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

Thank you, Brian, and good morning, everybody. As you can see on the slide, our quarterly results were strong, and we reported $1.7 billion in net income, or $3.98 per share. Inside of this, we grew deposits and loans, increased our capital and liquidity positions, generated positive operating leverage, and maintained strong credit quality. Now, for the past month, we've seen market volatility across the broader industry. And while we take this situation seriously and are closely monitoring the environment, it's important to note that these events have taken place within a few banks with very unique business models. Inside of our company, we really haven't seen any meaningful impacts from the events of the past month. Our balance sheet remains strong and stable, and we're operating the company in the same way we were at the beginning of March. Ultimately, over time, we expect the dynamics playing out in the banking system today to contribute to changes in the competitive landscape. And while it's still early innings, we believe that PNC will be a beneficiary from this process. That said, in the near term, we're not immune to the competitive environment and the deposit dynamics that will ultimately impact our NII in the near term, and Rob's going to cover that in more detail in a second. We remain focused on growing relationships across our lines of business, and we continue to execute on key priorities, including the expansion in the BBVA legacy markets. Rob will provide more details on our financial performance in a moment. However, for this particular call, he'll review our first quarter earnings in a slightly condensed manner to allow time to also cover key balance sheet focus points that have been top of mind for our investors in the last couple of weeks. And, of course, following that, we'll be able to discuss your specific questions in the Q&A segment. Finally, I'd like to thank our 61,000 employees for helping deliver a strong quarter and everything they do to support our customers. Now with that, I'll turn it over to Rob.

Thanks, Bill, and good morning, everyone. Our balance sheet is on slide four and is presented on an average basis. Loans for the first quarter were $326 billion, an increase of $3.6 billion, or 1% length quarter. Investment securities were relatively stable at $143 billion. Cash balances at the Federal Reserve averaged $34 billion and increased $4 billion during the quarter. Deposits of $436 billion grew on both a spot and average basis linked quarter. Average borrowed funds increased $4 billion, which reflected fourth quarter 2022 activity, as well as senior note issuances in January of this year. At quarter end, our tangible book value was $76.90 per common share, an increase of 7% linked quarter. And we remain well capitalized with an estimated CET1 ratio of 9.2% as of March 31st, 2023. During the quarter, we returned $1 billion of capital to shareholders, which included $600 million of common dividends and approximately $370 million of share repurchases, or 2.4 million shares. Due to market conditions and increased economic uncertainty, we expect to reduce our share repurchase activity in the second quarter. And of course, we'll continue to monitor this and may adjust share repurchase activity as appropriate. Slide five shows our loans and deposits in more detail. During the first quarter, loan balances averaged $326 billion, an increase of $4 billion, or 1%, largely reflecting the full quarter impact of growth in the fourth quarter of 2022. Deposits averaged $436 billion in the first quarter, increasing $1.3 billion. We continue to see a mixed shift from non-interest-bearing to interest-bearing, and I will cover that in more detail in a few minutes. Our rate paid on interest-bearing deposits increased to 1.66% during the first quarter, from 1.07% in the fourth quarter of 2022. And as of March 31st, our cumulative deposit beta was 35%. Turning to the income statement on slide six, as you can see, first quarter 2023 reported net income was $1.7 billion, or $3.98 per share. Total revenues of $5.6 billion decreased $160 million compared to the fourth quarter of 2022. Net interest income decreased $99 million, or 3%, primarily driven by two fewer days in the quarter and higher funding costs. partially offset by higher yields on interest-earning assets. Our net interest margin of 2.84% declined 8 basis points, reflecting the increased funding costs I just mentioned. Non-interest income also declined 3%, or $61 million, as growth in asset management and brokerage was more than offset by a general slowdown in capital markets activity, as well as seasonally lower consumer transaction volumes. First quarter expenses declined $153 million, or 4% linked quarter, even after accounting for the increase to the FDIC's deposit assessment rate, which equated to $25 million. Provision was $235 million in the first quarter and included the impact of updated economic assumptions, as well as changes in portfolio composition and quality. And our effective tax rate was 17.2%. Turning to slide seven, we highlight our revenue and expense trends. As a result of our diversified revenue streams and expense management efforts, we generated positive operating leverage of 2% linked quarter and 15% compared to the same period a year ago. And as we previously stated, we have a goal to reduce costs by $400 million in 2023 through our continuous improvement program, and we're confident we will achieve our full-year target. And as you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide eight. Non-performing loans remain stable at $2 billion and continue to represent less than 1% of total loans. Total delinquencies of $1.3 billion declined $164 million, or 11% linked quarter. Notably, the delinquency rate of 41 basis points is our lowest level in over a decade. Net charge-offs were $195 million, a decrease of $29 million linked quarter. Our annualized net charge-offs average loans ratio was 24 basis points in the first quarter. And our allowance for credit losses totaled $5.4 billion, or 1.7% of total loans on March 31st, essentially stable with year-end 2022. Before I provide an update on our forward guidance, as Bill mentioned, We want to take a deeper dive into some of the key balance sheet items that are top of mind in the current environment related to deposits, securities and swaps, capital and liquidity, and the impact of potential regulatory changes. And finally, office exposure within our commercial real estate portfolio. In our view, we believe we are well positioned across all these key areas of focus. Turning to slide 10, our $437 billion deposit base is broken down between consumer and commercial categories to give you a view of the composition and granularity of the portfolio. At the end of the first quarter, our deposits were 53% consumer and 47% commercial. Inside of our $230 billion of consumer deposits, approximately 90% are FDIC insured. The portfolio is very granular with an average account balance of approximately $11,500 across nearly 20 million accounts throughout our coast-to-coast franchise. Our $207 billion of commercial deposits are 20% insured, but importantly, approximately 95% of the total balances are held in operating and relationship accounts. These include deposits held as compensating balances to pay for treasury management fees, escrow deposits at Midland Loan Services, and broader relationship accounts, all of which tend to provide more stability than deposit-only accounts. Importantly, we have approximately 1.4 million commercial deposit accounts representing a diverse set of industries and geographies. Turning to slide 11, we highlight our mix of non-interest-bearing and interest-bearing deposits. Our consumer deposits non-interest-bearing mix has been stable, remaining at 10 percent compared to the same period a year ago. The commercial side is where we expected to see a continued shift from non-interest-bearing into interest-bearing deposits as rates have risen, and that has played out, albeit at a somewhat faster pace than we had expected. The commercial non-interest-bearing portion of total deposits was 45% as of March 31st, down from 58% a year ago. Importantly, commercial non-interest-bearing deposits include the compensating balances and mid-loan escrow deposits I mentioned previously, which provide support to this mix through time. On a consolidated basis, our level of non-interest-bearing deposits was 27% at the end of the first quarter of 2023, down from 33% a year ago. PNC has historically operated with a higher percentage of non-interest-bearing deposits relative to the banking industry, due in part to the strength of our treasury management business and granular deposit base. As a result, we expect our non-interest-bearing portion of deposits to continue to exceed industry averages and approach the mid-20% range by year-end 2023. In addition to our mixed shift, we have seen a faster increase in our deposit costs this year as the Federal Reserve has continued to raise short-term interest rates. Slide 12 shows our recent trends and our current expectations for deposit betas through the end of 2023. The increase in our current deposit beta expectations are largely driven by recent events that have increased the intensity and focus on rates paid and ultimately has added incremental pricing pressure sooner than we previously expected. We expect the Federal Reserve to raise the benchmark rate by 25 basis points in May. This, coupled with heightened competition for deposit, has accelerated our expectations for the level and pace of beta increase, and we now expect to reach a terminal beta of 42% by year end. Slide 13 details our investment securities and SWOT portfolios. Our securities balance averaged $143 billion in the first quarter, and we're a relatively stable linked quarter. The yield on our securities portfolio increased 13 basis points to 2.49%, as we continue to replace runoff at higher reinvestment rates. Yields on new purchases during the quarter exceeded 4.75%. Our portfolio is high quality and positioned with a short duration of 4.3 years, meaningfully shorter than many of our peers. Approximately two-thirds of our securities are recorded as held to maturity, and one-third is available for sale. Average security balances represent approximately 28% of interest-earning assets. Received fixed swaps pointed to the commercial loan book remain largely stable at $42 billion notional value and 2.25-year duration. At the end of the first quarter, our accumulated other comprehensive loss improved by $1.1 billion, or 10%, to $9.1 billion, driven by the impact of lower interest rates during the quarter and normal accretion as the securities and swaps pulled apart. Slide 14 highlights the pace of expected security and swap maturities, as well as the related AOCI runoff. By the end of 2024, we expect about 26% of our securities and swaps to roll off. This will drive increases in our securities and commercial loan yields, as well as meaningful tangible book value improvement, as we expect approximately 40% AOCI accretion by the end of the year 2024. Slide 15 highlights our strong liquidity positions. Our strong liquidity coverage ratios continue to improve in the first quarter and exceeded regulatory requirements throughout the quarter. Our cash balances at the Federal Reserve totaled $34 billion, and we maintain substantial unused borrowing capacity and flexibility through other funding sources. PNC has a robust liquidity management process, which includes a required statutory daily liquidity coverage ratio assessment, as well as a monthly net stable funding ratio calculation. In addition, we perform monthly internal liquidity stress testing that covers a range of time horizons, as well as systemic and idiosyncratic stress scenarios. Our mix of borrowed funds to total liabilities has historically averaged approximately 17% and reached an unprecedented low level of 6% in 2021. On March 31st, our mix was 12%, and we expect to move closer to the historical average over time. In light of the current environment, we anticipate that we will be subject to a total loss-absorbing capacity requirement in some form and at some point with a reasonable phase-in period. Importantly, as our borrowed funds continue to return to a more normalized level, we would expect to be compliant through our current issuance plans under existing TLAC requirements. Slide 16 shows our solid capital position with an estimated CET1 ratio of 9.2% at quarter end. As a Category 3 institution, we don't include AOCI in our CET1 ratio, but understand why there is focus on this ratio with the inclusion of AOCI. As of March 31, 2023, our CET1 ratio, including AOCI, was estimated to be 7.5%, which remains above our 7.4% required level, taking into account our current stress capital buffer. However, we also believe it's important to take a look at the balance sheet positioning of a bank from a market value of equity perspective, similar to our understanding of Basel IRRBB rules. Market value of equity doesn't truly get reflected on the balance sheet today due to generally accepted accounting principles, which results in a skewed approach of valuing certain items primarily on the asset side. While AOCI takes into account the current valuation of the securities and certain portions of our swap portfolios, that does not account for the valuation of the deposit book, which can be a meaningful offset in a rising interest rate environment. In fact, looking at PNC's change in market value of equity over the past year, the increase in the market value of our deposits in a rapidly rising interest rate environment has significantly outpaced all unrealized losses on the asset side of the balance sheet, including securities and fixed rate loans. Total market value of equity increased substantially in the rising rate environment, And further, our duration of equity is now essentially zero and well positioned in the current environment. Importantly, our models use conservative assumptions regarding estimates for betas, mix, balances, and deposit lives. We also recognized early on that large inflows of deposits during the pandemic were driven by a combination of QE and fiscal stimulus, which were likely to be short-lived. Recall our Fed balances peaked in the first quarter of 2021 around $86 billion. As a result, we modeled an economic value associated with those deposits at a fraction of the value of core deposits. Turning to slide 17, I wanted to spend a few minutes talking about our commercial real estate portfolio. While credit quality is strong across the majority of our CRE book, office is a segment receiving a lot of attention in this environment due to the shift to remote work and higher interest rates. So we thought it would be worthwhile to highlight our exposure and our position with this portfolio. At the end of the first quarter, we had $8.9 billion, or 2.7% of our total loans in our office portfolio. Turning to slide 18, you can see the composition of this portfolio, which is well diversified across geography, tenant type, and property classification. Reserves against these loans, which we have built over several quarters, now total 7.1%, a level that we believe adequately covers expected losses. In regard to our underwriting approach, we adhere to conservative standards, focus on attractive markets, and work with experienced, well-capitalized sponsors. The office portfolio was originated with an approximate loan-to-value of 55% to 60%, and the significant majority of those properties are defined as Class A. We have a highly experienced team that is reviewing each asset in the portfolio to set appropriate action plans and test reserve adequacy. We don't solely rely on third-party appraisals, which will naturally be slow to adjust to the rapidly shifting market conditions. Rather, we are stress-testing property performance to set realistic expectations. To appropriately sensitize our portfolio, we've significantly discounted net operating income levels and property values across the entire office book. Additionally, tenant retention, build-out costs, and concession levels are all updated to accurately reflect market conditions. Credit quality in our office portfolio remains strong today, with only 0.2% of loans delinquent, 3.5% non-performing, and a net charge-off rate of 47 basis points over the last 12 months. Along those lines, we continue to see solid performance within the single-tenant medical and government loans, which represent 40% of our total office portfolio. These have occupancy levels above 90% and watch list levels of 3% or less. Where we do see increasing stress and a rising level of criticized assets is in our multi-tenant loans, which represents 58% of our office portfolio. Multi-tenant loans are currently running in the mid-70% occupancy range, watch list levels are greater than 30%, and 60% of the portfolio is scheduled to mature by the end of 2024. In the near term, this is our primary concern area as it relates to expected losses, and by extension comprises the largest portion of our office reserves. Multi-tenant reserves on a standalone basis are 9.4%. Obviously, we'll continue to monitor and review our assumptions to ensure they reflect real-time market conditions. For each of the key areas of focus I just discussed, we believe we are well positioned. And slide 19 summarizes our balance sheet strength during this volatile time. Our deposits are up, our capital and liquidity positions are strong, and our overall credit quality is solid. In summary, PNC reported a strong first quarter 2023. In regard to our view of the overall economy, we are expecting a recession starting in the second half of 2023, resulting in a 1% decline in real GDP. Our rate path assumption includes a 25 basis point increase in the Fed funds rate in May. Following that, we expect the Fed to pause rate actions until early 2024 when we expect a 25 basis point cut. Looking ahead, our outlook for full year 2023 compared to 2022 results is as follows. We expect spot loan growth of 1% to 3%, which equates to average loan growth of 5% to 7%. Total revenue growth to be up 4% to 5%. Inside of that, our expectation is for net interest income to be up 6% to 8%. At this point, visibility remains challenging, and our full-year NII guidance assumes the continuation of the recent intensity on deposit pricing, which is being driven by recent events. We expect non-interest income to be stable, expenses to be up 2% to 3%, and we expect our effective tax rate to be approximately 18 percent. Based on this guidance, we expect we will generate positive operating leverage in 2023. Looking at the second quarter of 2023 compared to the first quarter of 2023, we expect average loans to be stable, net interest income to be down 2 to 4 percent, fee income to be stable to down 1 percent, other non-interest income to be between $200 and $250 million, excluding net securities and visa activity. Taking all the component pieces, we expect total revenue to decline approximately 3%. We expect total non-interest expense to be up 1% to 2%. And we expect second quarter net charge-offs to be between $200 million and $250 million. Further, given our strong credit metrics, our credit quality is trending better than our expectations. And with that, Bill and I are ready to take your questions.

Thank you. If you would like to register your question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press 1-3. One moment, please, for the first question. Our first question comes from the line of Betsy Krasick with Morgan Stanley. Please go ahead.

Hi. Good morning.

Hey, good morning, Betsy.

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

Could have been. Could have been, yeah. Thank you. The team did a nice job putting that together. Thank you for recognizing that.

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

We're sitting here puzzled. We grow deposits average in spot, you know, against the backdrop of, you know, absent the volatility in the market, deposits still overall leaving the systems. you know, particularly in the government money funds and then just the shrinkage of the total on the back of QT. You know, our rate paid, you know, if you look year on year, I think our total deposits are down 3% or something, which is, you know, less than most anybody we'd compare it to. And we have purposefully been protecting the franchises in the course of doing that, um, I recognize some other people don't do that and that's, you know, we'll, we'll, we'll see how that plays out through time. Um, but I, you know, I, we kind of feel we outperformed on deposits. So I'm, I'm a little bit in the first quarter. Yeah.

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

Well, first of all, we look at that all the time. And as Rob put into his comments, a large portion of the deposit growth that we saw through COVID, you know, so, so stimulus and the, the, the growth in the, in the Fed's balance sheet, we just assumed had a life of a day, a zero, um, you know, because we're in an abnormal period of time that the core operating deposits that we have, you know, particularly as you go into middle market are, are basically the monies, you know, the working capital monies that, that companies use to run their companies, um, we truncate and always have truncated the modeled lives of those deposits well below what the practical experience would show us. Yeah, so it's conservative.

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

And, you know, accounts, you know, you almost can't compare what happened at, you know, Silicon Valley and Signature to any other bank I've ever seen in terms of the concentration of, you know, the deposit accounts. And the nature of the clients. Just the nature of them. I mean, a lot of that money was, you know, it was capital raised money that was sitting there.

Right. Okay, that's super. Thank you so much. Appreciate it.

Our next question from the line of Mike Mea with Wells Fargo Securities. Please go ahead.

Hi, I guess this question goes in the category of no good deed goes unpunished. Your operating leverage in the first quarter of the year was over 10%. You've guided for positive operating leverage this year of 1% to 3%. Your cycle to date beta, I estimate that being below 40%. So all that looks really good. But on the other hand, you did, I guess, lower your leverage guidance for how much positive operating leverage this year you mentioned nii you mentioned the intensity on deposit pricing so just can you help talk about the trade-offs of pursuing growth with more deposits versus maybe you know scaling back if that deposit pricing is really that much more intense or do you see that not being so at some point i think my the the

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

And I would just add, we've got to focus on our core franchise and our clients. So on the commercial side, it's really the effect of commercial clients choosing to switch to interest-bearing from non-interest-bearing. And their relationship's fully intact. And then on the consumer side, as Bill just mentioned, the interest-bearing deposits and the pressure around rates paid there.

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

Are you seeing that at all or still not yet?

Our new production is a little bit better than it was, but in fairness – You know, at the moment, credit looks much better than we otherwise would have assumed. So it's a tradeoff. Now, it's going to be interesting, Mike, because, you know, the marginal cost of funds for the U.S. banking system has just gone up a lot, you know, as a result of this flurry. And so all all sequel, you would expect credit spreads to widen here simply because the cost of funds for all banks has gone up. I haven't seen that play out yet, but it continues to be at least my expectation that it will.

All right. Thank you.

Our next question comes from the line off Gerard Cassidy with RBC. Please go ahead. Hi, guys.

How are you?

Hey, morning, Gerard.

Bill, can you give us – you guys pointed out about Rob the – expectations on TLAC in your prepared remarks, but can you guys give us some color on what changes may come as a result of the signature and Silicon Valley bank failures? The regulators look like they're going to reassess the situation. We'll get the postmortem on May 1st, of course, but what do you guys think may happen in terms of additional requirements for regional banks like yours? And I know TLAC, you're already planning on that, but outside of TLAC.

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

No, and Bill and Rob. Go ahead, Rob.

Those are the two prominent subjects, TLAC and AOCI inclusion.

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

Very, very clear. And I'm glad you guys put the whole balance sheet, the equity evaluation, because that message has to get out. And I'm glad you guys did that. So thank you. Moving on to commercial and industrial loans, you guys have seen really good growth over the past year. Can you give us a little more color on do you see a re-intermediation coming into the banking system because the capital markets are still disrupted? Or is it just you guys have had success with BBVA and that's working for you? Can you give us some color of that growth that you're seeing?

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

Got it. Very helpful. Thank you. And to reiterate what Betsy said, great deck. Thank you very much.

Thanks, Gerard.

Next question from the line of John Pancari with Evercore.

Please go ahead. Good morning.

Hey, John. Hello.

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

Yes, sure. Yeah, sure. Hey, John. Good morning. It's Rob. The way that we look at it in terms of determining where we're going to end up, and again, it's an expectation. We'll see how it plays out ultimately, but you're on the right track. So if you take a look at our total deposits of $437 billion, and you take commercial and the high net worth, the consumer portion, which is high net worth, which is around $230 billion, those those betas have moved. They're already at terminal. It's done. So, you know, that leaves roughly, you know, $200 billion or so in consumer deposits. As I mentioned in my comments, 10% of those are non-interest bearing, which are transactional accounts that we don't expect to change. So, you know, you're at $170 billion, the minority of our total deposits of interest bearing consumer deposits that are sort of in play and that we expect to pay higher rates on. So, That's how we get to maybe a more conservative number than what you're seeing on peers that don't have the same mix.

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

So we did see in mid-March, we saw some inflows during that week at the height of the disruption, but a lot of that settled out. So we don't expect to see that be a factor for us positively or negatively as we move into the second quarter.

The only thing I'd say, we actually opened In March, twice the number of accounts, you know, in our CNI franchise that we would otherwise open in a month. So, you know, away from the deposits that came in, we actually got a bunch of clients. Yeah. You know, the deposits will stay and get mixed. Some will go. But we grew our account portfolio pretty substantially in one month.

Okay, great. If I could put one more in there. Just on the office front, do you happen to have perhaps the refreshed LTVs that you're starting to see in that portfolio?

That's a good question, and I haven't seen them, but it's worth I don't know if we put in the deck or not, but we underwrite to what, 55 to 60? 55 to 60. And all of that stuff is stale, and all the appraisals that you get are stale. And so, in effect, what we end up doing is you assume that less leases renew than you otherwise would in a normal cash flow analysis. You drop that pretty materially. You assume that lease rates, all else equal, are going to go down, and then you have to put in the rehab costs, you know, to release it. And then you discounted a lower rate. So we've done all that building by building and then taken reserves against it. And I guess the final point I'd make, if you think about Rob's number, it was a 9.6%. We have against a multi-tenant, right? You know, effectively you're saying, all right, I can have 20% of class A office default and lose 50 cents on the dollar on a portfolio that was originally underwritten at 60%. That's a pretty severe outcome.

Yeah, and I would just add to that, John.

Bill mentioned it. We have a relatively small portfolio, so we're able to go asset by asset rather than just broad strokes across a general portfolio.

Look, we know how to do this. We've been in the business for a long time. We have all the resources and have seen the activity of Midland um you know we know all the borrowers we're with and and you know we think we've laid it out pretty clearly we you know we're going to have charge-offs um but we've you know that's why we built the reserves where they're coming from and we built the reserves got it very helpful thank you next question from the line of bill karkashi with wolf research please go ahead

Thanks. Good morning, Bill and Rob. I wanted to follow up on the deposit beta commentary. Rob, you mentioned that mid-20% non-interest-bearing deposit mix that's implicit, I believe, in your 42% terminal beta assumption. It looks like that would get you back to pre-COVID levels on slide 11, I think. How are you thinking about the risk that that non-interest-bearing mix will continue to fall, not just to pre-COVID levels, but

potentially you know even lower perhaps you know some have talked about you know yeah we can see you know and we take a look at the nature of the accounts um uh mid-20s is is our estimate it could go lower uh our expectations are though that it would be in the mid-20s and that's really really on the basis of the nature of the operating accounts that we have uh that is we just were mentioning we know really well and we know um the nature of their activities so it's It's really knowledge of our operating book that gives us that indication.

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

I'm not sure. If you put ASCI in, we're already kind of over the threshold. All else equal, I think we're well positioned and fine. We've As Rob mentioned, we're, you know, at least at the moment being conservative on our thoughts on share repurchase. But most of that is to kind of wait out the current environment, get through earnings and see where we are. I don't, you know, I don't see any issue coming out of regulation that we won't be able to handle in the due course.

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

Next question, please.

Next question from the line of Scott Seifers with Piper Sandler. Please go ahead.

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

It's a great question. It's probably 50-50. So demand has softened a little bit, and then, you know, the marginal cost of sinking new clients has gone up, so we're a little more picky than we were. It's probably 50-50.

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

Okay, perfect. Thank you. And then, Bill, I was hoping you could expand just a bit on that, commercial account opening comment you made a couple questions ago. Maybe as you sort of think of how the world might look going forward for commercial customers, do you think they'll just maybe diversify their relationships to protect themselves a little? How will an operational account work? Will people just keep less in their operational accounts and sprinkle it elsewhere? Any thoughts on how things might evolve?

I

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

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

Next question from the line of Ken Oslin with Jeffries. Please go ahead.

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

Okay, I think you're asking in terms of the full year. So, you know, we've given you the new guidance around our NII, and we've been through that. As far as fees go, you know, we're calling it to be stable year over year. And there's some moving parts in there. Some of the fee categories are doing a little better than we expected. Some are doing a little bit worse. But altogether, it's still stable.

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

Yeah, so Harris Williams, you're accurate in terms of that's our biggest driver of our capital markets advisory businesses. And they had a slower than usual quarter in the first quarter, obviously reflecting a lot of the disruption. And the pipelines are still pretty good. We're not expecting a big rebound in the second quarter, but potentially in the second half. But to your point, a lot of that depends on the psychology at the time and the ability and the support for both buyers and sellers to do deals.

Okay. Hey, Rob, one more quick one. I know your footnote on your beta slide says that you don't include time deposits in your beta calcs. Are we generally to assume that the beta on time deposits is obviously very high, just given what we know to the earlier point that Bill made about industry funding costs?

Yeah, that's right. And again, that's a conventional measure, so that's not our own personal PNC measure. That's how the industry calculates it.

Okay. Understood. Thank you.

Once again, please press 1-4 to queue up for a question over the phone lines. Next question from the line of Stéphane Chet with 0.72. Please go ahead.

Yes, thank you. A quick question, if I may, on the commercial real estate follow-up one. On criticized loans on slide 18, you said 20%, twice as much as the rest of your commercial real estate book. So I would just like to understand what was this number before and how you would expect this number to evolve from here. Thank you.

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

Yeah, yeah. Sorry. On slide 18, you mentioned that for office loan ratio is 20%. I just would like to know what was this number before for previous quarters and how would you expect this number to evolve from here?

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

Thank you.

Next question from the line of Alan Davis, NatWest Markets.

Please go ahead.

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

The add-on held to maturity, so inside of AOCI today is one number, and then we have another smaller loss in held to maturity, which we disclosed. Three and a half billion, yeah.

I did. I apologize. I did not see that. Fantastic. Sorry, I didn't mean to waste your time.

Thank you. No problem.

We have no further questions on the phone line.

Okay. Well, thank you for joining our call and your interest in P&C. And if you have any other additional questions or need follow-up, please feel free to reach out to the IR team. Thank you. Bye.

Thanks, everybody. Thank you.

That concludes today's call.

We thank you for your participation and ask you to please disconnect your lines. Thank you. Thank you. Thank you. Music. Thank you. Thank you.

Thank you.

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

Thank you, Brian, and good morning, everybody. As you can see on the slide, our quarterly results were strong, and we reported $1.7 billion in net income, or $3.98 per share. Inside of this, we grew deposits and loans, increased our capital and liquidity positions, generated positive operating leverage, and maintained strong credit quality. Now, for the past month, we've seen market volatility across the broader industry. And while we take this situation seriously and are closely monitoring the environment, it's important to note that these events have taken place within a few banks with very unique business models. Inside of our company, we really haven't seen any meaningful impacts from the events of the past month. Our balance sheet remains strong and stable, and we're operating the company in the same way we were at the beginning of March. Ultimately, over time, we expect the dynamics playing out in the banking system today to contribute to changes in the competitive landscape. And while it's still early innings, we believe that PNC will be a beneficiary from this process. That said, in the near term, we're not immune to the competitive environment and the deposit dynamics that will ultimately impact our NII in the near term, and Rob's going to cover that in more detail in a second. We remain focused on growing relationships across our lines of business, and we continue to execute on key priorities, including the expansion in the BBVA legacy markets. Rob will provide more details on our financial performance in a moment. However, for this particular call, he'll review our first quarter earnings in a slightly condensed manner to allow time to also cover key balance sheet focus points that have been top of mind for our investors in the last couple of weeks. And, of course, following that, we'll be able to discuss your specific questions in the Q&A segment. Finally, I'd like to thank our 61,000 employees for helping deliver a strong quarter and everything they do to support our customers. Now with that, I'll turn it over to Rob.

Thanks, Bill, and good morning, everyone. Our balance sheet is on slide four and is presented on an average basis. Loans for the first quarter were $326 billion, an increase of $3.6 billion, or 1% length quarter. Investment securities were relatively stable at $143 billion. Cash balances at the Federal Reserve averaged $34 billion and increased $4 billion during the quarter. Deposits of $436 billion grew on both a spot and average basis linked quarter. Average borrowed funds increased $4 billion, which reflected fourth quarter 2022 activity, as well as senior note issuances in January of this year. At quarter end, our tangible book value was $76.90 per common share, an increase of 7% linked quarter. And we remain well capitalized with an estimated CET1 ratio of 9.2% as of March 31st, 2023. During the quarter, we returned $1 billion of capital to shareholders, which included $600 million of common dividends and approximately $370 million of share repurchases, or 2.4 million shares. Due to market conditions and increased economic uncertainty, we expect to reduce our share repurchase activity in the second quarter. And of course, we'll continue to monitor this and may adjust share repurchase activity as appropriate. Slide five shows our loans and deposits in more detail. During the first quarter, loan balances averaged $326 billion, an increase of $4 billion, or 1%, largely reflecting the full quarter impact of growth in the fourth quarter of 2022. Deposits averaged $436 billion in the first quarter, increasing $1.3 billion. We continue to see a mixed shift from non-interest-bearing to interest-bearing, and I will cover that in more detail in a few minutes. Our rate paid on interest-bearing deposits increased to 1.66% during the first quarter, from 1.07% in the fourth quarter of 2022. And as of March 31st, our cumulative deposit beta was 35%. Turning to the income statement on slide six, as you can see, first quarter 2023 reported net income was $1.7 billion, or $3.98 per share. Total revenues of $5.6 billion decreased $160 million compared to the fourth quarter of 2022. Net interest income decreased $99 million, or 3%, primarily driven by two fewer days in the quarter and higher funding costs. partially offset by higher yields on interest-earning assets. Our net interest margin of 2.84% declined 8 basis points, reflecting the increased funding costs I just mentioned. Non-interest income also declined 3%, or $61 million, as growth in asset management and brokerage was more than offset by a general slowdown in capital markets activity, as well as seasonally lower consumer transaction volumes. First quarter expenses declined $153 million, or 4% linked quarter, even after accounting for the increase to the FDIC's deposit assessment rate, which equated to $25 million. Provision was $235 million in the first quarter and included the impact of updated economic assumptions, as well as changes in portfolio composition and quality. And our effective tax rate was 17.2%. Turning to slide seven, we highlight our revenue and expense trends. As a result of our diversified revenue streams and expense management efforts, we generated positive operating leverage of 2% linked quarter and 15% compared to the same period a year ago. And as we previously stated, we have a goal to reduce costs by $400 million in 2023 through our continuous improvement program, and we're confident we will achieve our full-year target. And as you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide eight. Non-performing loans remain stable at $2 billion and continue to represent less than 1% of total loans. Total delinquencies of $1.3 billion declined $164 million, or 11% linked quarter. Notably, the delinquency rate of 41 basis points is our lowest level in over a decade. Net charge-offs were $195 million, a decrease of $29 million linked quarter. Our annualized net charge-offs to average loans ratio was 24 basis points in the first quarter. And our allowance for credit losses totaled $5.4 billion, or 1.7% of total loans on March 31st, essentially stable with year-end 2022. Before I provide an update on our forward guidance, as Bill mentioned, We want to take a deeper dive into some of the key balance sheet items that are top of mind in the current environment related to deposits, securities and swaps, capital and liquidity, and the impact of potential regulatory changes. And finally, office exposure within our commercial real estate portfolio. In our view, we believe we are well positioned across all these key areas of focus. Turning to slide 10, our $437 billion deposit base is broken down between consumer and commercial categories to give you a view of the composition and granularity of the portfolio. At the end of the first quarter, our deposits were 53% consumer and 47% commercial. Inside of our $230 billion of consumer deposits, approximately 90% are FDIC insured. The portfolio is very granular with an average account balance of approximately $11,500 across nearly 20 million accounts throughout our coast-to-coast franchise. Our $207 billion of commercial deposits are 20% insured, but importantly, approximately 95% of the total balances are held in operating and relationship accounts. These include deposits held as compensating balances to pay for treasury management fees, escrow deposits at Midland Loan Services, and broader relationship accounts, all of which tend to provide more stability than deposit-only accounts. Importantly, we have approximately 1.4 million commercial deposit accounts representing a diverse set of industries and geographies. Turning to slide 11, we highlight our mix of non-interest-bearing and interest-bearing deposits. Our consumer deposits non-interest-bearing mix has been stable, remaining at 10 percent compared to the same period a year ago. The commercial side is where we expected to see a continued shift from non-interest-bearing into interest-bearing deposits as rates have risen, and that has played out, albeit at a somewhat faster pace than we had expected. The commercial non-interest-bearing portion of total deposits was 45% as of March 31st, down from 58% a year ago. Importantly, commercial non-interest-bearing deposits include the compensating balances and mid-loaned escrow deposits I mentioned previously, which provide support to this mix through time. On a consolidated basis, our level of non-interest-bearing deposits was 27% at the end of the first quarter of 2023, down from 33% a year ago. PNC has historically operated with a higher percentage of non-interest-bearing deposits relative to the banking industry, due in part to the strength of our treasury management business and granular deposit base. As a result, we expect our non-interest-bearing portion of deposits to continue to exceed industry averages and approach the mid-20% range by year-end 2023. In addition to our mixed shift, we have seen a faster increase in our deposit costs this year as the Federal Reserve has continued to raise short-term interest rates. Slide 12 shows our recent trends and our current expectations for deposit betas through the end of 2023. The increase in our current deposit beta expectations are largely driven by recent events that have increased the intensity and focus on rates paid and ultimately has added incremental pricing pressure sooner than we previously expected. We expect the Federal Reserve to raise the benchmark rate by 25 basis points in May. This, coupled with heightened competition for deposit, has accelerated our expectations for the level and pace of beta increase, and we now expect to reach a terminal beta of 42% by year end. Slide 13 details our investment securities and SWOT portfolios. Our securities balance averaged $143 billion in the first quarter, and we're a relatively stable linked quarter. The yield on our securities portfolio increased 13 basis points to 2.49%, as we continue to replace runoff at higher reinvestment rates. Yields on new purchases during the quarter exceeded 4.75%. Our portfolio is high quality and positioned with a short duration of 4.3 years, meaningfully shorter than many of our peers. Approximately two-thirds of our securities are recorded as held to maturity, and one-third is available for sale. Average security balances represent approximately 28% of interest-earning assets. Received fixed swaps pointed to the commercial loan book remain largely stable at $42 billion notional value and 2.25-year duration. At the end of the first quarter, our accumulated other comprehensive loss improved by $1.1 billion, or 10%, to $9.1 billion, driven by the impact of lower interest rates during the quarter and normal accretion as the securities and swaps pulled apart. Slide 14 highlights the pace of expected security and swap maturities, as well as the related AOCI runoff. By the end of 2024, we expect about 26% of our securities and swaps to roll off. This will drive increases in our securities and commercial loan yields, as well as meaningful tangible book value improvement, as we expect approximately 40% AOCI accretion by the end of the year 2024. Slide 15 highlights our strong liquidity positions. Our strong liquidity coverage ratios continue to improve in the first quarter and exceeded regulatory requirements throughout the quarter. Our cash balances at the Federal Reserve totaled $34 billion, and we maintain substantial unused borrowing capacity and flexibility through other funding sources. PNC has a robust liquidity management process, which includes a required statutory daily liquidity coverage ratio assessment, as well as a monthly net stable funding ratio calculation. In addition, we perform monthly internal liquidity stress testing that covers a range of time horizons, as well as systemic and idiosyncratic stress scenarios. Our mix of borrowed funds to total liabilities has historically averaged approximately 17% and reached an unprecedented low level of 6% in 2021. On March 31st, our mix was 12%, and we expect to move closer to the historical average over time. In light of the current environment, we anticipate that we will be subject to a total loss absorbing capacity requirement in some form and at some point with a reasonable phase-in period. Importantly, as our borrowed funds continue to return to a more normalized level, we would expect to be compliant through our current issuance plans under existing TLAC requirements. Slide 16 shows our solid capital position with an estimated CET1 ratio of 9.2% at quarter end. As a Category 3 institution, we don't include AOCI in our CET1 ratio, but understand why there is focus on this ratio with the inclusion of AOCI. As of March 31, 2023, our CET1 ratio, including AOCI, was estimated to be 7.5%, which remains above our 7.4% required level, taking into account our current stress capital buffer. However, we also believe it's important to take a look at the balance sheet positioning of a bank from a market value of equity perspective, similar to our understanding of Basel IRRBB rules. Market value of equity doesn't truly get reflected on the balance sheet today due to generally accepted accounting principles, which results in a skewed approach of valuing certain items primarily on the asset side. While ASCI takes into account the current valuation of the securities and certain portions of our swap portfolios, It does not account for the valuation of the deposit book, which can be a meaningful offset in a rising interest rate environment. In fact, looking at PNC's change in market value of equity over the past year, the increase in the market value of our deposits in a rapidly rising interest rate environment has significantly outpaced all unrealized losses on the asset side of the balance sheet, including securities and fixed rate loans. Total market value of equity increased substantially in the rising rate environment, And further, our duration of equity is now essentially zero and well-positioned in the current environment. Importantly, our models use conservative assumptions regarding estimates for betas, mix, balances, and deposit lives. We also recognized early on that large inflows of deposits during the pandemic were driven by a combination of QE and fiscal stimulus, which were likely to be short-lived. Recall our Fed balances peaked in the first quarter of 2021 around $86 billion. As a result, we modeled an economic value associated with those deposits at a fraction of the value of core deposits. Turning to slide 17, I wanted to spend a few minutes talking about our commercial real estate portfolio. While credit quality is strong across the majority of our CRE book, office is the segment receiving a lot of attention in this environment due to the shift to remote work and higher interest rates. So we thought it would be worthwhile to highlight our exposure and our position with this portfolio. At the end of the first quarter, we had $8.9 billion, or 2.7% of our total loans in our office portfolio. Turning to slide 18, you can see the composition of this portfolio, which is well diversified across geography, tenant type, and property classification. Reserves against these loans, which we have built over several quarters, now total 7.1%, a level that we believe adequately covers expected losses. In regard to our underwriting approach, we adhere to conservative standards, focus on attractive markets, and work with experienced, well-capitalized sponsors. The office portfolio was originated with an approximate loan-to-value of 55% to 60%, and the significant majority of those properties are defined as Class A. We have a highly experienced team that is reviewing each asset in the portfolio to set appropriate action plans and test reserve adequacy. We don't solely rely on third-party appraisals, which will naturally be slow to adjust to the rapidly shifting market conditions. Rather, we are stress testing property performance to set realistic expectations. To appropriately sensitize our portfolio, we've significantly discounted net operating income levels and property values across the entire office book. Additionally, tenant retention, build-out costs, and concession levels are all updated to accurately reflect market conditions. Credit quality in our office portfolio remains strong today, with only 0.2% of loans delinquent, 3.5% non-performing, and a net charge-off rate of 47 basis points over the last 12 months. Along those lines, we continue to see solid performance within the single-tenant, medical, and government loans, which represent 40% of our total office portfolio. These have occupancy levels above 90% and watch list levels of 3% or less. Where we do see increasing stress and a rising level of criticized assets is in our multi-tenant loans, which represents 58% of our office portfolio. Multi-tenant loans are currently running in the mid-70% occupancy range, watch list levels are greater than 30%, and 60% of the portfolio is scheduled to mature by the end of 2024. In the near term, this is our primary concern area as it relates to expected losses, and by extension comprises the largest portion of our office reserves. Multi-tenant reserves on a standalone basis are 9.4%. Obviously, we'll continue to monitor and review our assumptions to ensure they reflect real-time market conditions. For each of the key areas of focus I just discussed, we believe we are well positioned. And slide 19 summarizes our balance sheet strength during this volatile time. Our deposits are up, our capital and liquidity positions are strong, and our overall credit quality is solid. In summary, PNC reported a strong first quarter 2023. In regard to our view of the overall economy, we are expecting a recession starting in the second half of 2023, resulting in a 1% decline in real GDP. Our rate path assumption includes a 25 basis point increase in the Fed funds rate in May. Following that, we expect the Fed to pause rate actions until early 2024 when we expect a 25 basis point cut. Looking ahead, our outlook for full year 2023 compared to 2022 results is as follows. We expect spot loan growth of 1% to 3%, which equates to average loan growth of 5 to 7 percent, total revenue growth to be up 4 to 5 percent. Inside of that, our expectation is for net interest income to be up 6 to 8 percent. At this point, visibility remains challenging, and our full-year NII guidance assumes the continuation of the recent intensity on deposit pricing, which is being driven by recent events. We expect non-interest income to be stable, expenses to be up 2 to 3 percent, and we expect our effective tax rate to be approximately 18 percent. Based on this guidance, we expect we will generate positive operating leverage in 2023. Looking at the second quarter of 2023 compared to the first quarter of 2023, we expect average loans to be stable, net interest income to be down 2 to 4 percent, fee income to be stable to down 1 percent, other non-interest income to be between $200 and $250 million, excluding net securities and visa activity. Taking all the component pieces, we expect total revenue to decline approximately 3%. We expect total non-interest expense to be up 1% to 2%. And we expect second quarter net charge-offs to be between $200 million and $250 million. Further, given our strong credit metrics, our credit quality is trending better than our expectations. And with that, Bill and I are ready to take your questions.

Thank you. If you would like to register your question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press 13. One moment, please, for the first question. Our first question comes from the line of Betsy Krasick with Morgan Stanley. Please go ahead.

Hi, good morning.

Hey, good morning, Betsy.

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

Could have been. Could have been, yeah. Thank you. The team did a nice job putting that together. Thank you for recognizing that.

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

We're sitting here puzzled. We grow deposits average in spot, you know, against the backdrop of, you know, absent the volatility in the market, deposits still overall leaving the systems. you know, particularly in the government money funds and then just the shrinkage of the total on the back of QT. You know, our rate paid, you know, if you look year on year, I think our total deposits are down 3% or something, which is, you know, less than most anybody we'd compare it to. And we have purposefully been protecting the franchised in the course of doing that, I recognize some other people don't do that. And that's, you know, we'll, we'll, we'll see how that plays out through time. But I, you know, I, we kind of feel we outperformed on deposits. So I'm a little bit in the first quarter. Yeah.

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

Well, first of all, we look at that all the time. And as Rob put into his comments, a large portion of the deposit growth that we saw through COVID, you know, so stimulus and the growth in the Fed's balance sheet, we just assumed had a life of a day, a zero, you know, because we're in an abnormal period of time. The core operating deposits that we have, you know, particularly as you go in the middle market, are basically the monies, you know, the working capital monies that companies use to run their companies. we truncate and always have truncated the modeled lives of those deposits well below what the practical experience would show us. Yeah, so it's conservative.

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

And, you know, accounts, you know, you almost can't compare what happened at, you know, Silicon Valley and Signature to any other bank I've ever seen in terms of the concentration of, you know, the deposit accounts. And the nature of the clients. Just the nature of them. I mean, a lot of that money was, you know, it was capital raised money that was sitting there.

Right. Okay, that's super. Thank you so much. Appreciate it.

Our next question from the line of Mike Mea with Wells Fargo Securities. Please go ahead.

Hi, I guess this question goes in the category of no good deed goes unpunished. Your operating leverage in the first quarter of the year was over 10%. You've guided for positive operating leverage this year of 1% to 3%. Your cycle to date beta, I estimate that being below 40%. So all that looks really good. But on the other hand, you did, I guess, lower your leverage guidance for how much positive operating leverage this year. You mentioned NII. You mentioned the intensity on deposit pricing. So just can you help talk about the tradeoffs of pursuing growth with more deposits versus maybe scaling back if that deposit pricing is really that much more intense, or do you see that not being so at some point?

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

And I would just add, we've got to focus on our core franchise and our clients. So on the commercial side, it's really the effect of commercial clients choosing to switch to interest-bearing from non-interest-bearing. And their relationship's fully intact. And then on the consumer side, as Bill just mentioned, the interest-bearing deposits and the pressure around rates paid there.

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

Are you seeing that at all or still not yet?

Our new production is a little bit better than it was, but in fairness – You know, at the moment, credit looks much better than we otherwise would have assumed. So it's a tradeoff. Now, it's going to be interesting, Mike, because, you know, the marginal cost of funds for the U.S. banking system has just gone up a lot, you know, as a result of this flurry. And so all all sequel, you would expect credit spreads to widen here simply because the cost of funds for all banks has gone up. I haven't seen that play out yet, but it continues to be at least my expectation that it will.

All right. Thank you.

Our next question comes from the line off Gerard Cassidy with RBC. Please go ahead. Hi, guys.

How are you?

Hey, morning, Gerard.

Bill, can you give us – you guys pointed out about Rob the – expectations on TLAC in your prepared remarks, but can you guys give us some color on what changes may come as a result of the signature and Silicon Valley bank failures? The regulators look like they're going to reassess the situation. We'll get the post-mortem on May 1st, of course, but what do you guys think may happen in terms of additional requirements for regional banks like yours? And I know TLAC, you're already planning on that, but outside of TLAC.

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

No, and Bill and Rob. Go ahead, Rob.

Those are the two prominent subjects, TLAC and AOCI inclusion.

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

Very, very clear. And I'm glad you guys put the whole balance sheet, the equity evaluation, because that message has to get out. And I'm glad you guys did that. So thank you. Moving on to commercial and industrial loans, you guys have seen really good growth over the past year. Can you give us a little more color on do you see a re-intermediation coming into the banking system because the capital markets are still disrupted? Or is it just you guys have had success with BBVA and that's working for you? Can you give us some color of that growth that you're seeing?

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

Got it. Very helpful. Thank you. And to reiterate what Betsy said, great deck. Thank you very much.

Thanks, Gerard.

Next question from the line of John Pancari with Evercore.

Please go ahead. Good morning.

Hey, John.

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

Yes, sure. Yeah, sure. Hey, John. Good morning. It's Rob. The way that we look at it in terms of determining where we're going to end up, and again, it's an expectation. We'll see how it plays out ultimately, but you're on the right track. So if you take a look at our total deposits of $437 billion, and you take commercial and the high net worth, the consumer portion, which is high net worth, which is around $230 billion, those those betas have moved. They're already at terminal. It's done. So, you know, that leaves roughly, you know, $200 billion or so in consumer deposits. As I mentioned in my comments, 10% of those are non-interest bearing, which are transactional accounts that we don't expect to change. So, you know, you're at $170 billion, the minority of our total deposits of interest bearing consumer deposits that are sort of in play and that we expect to pay higher rates on. So, That's how we get to maybe a more conservative number than what you're seeing on peers that don't have the same mix.

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

of those inflows that you saw?

So we did see in mid-March, we saw some inflows during that week at the height of the disruption, but a lot of that settled out. So we don't expect to see that be a factor for us positively or negatively as we move into the second quarter.

The only thing I'd say, we actually opened In March, twice the number of accounts, you know, in our CNI franchise that we would otherwise open in a month. So, you know, away from the deposits that came in, we actually got a bunch of clients. You know, the deposits will stay and get mixed. Some will go. But we grew our account portfolio pretty substantially in one month.

Okay, great. If I could put one more in there. Just on the office front, do you happen to have perhaps the refreshed LTVs that you're starting to see in that portfolio?

That's a good question, and I haven't seen them, but it's worth I don't know if we put in the deck or not, but we underwrite to what, 55 to 60? 55 to 60. And all of that stuff is stale, and all the appraisals that you get are stale. And so, in effect, what we end up doing is you assume that less leases renew than you otherwise would in a normal cash flow analysis. You drop that pretty materially. You assume that lease rates, all else equal, are going to go down, and then you have to put in the rehab costs that you know, to release it. And then you discounted at a lower rate. So we've done all that building by building and then taken reserves against it. And I guess the final point I'd make, if you think about Rob's number, it was a 9.6% we have against the multi-tenant. You know, effectively you're saying, all right, I can have 20% of Class A office default and lose 50 cents on the dollar on a portfolio that was originally underwritten at 60%. That's a pretty severe outcome.

Yeah, and I would just add to that, John. Bill mentioned it. We have a relatively small portfolio, so we're able to go asset by asset rather than just broad strokes across a general portfolio.

Look, we know how to do this. We've been in the business for a long time. We have all the resources and have seen the activity of Midland um you know we know all the borrowers we're with and and you know we think we've laid it out pretty clearly we you know we're going to have charge-offs um but we've you know that's why we built the reserves where they're coming from and we've built the reserves got it very helpful thank you next question from the line of bill karkashi with wolf research please go ahead

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

Yeah, we can see, you know, and we take a look at the nature of the accounts. Mid-20s is our estimate. It could go lower. Our expectations are, though, that it would be in the mid-20s, and that's really, really on the basis of the nature of the operating accounts that we have, that as we just were mentioning, we know really well, and we know the nature of their activities. So, it's It's really knowledge of our operating book that gives us that indication.

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

I'm not sure. If you put ASCI in, we're already kind of over the threshold. All else equal, I think we're well positioned and fine. We've As Rob mentioned, we're, you know, at least at the moment being conservative on our thoughts on share repurchase. But most of that is to kind of wait out the current environment, get through earnings and see where we are. I don't, you know, I don't see any issue coming out of regulation that we won't be able to handle in the due course.

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

Next question from the line of Scott Seifers with Piper Sandler. Please go ahead.

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

It's a great question. It's probably 50-50. So demand has softened a little bit, and then the marginal cost of sinking new clients has gone up, so we're a little more picky than we were. It's probably 50-50.

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

Okay, perfect. Thank you. And then, Bill, I was hoping you could expand just a bit on that commercial account opening comment you made a couple questions ago. Maybe as you think of how the world might look going forward for commercial customers, do you think they'll just maybe diversify their relationships to protect themselves a little? How will an operational account work? Will people just keep less in their operational accounts and sprinkle it elsewhere? Any thoughts on how things might evolve?

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

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

Next question from the line of Ken Austin with Jeffries. Please go ahead.

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

Okay, I think you're asking in terms of the full year. So, you know, we've given you the new guidance around our NII, and we've been through that. As far as fees go, you know, we're calling it to be stable year over year. And there's some moving parts in there. Some of the fee categories are doing a little better than we expected. Some are doing a little bit worse. But altogether, it's still stable.

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

Yeah, so Harris Williams, you're accurate in terms of that's our biggest driver of our capital markets advisory businesses. And they had a slower than usual quarter in the first quarter, obviously reflecting a lot of the disruption. And the pipelines are still pretty good. We're not expecting a big rebound in the second quarter, but potentially in the second half. But to your point, a lot of that depends on the psychology at the time and the ability and the support for both buyers and sellers to do deals.

Okay. Hey, Rob, one more quick one. I know your footnote on your beta slide says that you don't include time deposits in your beta calc. Are we generally to assume that the beta on time deposits is obviously very high, just given what we know to the earlier point that Bill made about industry funding costs?

Yeah, that's right. And, again, that's a conventional measure, so that's not our own personal PNC measure. That's how the industry calculates it.

Okay. Understood. Thank you.

Once again, please press 1-4 to queue up for a question over the phone lines. Next question from the line of Stéphane Chet with 0.72. Please go ahead.

Yes, thank you. A quick question, if I may, on commercial real estate. Follow-up one on criticized loans on slide 18. It's like 20%, twice as much as the rest of your commercial real estate book. So I would just like to understand what was this number before and how you would expect this number to evolve from here. Thank you.

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

Yeah, yeah. Sorry. On slide 18, you mentioned that for office loan ratio is 20%. I just would like to know what was this number before for previous quarters and how would you expect this number to evolve from here?

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

Thank you.

Next question from the line of Alan Davis, NatWest Markets.

Please go ahead.

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

The add-on health and maturity, so inside of AOCI today is one number, and then we have another smaller loss in health and maturity, which we disclosed. Three and a half billion, yeah.

Oh, you did? I apologize. I did not see that. Fantastic. Sorry, I didn't mean to waste your time.

Thank you. I brought a lot of waste.

We have no further questions on the phone line.

Okay. Well, thank you for joining our call and your interest in P&C. And if you have any other additional questions or need follow-up, please feel free to reach out to the IR team. Thank you. Bye. Thanks, everybody. Thank you.

That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.