PNC Financial Services Group, Inc. (The)

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 Demchek, and Rob Riley, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials, as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of July 18th, 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, everyone. As you can see on the slide, we delivered solid results in the second quarter, generating exactly $1.5 billion in net income, or $3.36 in diluted earnings per share. While the macro environment and the competitive dynamics playing out within the banking sector pressured our revenue during the quarter, our results reflect the overall strength of our franchise and balance sheet. And importantly, through it all, we remain focused on executing on our strategic priorities. Our momentum across our markets remains strong, especially in the Southwest. We are growing households and commercial customers throughout our footprint. Rob will take you through the details of our second quarter results in a moment, but I'd like to call out a few highlights. First, we grow our capital during the quarter and feel very good about our positioning of our balance sheet in the current environment. In the next few weeks, we expect the Fed will announce changes to the Basel III capital framework. We believe our strong capital and liquidity levels, as well as our earnings power, provide the strength and flexibility to address upcoming regulatory changes. At the same time, we continue to support our customers, grow our business, and deliver returns for our shareholders. And in line with our focus on shareholder returns, we recently increased our quarterly common stock dividend by 5 cents. Our financial strength and stability are evidenced in the Fed's latest stress tests, resulting in an improvement in our stress capital buffer to the regulatory minimum level of 2.5% in October. Second, expense control is in focus. Rob will touch on this in a moment, but we have increased our continuous improvement program target for 2023 and are taking a hard look at opportunities for even further expense improvements across the franchise. Third, credit quality for the quarter remains strong, reflecting our diversified lending franchise and our focus on developing valuable, sustainable businesses based on long-term customer relationships. And finally, I'd like to thank our employees for their efforts and contributions during the quarter. And with that, I'll turn it over to Rob.

Thanks, Bill, and good morning, everyone. Our balance sheet is on slide three, and we're presenting on an average basis and comparing to the first quarter. Loans were stable at $325 billion. Investment securities declined $2 billion, or 2%. Cash balances at the Federal Reserve were $31 billion and decreased $3 billion. Deposits of $426 billion declined $10 billion, or 2%. Borrowed funds increased $3 billion. As an aside, since 2021, we've been deliberate in issuing TLAC-compliant debt, so we're confident we'll meet the upcoming TLAC requirements through our normal course of funding. At quarter end, AOCI was a negative $9.5 billion. Intangible book value was $77.80 per common share, an increase of 5% compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 9.5% as of June 30, 2023, which increased 30 basis points linked quarter. We returned approximately $700 million of capital to shareholders in the quarter, which included $600 million of common dividends and approximately $100 million of share repurchases for 1.1 million shares. And as Bill just mentioned, our board recently approved a $0.05 increase to our quarterly cash dividend on common stock, raising the dividend to $1.55 per share. Our recent CCAR results underscore the strength of our balance sheet, and as previously announced, our current stress capital buffer of 2.9% will improve to the regulatory minimum of 2.5% for the four-quarter period beginning in October 2023. Due to the expected issuance by the federal banking agencies of proposed rules to adjust the Basel III capital framework, share repurchase activity in the third quarter is expected to remain modest. We will continue to monitor this and may adjust share repurchase activity as appropriate. Slide four shows our loans in more detail. Second quarter loans averaged $325 billion and increased $20 billion, or 6%, compared to the same period a year ago. This growth reflected strong loan demand during the back half of 2022 and our ability to capitalize on opportunities in our expanded franchise. Average loan balances were stable linked quarter as growth in consumer was offset by a decline in commercial, with commercial balances reflecting generally weaker demand. Consumer loans grew $400 million compared to the first quarter, reflecting higher residential mortgage, credit card, and auto balances. Commercial loans averaged $223 billion in the second quarter, a decline of $1 billion, as limited new production was more than offset by paydowns. Loan yields increased 28 basis points to 5.57% in the second quarter, predominantly driven by the higher rate environment. Slide five covers our deposits in more detail. Deposits declined 2% on both a spot and average basis-length quarter, reflecting the continuing pressure of quantitative tightening and increased spending activity, as well as consumer tax payments. Deposits continue to move from non-interest-bearing to interest-bearing accounts. As expected, the mixed shift is being driven by commercial deposits. In the second quarter, commercial non-interest-bearing deposits represented 45% of total commercial deposits compared to 47% in the first quarter. Our consumer deposit non-interest bearing mix has been stable, remaining at 10%. On a consolidated basis, our level of non-interest bearing deposits was 27% in the second quarter, down slightly from 28% in the first quarter, consistent with our expectations. And we still expect the non-interest bearing portion of our deposits to stabilize in the mid 20% range. Our rate paid on interest bearing deposits increased to 1.96% during the second quarter, up from 1.66% in the prior quarter. And as of June 30th, our cumulative deposit beta was 39%. Looking forward, we expect the Federal Reserve to raise the benchmark rate by 25 basis points in July. We believe this will put additional pressure on betas, and as a result, we expect our third quarter and year-end cumulative betas to be 42% and 44%, respectively. Slide 6 details our investment securities and swap portfolios. Average investment securities of $141 billion decreased $2.4 billion, or 2%, as limited purchase activity during the quarter was more than offset by portfolio paydowns and maturities. The securities portfolio yield increased three basis points to 2.52%, reflecting the runoff of lower-yielding securities. And as of June 30th, the duration of the investment securities portfolio was 4.2 years. Our received fixed swaps pointed to the commercial loan book totaled $40 billion at the end of the second quarter. The weighted average received fixed rate of our swap portfolio increased 25 basis points linked quarter to 1.73%, and the portfolio duration was 2.3 years as of June 30th. During the second quarter, our accumulated other comprehensive loss increased by $400 million. Paydowns and maturities were in line with our expectations, but were more than offset by the negative impact from higher-than-expected rates throughout the quarter. Notwithstanding this AOCI impact, our tangible book value increased 1% to $77.80 compared to March 31st. Importantly, as lower-rate securities and swaps roll off, we expect our securities yields to continue to increase, resulting in a meaningful improvement to tangible book value from AOCI accretions. Turning to the income statement on slide seven, for the first half of 2023, revenue grew 11% compared to the same period a year ago, reflecting higher interest rates and overall business growth. Non-interest expense grew 4% and was well controlled despite a higher FDIC assessment rate and inflationary pressures. As a result, PPNR grew 24%. For the second quarter, net income was $1.5 billion or $3.36 per share. Total revenue of $5.3 billion decreased $310 million, or 6%, compared to the first quarter of 2023. Net interest income declined $75 million, or 2%. And our net interest margin was 2.79%, a decline of five basis points. Non-interest income declined $235 million, or 12%, driven by both lower fee income and other non-interest income. which included visa fair value adjustments of a negative $83 million that I will discuss in a moment. Second quarter expenses increased $51 million, or 2% linked quarter. Provision was $146 million in the second quarter, reflecting portfolio activity and changes in macroeconomic variables. And our effective tax rate was 15.5%, which included the favorable impact of certain tax matters in the second quarter. Turning to slide eight, We highlight our revenue trends. Second quarter revenue was down $310 million or 6% compared with the first quarter. Net interest income of $3.5 billion decreased $75 million or 2% as higher yields on interest earning assets were more than offset by increased funding costs and lower loan and security balances. Fee income was $1.7 billion and decreased $106 million or 6% linked quarters. The primary driver of the decline in fee income was residential and commercial mortgage revenue, which was down $79 million. Inside of that, $58 million was related to lower net valuation of mortgage servicing rights. Beyond that, capital markets and advisory revenue decreased $49 million, or 19%, driven by lower merger and acquisition advisory fees and loan syndication revenue. Going forward, we expect this activity to meaningfully increase in the second half of the year, which is included in our guidance that I will cover in a few minutes. Partially offsetting these declines was a $38 million or 6% increase in card and cash management fees, reflecting seasonally higher consumer transaction volumes and increased treasury management product revenue. Other non-interest income of $129 million declined 50% linked quarter, driven by lower private equity revenue, and included negative visa fair value adjustments related to litigation escrow funding and other valuation changes totaling $83 million. Turning to slide nine, our second quarter expenses were up $51 million or 2% length quarter and remain well controlled. The growth was primarily due to a $35 million increase in marketing expense reflecting seasonality. Personnel expense increased by $20 million or 1% which included the full quarter impact of annual employee merit increases. Every other expense category remains stable or declined compared to the first quarter of 2023. As Bill mentioned, we remain diligent in our expense management efforts, particularly when considering the current revenue environment. At the beginning of the year, we set a continuous improvement program goal of $400 million. Recently, we've identified initiatives that support increasing our CIP by an additional $50 million. raising our full-year target to $450 million. Further, we'll continue to look for additional efficiencies during the remainder of 2023, and importantly, as we begin to plan for 2024. Our credit metrics are presented on slide 10. Our credit quality remains strong, and notably, the leading indicators for credit quality continue to perform well. Non-performing loans were down $97 million, or 5%, and continue to represent less than 1% of total loans. And total delinquencies of $1.2 billion decreased to $114 million, or 9% linked quarter. Net charge-offs of $194 million were stable linked quarter. Our annualized net charge-offs to average loans ratio was 24 basis points in the second quarter. And our allowance for credit losses totaled $5.4 billion, or 1.7% of total loans on June 30th, essentially stable with March 31st. While overall credit quality remains strong across our portfolio, the office category within commercial real estate continues to be a key area of concern. As expected, we saw increases in charge-offs related to office during the quarter. However, the portfolio metrics remain largely similar to those presented in our comprehensive view last quarter. Naturally, we'll continue to monitor and review our assumptions to ensure they reflect real-time market conditions, and a full update is included in the appendix slide. In summary, P&C reported a solid second quarter 2023. In regard to our view of the overall economy, we're expecting a mild recession starting in early 2024 with a contraction in real GDP of less than 1%. Our rate path assumption includes a 25 basis point increase in the Fed funds rate in July. Following that, we expect the Fed to pause rate actions until March 2024 when we expect the Fed to begin to cut rates. Looking ahead, our outlook for the third quarter of 2023 compared to the second quarter of 2023 is as follows. We expect average loans to decline approximately 1%, net interest income to be down 3% to 4%, non-interest income to be up 10% to 11%. Taking the component pieces, we expect total revenue to be up approximately 1%. We expect total non-interest expense to be stable and we expect second quarter net charge-offs to be between $200 and $250 million. Considering our reported operating results for the first half of 2023, third quarter expectations, and current economic forecasts for the full year 2023 compared to full year 2022, we expect spot loans to be relatively stable, which equates to average loan growth of 5% to 6%. Total revenue growth to be approximately 2% to 2.5%, Inside of that, our expectation is for net interest income to be in the range of up 5% to 6%. This is a move to the lower end of our previous guidance, largely driven by anticipated deposit costs moving a bit faster than we expected and slightly lower loan growth expectations. We expect non-interest income to decline 2% to 4%, which is down from our earlier expectations of stables. This change is resulting from softer than expected capital markets revenue in the second quarter and $127 million of visa-related charges that have been incurred year-to-date. Expenses are expected to be up approximately 2%. Credit quality is trending better than expected. And we expect our effective tax rate to be approximately 18%. And with that, Bill and I are ready to take your questions.

Thank you. If you'd like to register a 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 the one followed by the three. Once again, to register for a question, please press the one followed by the four. Our first question is coming from the line of John Pancari with Evercore. Please go ahead. Morning.

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

Yeah, sure. John, this is Rob. So in regard to our total non-interest income guidance for the full year, we did change it from stable to down 2% to 4%. Most of that in terms of that decline has occurred. So it's really reflective of what occurred in the second quarter last In regard to capital market fees, underperforming our expectations and the visa charge that we talked about, which is not in fees but is in other non-interest income. Going forward, we do expect to pick up in capital markets fees, and that's in our guidance both for the third quarter and the balance of the year. Just to give you some more color around that, we expect capital markets to get back to, in the third quarter, the first quarter levels run rate that we were at. and then some meaningful growth on top of that as well. And that's all in our guidance. So in short order, the decline in the guidance has already occurred, and we've blended that into the full year.

Okay. All right. That's helpful. And then separately, on the capital returns, I know you indicated that you expect buybacks to remain somewhat minimal. So just pending Basel III. Is that maybe perhaps in that $100 million range, or is there another way to think about that? And then separately, maybe, Bill, if you could talk about any thought around M&A appetite, both on the non-bank side and the bank side.

Thanks. I can handle the first one there, I guess, in terms of the capital. And then, Bill, you can talk about the Some of the changes. Yeah, no surprise there. We feel good about our capital levels. Our CET capital ratio increased 30 basis points in the quarter, so we're at 9.5. We did well on the stress test, the most recent stress test, where our stress capital buffer decreased. So we're in an excess capital position. Part of that thinking was the increase in the dividend that we announced recently. As far as share repurchases, like I said, it's not a surprise. We're on pause. It's sensible to see what these new rules mean, understand the details, and then build that into our capital return plan. So we're positioned for share repurchases going forward, but it's just sensible to take a pause right now.

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

Okay, great. Thanks for taking the question. Sure.

Our next question is coming from the line of Dave George with Baird. Please go ahead.

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

I think at the 10,000-foot level, our appetite to lend and support our clients isn't affected by short-term funding costs and so forth. You're seeing... somewhat tepid loan growth largely because there's tepid loan demand. You know, I think as a practical matter, there's a backlog building. A lot of our clients have been hesitant to do refinance under some hope that spreads would come back down. I don't think that's going to happen. So I think you'll see activity towards the back half of the year. But in any event, we just, you know, we support clients. We don't manage the balance sheet and the clients get the results the other way. With respect to interest rates, we are as neutral as we can otherwise be. And I think what you're going to see through time is, you know, deposits move back towards historical norms in terms of non-interest bearing moving to interest bearing. And we reach that kind of cumulative beta that's going to be offset, you know, by swaps and securities, fixed rate assets rolling off and repricing. You know, and that's kind of what we target is we run the balance sheet in a neutral position right now.

Yeah, I would just add to that. So, you know, we ran for many years, you know, substantially asset sensitive, and that's changed. So we're slightly asset sensitive but really neutral right now.

Thank you.

Our next question is coming from the line of Erica Najarian with UBS. Please go ahead.

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

Yeah, that's fair. That's fair. Of course, our own plans are As I mentioned in our opening comments, that we wouldn't see rate cuts until first quarter of next year, but you're in the right neighborhood.

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

You know, again, we are, at the moment, basically neutral to rates, so a duration of equity that's been bouncing around plus or minus a half a year. So adding in this environment would be choosing to get long. Choosing to get long would basically be saying that we think the forward curve is correct and we like term rates. And I'm not sure we do that. We agree with that yet, which is why you've seen security balances roll down. I think the big unknown for us and everybody is if and when the Fed pauses and then cuts rates, what actually happens to the shape of the yield curve in term rates? And, you know, expectations would be you'd see a massive flattening. So I'm not sure at the moment that there's value to be had in extending duration. To the extent we do, we're doing it in a very short end. You'd, in fact, see that in our swaps book. While balances are down, we canceled some and put some other ones on. But very short-dated. Got it. Thank you.

As a reminder, to register for a question, please press the one followed by the four. Our next question is coming from the line of Scott Cyphers with Piper Sandler. Please go ahead.

Morning, everyone. Thank you for taking the question. I just wanted to ask sort of a conceptual question on deposit pricing. The pressures seem, I guess, a little bit uneven by company. I was hoping you could spend a moment discussing sort of how you think about the balance between not necessarily needing to show liquidity the way some others do, but still being bound, you know, just naturally by competitive dynamics within the footprint.

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

But mostly protecting our core consumer customer and commercial customer.

Yeah, no, I mean, you hit on it. I guess I probably could have ordered it better. But, you know, I look at your Q beta assumption. It's lower than some others but seems sort of realistic also just within the sort of confines of what you're actually experiencing. So I was just curious about how the competitive dynamic sort of weighed in there, and I think you touched on it. So I appreciate that.

I think if your base flows were higher than what was otherwise happening because of QTs, in other words, you were losing deposits at a pace, you know, in that instance, your replacement cost is full rate. And I think you're going to see that, you know, play out as earnings come out this week where you're going to see some pretty extreme differences in what's happened to funding costs. But, you know, our flows have been largely kind of following QT trend.

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

Yeah, sure. Scott, this is Rob. Yeah, particularly for us, the M&A piece, Harris-Williams is a high percentage of our capital market fees. We're going off of pipelines. So, you know, the pipeline in our advisory businesses and largely extrapolate that to capital markets in total. uh is up 20 over the first quarter and six percent year over year and as you know they had a pretty good second half of 2022 so uh we're basing it on that okay perfect all right thank you all very much sure our next question is coming from the line of mike mayo with wells fargo please go ahead uh hi good morning um

I thought you might push a little harder on this. So your revised 2023 guidance using midpoints is for NII to be 150 basis points less, fees to be 300 basis points less, and expenses only 50 basis points less. So I'm just wondering how much harder you might push on the expenses. You did mention the CIP going from 400 to 450 million of savings this year. So I guess that helps, but Are you preserving infrastructure and resources for potential growth? Is it just not that variable? Or what else can you do to get expenses more in sync with the revised lower revenue guidance? And that's all recognized, and I think you're still guiding for positive operating leverage this year. It's just not as high as it once was.

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

Just in terms of the timing, because there's only six months left, so actions that you take don't show up in that run rate. But we did reduce, as you pointed out, we did reduce the expectation to up 2% year over year. That includes the FDIC special assessment that was in there and obviously inflationary pressure. So that's pretty good, but we're not going to stop there.

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

24 seems so far away at the moment. But, you know, I think, I guess what I would say is we're running the company for the long term here. We continue to see once we get through rate normalization, tremendous upside in the company in growth through clients in our new markets. And are we at the trough now? Are we at the trough with our guidance for the fourth quarter? I don't know. I don't know if you have a view on it, Rob.

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

Okay. Thank you.

Our next question is coming from the line of Betsy Gracek with Morgan Stanley. Please go ahead.

Hi. How are you doing? Hi, Betsy. Two questions. One is I know we talked earlier about demand for loans not that great, but I'm also wondering, you know, is there a credit box widening event that or, you know, process we should be thinking about given that credit quality is so good?

Probably not.

Well, you've always said we don't change our box.

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

Okay. All right. Separately on the regulatory, I know you've said in the past that your LCR ratio is compliant no matter how you measure it. When you say no matter how you measure it, are you talking about, hey, even if you were at a G-sub standard? Is that what you're referring to?

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

Yeah, no, it's much higher than anybody else we calc. So I was just wondering if that's what you were thinking about there. Okay, last ticky-tacky thing is just on this FDIC special assessment, I'm not sure if I heard this right or not, but is that in your full-year expense guide, or should we be thinking about it?

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

And that you would be putting below the line, is that right?

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

Okay. All right. Thanks so much. Sure. Thanks, Betsy.

As a reminder, to register for a question, please press the 1 followed by the 4. Again, that's the 1 followed by the 4. Our next question is coming from the line of Abraham Unwala from Bank of America. Please go ahead.

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

I think for... Look, I think for the industry broadly, it's fair value accounting targets where, you know, even MOEs at this point, there'd have to be, for most banks, it would get together a fairly substantial capital raise. You know, and that's going to stop people from doing things. I think you've heard... quite loudly coming out of D.C., recognition that there's going to need to be consolidation in the industry to create competition against some of the giant banks. So, you know, I don't know that that shows up largely on a hurdle. And the final thing is just the franchise value of what you might look at. You know, it's... people used to do deals just for size. I think we're in an environment, uh, in a credit environment where that can be dangerous because I think there's a lot of, um, um, bad balance sheets out there, you know, heavy real estate concentration and other things that would, would be a red flag.

But the mark to market is the primary challenge.

Got it. And I guess no way to resolve that, the lower rates at some point. And, um, Is there a follow-up on interest rates and your deposit data guidance? It all feels incremental, well within control. If the Fed is close to being done, do you see a big risk of deposit behavior shifting, backbook repricing down the road? Or if the Fed is actually done, we're getting close to the endgame here?

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

And particularly in the interest-bearing consumer deposits, which could still go up even though the Fed stopped or cut.

Got it. Thank you both. Sure.

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

Hey, Bill, just your big picture perspective. So are we going into a recession, soft landing, no landing, hard landing? And remind us, your reserves are predicated on unemployment of a certain level. And at what theoretical point would you say, hey, it's OK for us to release some of those reserves?

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

Okay. And did you make any changes? Where are you right now in the commercial, the office reserving? Because I know you were kind of high in the industry before.

Yeah, we're higher. We're 7.4% on the office book. But we're over 10 on the multi-tenant piece. So the office book, inside of the office book, the multi-tenant piece, which is where we have the biggest concern, is close to 11%.

So I think we're reserved for whatever happens in that book, but we'll need those reserves because we do think there's going to be problems in the office space.

Great. All right. Thank you.

Yeah.

Okay. We have no further questions.

Thank you all for your participation on the call. If you have any follow-up questions, please feel free to reach out to the IR team.

Thanks, everybody. Thank you.

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