure. Maybe not the same degree of pricing, though. And I'm just it's that pricing element that, you know, it's tough for you or anyone to really know how much you should be pricing these loans if you think we might be going into a recession. So how do you get to that level?

Look, it's pricing ultimately is market driven. And it's, you know, I would expect for a given credit quality, we're going to see small backup. Of course, pricing is is also based on a grid. So as we go into a slower economy and people run another turn of leverage given their performance, we'll see jumps in spreads that's built into the existing contract because spreads are performance-based in a lot of the loans that we do. So we'll get there. More important to us, Mike, is the cross-sell that we ultimately get. At the end, loan pricing, as long as we get good structure, pricing is important, but pricing along with the majority of the TM relationship and capital markets business really ups the return that you get from that client relationship.

There's a structure component. There's a lot of good companies out there that don't have structures that we would lend into that They could change that.

And then I guess one more. In terms of your 30 MSAs, your newer markets, your BBVA markets, do you have any metrics on what market share you have there versus your legacy franchise? Because that would size the opportunity.

It's small.

Big opportunity. The opportunity is big.

So big that we don't need to worry about that right now. We just need to do more. Okay. All right. Thanks a lot.

There are no further questions.

Thanks, everybody. Thank you.

Thank you. That does conclude the call for today. We thank you for your participation and ask that you disconnect your lines. Have a great day.