PNC Financial Services Group, Inc. (The)

Greetings and welcome to the PNC Financial Services Group fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brian Gill, Executive Vice President and Director of Investor Relations. Thank you. You may begin.

Well, good morning, and welcome to today's conference call for the PNC Financial Services Group. I am Brian Gill, the Director of Investor Relations for PNC, and participating on this call are PNC's Chairman 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 January 16th, 2025, 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've seen, we had a solid fourth quarter and a very strong year. For the full year 2024, we earned $6 billion or $13.74 per share. We executed well against our priorities and continue to gain momentum across our franchise. While loan demand remained soft throughout the year, our net interest income benefited meaningfully from fixed asset repricing, and we expect to see further tailwinds from repricing over the next couple of years. We grew fee income by 6%, and we achieved record revenue. At the same time, we maintained our expense discipline, allowing us to deliver positive operating leverage, which is an aside, and you will recall that looked pretty much out of reach at the start of 2024. Finally, we grew capital and increased our tangible book value per share by 12% compared to last year, while returning $3 billion of capital to shareholders through dividends and share buybacks. Now, Rob's going to walk through the financial results in more detail, but I wanted to take just a moment to reflect on the strength of PNC's positioning as we head into 2025. Our businesses are performing exceptionally well, and we continue to see positive momentum, particularly in our expansion markets. CNIB had record revenue in non-interest income in 2024 as new client growth continued at an accelerated rate. Our sales in our expansion markets grew 26%, with over 60% of those sales being non-credit. In retail banking, consumer DDA growth in 2024 was the highest it's been in eight years, and we produced record brokerage revenue at P&C Investments. And the asset management group delivered its strongest level of positive net flows in years. Going forward, we're investing in new products and an expanded footprint to further accelerate our momentum. We will soon be rolling out our new online banking platform. We are doubling our new branch builds to gain scale on some of the fastest growing regions in the country. And on the corporate side, we recently announced our entry into the Salt Lake City market. As Rob will highlight, our forward guidance solidly points to record NII in 2025, as well as strong fee income growth across our franchise. This combined with our ongoing expense discipline positions us to deliver meaningful, positive operating leverage this year. But there are a lot of uncertainties regarding the outlook for the economy, interest rates, the regulatory environment, We believe that PNC's balance sheet is well positioned. We are adequately reserved for our credit risk, and our strong capital levels provide substantial flexibility as we enter 2025. Before wrapping up, I'd like to spend just a moment to express our sympathies to those who have been impacted by the wildfires. PNC is, of course, committed to supporting our customers, our communities, and importantly, the more than 200 employees we have in the affected areas. I also want to thank our employees for everything they do for our company and our customers. We accomplished a significant amount in 2024, and we're entering 2025 with a lot of momentum. I've never been more excited about the opportunities in front of us to continue to grow our franchise and to deliver for our stakeholders. And with that, I'll turn it over to Rob to take you through the numbers.

Rob? Thanks, Bill, and good morning, everyone. Our balance sheet is on slide four and is presented on an average basis. For the length quarter, loans of $319 billion were stable, investment securities increased by $2 billion, and our cash balances at the Federal Reserve were $38 billion, a decrease of $7 billion, or 16%. Deposit balances grew $3 billion and averaged $425 billion. Borrowed funds decreased $9 billion, or 12%, primarily due to the maturity of FHLB advance At quarter end, AOCI was negative $6.6 billion compared to negative $5.1 billion as of September 30th, reflecting the impact of higher rates. Our tangible book value was $95.33 per common share, which was a slight decline linked quarter due to the decrease in AOCI, but a 12% increase compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 10.5% as of December 31st. and we estimate our revised standardized ratio, which includes AOCI, to be 9.2% at quarter end. We continue to be well positioned with capital flexibility. We returned approximately $900 million of capital to shareholders during the quarter through both common dividends and share repurchases. Slide five shows our loans in more detail. Average loan balances of $319 billion were stable compared to the third quarter. and the yield on total loans decreased 26 basis points to 5.87% in the fourth quarter, primarily driven by lower short-term rates. Consumer loans averaged $100 billion and were essentially flat-linked quarter, as growth in auto was offset by a decline in residential real estate. Commercial loans of $219 billion were stable, as growth in CNIB and leasing balances was offset by a $1 billion decline in commercial real estate loans. On a period-end basis, commercial loans declined roughly $5 billion, reflecting both lower CRE balances and utilization rates. Slide 6 details our investment security and swap portfolios. Overall, we continue to be relatively neutral to changes in interest rates in 2025, and we continue to manage our fixed and floating rate assets to reduce interest rate sensitivity in future years. Average investment securities of $144 billion increased $2 billion, as purchases more than offset runoff and maturities. During the quarter, we continued to add floating rate securities, and our total portfolio is now 20% floating, compared to 6% a year ago. The majority of our floating rate securities are designated as available for sale, and as a result, comprise approximately 40% of our AFS portfolio. Also, floating rate securities are a higher yielding alternative to excess cash at the Federal Reserve. The yield on our securities portfolio increased nine basis points to 3.17%, driven by higher rates on new purchases and the runoff of lower yielding securities. And as of December 31st, the duration of our securities portfolio was approximately 3.4 years. Our received fixed rate swaps pointing to the commercial loan book totaled $50 billion on December 31st, comprised of $37 billion of active swaps and $13 billion of forward starting swaps. The weighted average received rate on the active swaps increased 14 basis points linked quarter to 3.22%. Looking forward, we expect considerable runoff in our short-term duration securities and swap portfolios, which will allow us to continue to reinvest into higher-yielding assets. Accordingly, AOCI will accrete back with maturities, resulting in continued growth to tangible book value. A full update on the expected maturities and AOCI burndown is provided in the appendix. Slide 7 covers our deposit balances in more detail. Average deposits increased $3 billion, or 1%, reflecting continued growth in interest-bearing commercial balances, partially offset by lower consumer brokered CD balances. Regarding mix, Non-interest bearing deposits were stable at $96 billion and remained at 23% of total average deposits. Our rate paid on interest bearing deposits declined 29 basis points during the fourth quarter to 2.43%, reflecting pricing actions commensurate with the Fed rate cuts. Our cumulative deposit beta through December was 47%. And going forward, we expect our beta to be in the high 40% range. during the anticipated rate cutting cycle. Turning to slide eight, we highlight our income statement trends and a few notable items this quarter. Fourth quarter net income was $1.6 billion, or $3.77 per share. Comparing the fourth quarter to the third quarter, total revenue of $5.6 billion increased to $135 million, or 2%. Net interest income grew by $113 million, or 3%. And our net interest margin was 2.75%, an increase of 11 basis points. Non-interest income of $2 billion increased 1%. Non-interest expense of $3.5 billion increased $179 million, or 5%. The increase included non-core items netting to $79 million pre-tax or $62 million after-tax, which I'll provide more detail on in a few moments. Provision was $156 million, reflecting improved macroeconomic factors and portfolio activity. And our effective tax rate was 14.6%, which included $60 million of income tax benefits related to the resolution of certain tax matters. Turning to slide nine, we highlight our revenue trends. On a full year basis, we generated record revenue of $21.6 billion. as lower net interest income was more than offset by 6% growth in non-interest income. Looking at the linked quarter comparison, revenue increased $135 million, driven by higher net interest income. Net interest income of $3.5 billion increased $113 million, or 3%, driven by lower funding costs and the continued benefit of fixed-rate asset repricing. The income was $1.9 billion and decreased $84 million, or 4% linked quarter. Looking at the detail, asset management and brokerage income declined $9 million, or 2%, reflecting lower annuity sales, partially offset by the benefit of higher average equity markets. Capital markets and advisory fees decreased $23 million, or 6%, reflecting elevated third quarter activity. Card and cash management fees were stable as higher treasury management revenue was offset by credit card origination incentives. Lending and deposit services revenue grew $10 million, or 3%, due to increased customer activity. Mortgage revenue declined $59 million linked quarter, primarily due to elevated RMSR hedge gains in the third quarter. And our other non-interest income increased $106 million, reflecting a less negative impact from visa derivative activity. Turning to slide 10, full-year non-interest expense decreased by $488 million, or 3%. Core non-interest expense was down $152 million, or 1%, compared to 2023. As a result, we generated positive operating leverage on a reported basis, as well as adjusted for non-core expenses. Fourth quarter non-interest expense of $3.5 billion increased to $179 million, or 5%. As I mentioned, the quarter included $79 million of non-core expenses, which reflected $97 million of asset impairments, partially offset by an $18 million reduction to the FDIC special assessment. The asset impairments included a number of items and were primarily related to various technology investments. Core non-interest expense increased $100 million, or 3%, linked quarter, largely due to seasonality and higher marketing spent. As you know, we had a 2024 goal of $450 million in cost savings through our continuous improvement program, which we exceeded. Looking forward to 2025, our annual CIP target is $350 million, and this program will continue to fund a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide 11. Non-performing loans decreased $252 million, or 10%, linked quarter, driven by lower CNI and CRE NPLs. Total delinquencies of $1.4 billion were up $107 million, or 8%, compared with September 30th. The increase was primarily driven by commercial loan delinquencies, the majority of which have already been or are in the process of being resolved. Net loan charge-offs were $250 million. The $36 million linked quarter decrease was driven by lower office CRE charge-offs and higher commercial recoveries. And our annualized net charge-offs to average loans ratio was 31 basis points. Our allowance for credit losses totaled $5.2 billion, or 1.64% of total loans on December 31st, down one basis point from September 30th. Slide 12 provides more detail on our CRE office portfolio. Our office CRE balance has declined 7% or approximately $500 million a linked quarter as we continue to manage our exposure down. Criticized loans and non-performing balances also declined as paydowns and charge-offs outpaced new inflows during the quarter. Net loan charge-offs within the CRE office portfolio were $62 million, down from $95 million in the third quarter. Despite this decline, we continue to see stress in the office portfolio, given the challenges inherent in this book and the lack of demand for office properties. As a result, we expect additional charge-offs, the size of which will vary quarter to quarter, given the nature of the loans. Our reserves on the office portfolio increased at 13% as of December 31st, up from 11% the prior quarter. The increases in reserves reflect the continued valuation adjustments across the portfolio. Accordingly, we believe we are adequately reserved. In summary, PNC reported a solid fourth quarter, which contributed to an overall successful 2024 and we're well positioned for 2025. Regarding our view of the overall economy, we're expecting continued economic growth over the course of 2025, resulting in approximately 2% real GDP growth and unemployment to remain slightly above 4% through year end. We expect the Fed to cut rates two times in 2025 with a 25 basis point decrease in March and another in June. Looking ahead, our outlook for full year 2025 compared to 2024 results is as follows. In regard to loan growth, while a lot of indications point to accelerated growth, we've not built that into our guidance. As a result, our guidance reflects spot loan growth of 2% to 3%, which equates to stable average full year loans. We expect total revenue to be up approximately 6%. Inside of that, our expectation is for net interest income to be up 6% to 7% and non-interest income to be up approximately 5%. Non-interest expense to be up approximately 1%. And we expect our effective tax rate to be approximately 19%. Based on this guidance, we expect we will generate substantial positive operating leverage in 2025. Our outlook for the first quarter of 2025 compared to the fourth quarter of 2024 is as follows. We expect average loans to be down approximately 1%, net interest income to be down 2% to 3%, which includes the impact of two fewer days in the quarter, fee income to be stable, other non-interest income to be in the range of $150 to $200 million, excluding visa activity, Taking the component pieces of revenue together, we expect total revenue to be down 1% to 2%. We expect total non-interest expense to be down 2% to 3%. And we expect first quarter net charge-offs to be approximately $300 million. And with that, Bill and I are ready to take your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of John McDonald with Truist Securities. Please proceed with your questions.

Hi, good morning. I wanted to start off with a take on industry deposit growth and trends in 25. What are you guys seeing for the industry this year? And then maybe some comments on PNC's ability to gain some share in retail deposits, particularly as you start densifying some of the expansion markets.

Hey, John, good morning. It's Rob. Yeah, so on deposits, in terms of our outlook for 25, we do see growing deposits you know, slightly 1% to 2% over the course of the year. We do expect some seasonality, though, on commercial deposits where they'll go down a little bit in the first quarter and then grow from there. As far as our organic efforts in the expansion markets, things are going really well. And, you know, things continue along those lines. I'm sorry, Bill, the DDA growth that Bill talked about at the beginning, you know, bodes well for us.

Okay, thanks, Rob. And then in terms of the NII guidance, maybe just some thoughts on the cadence and the drivers, obviously down in the first quarter, and then how do the drivers align to pick up sequentially and kind of get you to that 6-7 for the year?

Yeah, so a couple of things on that, and I'll just repeat what I said in the opening comments. Our guides for the full year and for the first quarter is very conservative in terms of loan growth. Average loans for the full year are stable, spot up 2% to 3%. So we want to emphasize that in terms of how we calculate our full year NII and for the first quarter. Inside of that, obviously, it's a continuation of the fixed rate asset repricing that we've talked about a lot and the continued dynamics around the floating rates and the deposits. In the first quarter, we do call for NII to be down 2% to 3%. 75% of that decline is fewer days. And then the balance is just some lower seasonal commercial deposits that I talked about, both interest-bearing and non-interest-bearing, which is typical. And then, again, I emphasize no loan growth in our first quarter NII guidance.

Okay. And does the fixed asset reprice kind of pick up as you go through the year? Is there any kind of weighting to that throughout the year?

Well, it's pretty balanced. You know, it continues on the path that we're on. So, you know, it'll continue through 25 and beyond for that matter. Okay. Thank you. Sure.

Thank you. Our next question has come from the line of Scott Seifers with Piper Sandler. Please proceed with your questions.

Thank you. Good morning, guys. Thanks for taking the question. Let's see, Rob, so you've emphasized a couple times not a lot of loan growth baked into the guide, which I appreciate. Just curious, now that the dust has kind of settled on the election, maybe just updated thoughts on how you might see demand developing. It's pretty clear that's not going to be a requisite to hit your numbers. You know, just what are your clients thinking, saying, could we evolve something into the second half of the year? How are you thinking about kind of the major touch points you'll be looking for?

We've got this question for four quarters. A lot of indications that would suggest that utilization ought to increase. And I ought to say, you know, we're growing clients. We're growing DAT. We're just, you know, as utilization decreases, it's causing balances to fall. you know, under the presumption that the new administration acts pretty clearly as it relates to what they're going to do with tariffs and other things kind of right out of the gate so people know where they stand. Presumably, you'll start seeing investment and utilization increase. But we've just, you know, as we've said before, we've kind of gotten tired of trying to pick that model. point in time, yeah, where things go up and just be conservative about it.

Gotcha. Perfect. All right. Thanks, Bill. And then, Rob, in the past, you've talked about the company being able to generate sort of a 3% normalized margin. I guess I'm curious, I mean, so much of the ramp in NII seems kind of, you know, programmatic through the year. Is that 3%? Is it too ambitious to think that's something that you might be able to hit this year or would we have to You know, is it just going to take a little bit longer than that to develop?

Yeah, so we've talked about that. We don't provide NIM guidance because it's an outcome. We do expect NIM to continue to increase through the course of 2025. You know, we've approached that 3% level in the past, and, you know, I think it's logical to assume that we get close to that.

Okay. Okay. All right. Perfect. Thank you very much. I appreciate it. Sure.

Thank you. Our next question has come from the line of Erica Najarian with UBS. Please proceed with your questions.

Yes. Thank you so much. Rob, just to clarify, just as you can imagine, this is a big conversation that was happening with your investors this morning. You know, in terms of your response to Scott's question, Based on the mechanics, you can approach that 3% as an exit rate for the year. Again, like I know you don't give a NIM guide, but it seems like from a mechanical standpoint, I just wanted to confirm that's what you're telling us. And in terms of the two cuts they have embedded in your guide, I think a few folks have maybe one cut. Does that really matter if you have one cut or two in terms of your outlook for net interest income?

So the second question first. No, it doesn't. We're very neutral to rates. We've said that. So 25 is sort of locked in from a rate perspective. And then on your first question, yes, confirmed, you know, approaching 3% by the end of 25.

Great. And my follow-up question here is, you know, how, Bill, maybe you think about the demand construct for lines of credit in the rate environment that the forward curve is pricing in. So with a higher neutral rate than we expected and maybe some flatness, we don't have that now, but maybe some flatness from SOFR to the belly, how do you expect that in terms of impacting whether or not companies seek out to finance their projects through lines of credit versus going to the capital markets? And how much of that dynamic is embedded into your more conservative guide?

The conservative guide is simply because we don't have visibility in what would otherwise cause the change yet. The nuance of whether somebody goes to a capital market or a line of credit is a function of price. A line of credit can be swapped into fixed and capital markets can issue fixed. I don't know that that's a particular driver. Higher rates generally... Could have and have had, I imagine, you know, an impact on the total amount of line somebody carries just because carrying inventory and working capital is more expensive. You know, and I'm sure that's at least part of the impact as to why utilizations are lower today than they were pre-COVID.

Got it. Thank you.

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

Good morning. Just on the fee income side, I want to see if you can unpack the 5% growth outlook a bit for 2025. Maybe just look at the most noteworthy drivers. I know you've talked about the capital markets opportunity quite a bit in the past, as well as treasury and cash management and other areas. So if you could just Help us and think about what are the largest drivers of that 5% outlook. Thanks.

Yeah, sure, John. Just in the order of how we report our fees by categories, for 2025, asset management we would expect to be up mid-single digits. Capital markets and advisories up mid-to-high single digits. Card and treasury management up mid-to-high single digits. lending and deposit services up maybe low single digits. And then lastly, mortgage, we expect to be off approximately 10% or even more. That's a small component, but that's our best thinking at the moment.

Got it, Rob. Thanks for all that. That's helpful. And then separately on capital, on the buyback front, I mean, you're at the 10.5% to ET1 level. You've bought back $200 million in the fourth quarter. How should we think about a reasonable pace as you look at 2025? And if the $200 million level appears reasonable, could that level be sustained if you do see that pickup in loan growth off of your conservative expectation?

Yeah, I think, yes, the answer to that second part is yes, we can sustain that. And And the current plan is to continue at the levels that we've been doing. You saw $200 million in the fourth quarter. So between $100 and $200 million is where we've been averaging, and that's what I would expect going forward.

Okay, great. Thanks, Rob. Sure.

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

Hey, Bill. I guess I've been asking this question for the last three or four calls, so why break the streak? Loan growth. So you're giving your NII guide, assuming not much loan growth, just average zero. And I know you're getting out of the forecasting business, and so you just say it's basically zero, and here's your NII guide, and you're guiding for 400 base points of operating leverage, and that's that. Having said that, with all the caveats and the answers you gave before, what do you think is really happening? Is all the loan growth just going to debt capital markets or are the corporations just sluggish or what's going on?

It's not going to capital markets. I mean, there's a part of our book in the large corporate space where utilization has probably dropped more than most because of you know, their ability to hit capital markets. But it's, you know, across all the subsegments from smaller commercial to middle market, you know, through to even our specialty businesses and asset-based finance, for whatever reason, Mike, utilization is lower. And, you know, part of that's got to just be total cost. Part of it's got to be we've been running into a lot of uncertainty, right? We've been calling for this landing for the better part of Two years, and people would like to have landed and got on with it, I think, you know, before they invest a lot of capital. I think, you know, look, three quarters ago, if not four, we kind of said, we're going to quit forecasting this. We don't need it. We showed you numbers. We beat those numbers. And loan growth kind of ended up where we thought three or four quarters ago, which was not great. I don't know that it's going to be not great. In 25, I just don't know what it's going to be.

So you plug in any number that you want. Or importantly, when it's going to be.

Yeah. I mean, the important thing to remember, Mike, is that we're not going to behave differently than any other bank. We're not changing what we're doing. We're not getting out. We're not getting in. You know, we have a giant stock of revolving credit that will move with the market. And, you know, I just don't want to promise you a number that – has a big unknown to it.

Got it. And then just as a follow-up, Bill, you've never been shy, whether you testified to Congress or with your views in your CEO letters. There's a new administration. I think they're listening. So if you were talking to them and you do indirectly through the different industry groups, what would you hope to see changed as it relates to the regulation at PNC?

A couple of different themes. One is I think the government has to get off of the assumption that somehow the banking industry is the piggy bank to cure the ills in the world. All of the silliness around canceling fees and you know, rebating and all the other stuff, I think they've got to get back to following the law, and I think that will be a good thing. And, of course, the industry is sued on a number of those proposals, and I would expect that we'll have some success with that. I think they need to focus, you know, and we repeatedly emphasize it, this notion of focus on the core risks. We spend too much energy on things that do not affect the safety and soundness of a banking institution, and not enough, as we saw a year ago, on things that do. And I would hope to see that we'll see some change inside of that. There, at some point, they'll redo Basel III. My best guess is that'll be a neutral outcome. I don't think it's going to cause things to go lower. I don't think it's going to cause them to go up. There's going to be some changes to the stress And that's kind of it. You know, let us do our job. You know, the banking industry does a lot of good for this country. And I, you know, and I think by and large, the industry is in a really good place over the next couple of years.

All right, great. Thank you.

Thank you. Our next question has come from the line of Betsy Gracek with Morgan Stanley. Please proceed with your questions.

Hi, thanks so much. Good morning. So first question, just one more on the loan growth. I wonder how much of the CNI weakness is a function of paydowns, right? Because, you know, companies can go term out, pay down their CNI loan. But now, With SOFR two-year, three-year, four-year, five-year portion of the curve pretty flat, is there any changes going on there? Could you discuss how much that is impacting the overall number?

I don't think at all. You know, the shape of the curve is different. largely irrelevant. A company figures out how long they want to borrow for and whether they want to do it fixed or floating. And they can achieve that either through a bond in the capital market swapped or a loan that's swapped the other way or whichever way they want to do it. So I think this is raw demand for capital. I think, as I said, for large corporates, the spread component in the capital markets is really attractive. So that's driven by spread and demand. as opposed to some notion of expense, you know.

All right.

Okay.

So really, originations are really low. Okay.

And, Goddard, thank you. But that's not right either. Originations are high. Utilization is low.

Yeah. So, Betsy, our unfunded commitment growth has been strong all year, including in the fourth quarter. So those are lines that our commercial customers are establishing that they're paying for. which is probably the strongest indication of borrowing intent.

Okay, so separate question just on liquidity. I think, Rob, you mentioned the liquidity number that you've got at the Fed, and with rate cuts anticipated coming up, and I know your LCR ratio is super high. You have a really, really strong liquidity. You're best in class on liquidity by far. I'm just wondering, are we... leaving some money on the table by keeping all that there? Is there any, within your outlook for NII this year, do you keep all that liquidity at the Fed this year, or is there some redeployment that's expected at some point?

That's actually a fair question. You know, if we knew with certainty that there really wasn't going to be any loan growth, then we would probably deploy the cash in a different form that would have a slightly higher yield. So there is an interplay there that probably isn't in our guidance and is fair.

Okay, thank you.

And reflects our optimism, even though it's not in our guidance.

Right.

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

Hi, Bill. Hi, Rob. Can you guys share with me, I understand the competition from the capital markets. You guys have been dealing with this for 40 years. The private credit area seems to have obviously gained a lot of attention these last couple of years. And And I kind of wonder, you know, when Basel III Endgame originally came out in July of 23, a lot of banks had to kind of reassess their risk-weighted assets. We heard about risk-weighted asset diets and stuff. And I'm wondering if the private credit guys took advantage of that. Do you bump into them much? Maybe in the large corporate you might build, but do you guys see them in the middle markets at all? Or no, it's really just the large stuff that they tend to swim in that ocean?

So you're hitting on two different things. The risk-weighted asset diet that many people went on was, you know, structured credit sales, effectively using a credit derivative to ensure some bottom tranche on autos or middlemen. Low-yielding assets. You know, so that was much more of selling the riskiest tranche of some pool of credit I already hold to get regulatory capital arbitrage. the private capital movement of capital basically moving into credit as the next investment vehicle. You know, it's interesting. We had this conversation with a bunch of bank CEOs at a conference meeting we had where none of us kind of said we ever, like we haven't seen a deal we've lost that we wanted. However, We have seen, you know, we have been competed away at levels that we just wouldn't match. So at the margin, it matters. It's one of the reasons, you know, at PNC, we formed this partnership with TCW so that in some of those instances, instead of losing the client in that case, we keep the client, fund them through a different vehicle and keep all the TM and fee related. Yeah, today. But it's not, you know, None of that, like whatever's happening in private credit for all the headlines, that has nothing to do with why our loan growth is lower than it's been historically.

And you guys have been very strong in the asset-backed lending area. Do you see other competitors in that arena or no? It's just the traditional asset-backed lenders that you've competed against for years.

We're pretty much, it's the traditional people. I mean, any, you know, when you talk about asset-backed lending, asset-based, it's a big operational business. It's hundreds of field auditors across the country. It's very difficult for a fund to say, okay, I'm going to enter that business because it's a giant operating business that goes along with it.

And then just as a follow-up, on the rollout of – you talked about, you know, building out the new branches and the plans for doing this. Are there – where do you head first? Is it, you know, the southwest? Is it the west coast? Or what's the layout that we should expect as you build that out over the next number of years?

Hey, Gerard, it's Rob. Yeah, I would say, you know, it's in all the places that you would expect – You know, the recent sort of step up has a focus on South Florida, the Miami area. But, of course, in our expansion markets in Texas, Arizona, Colorado, those are the places.

Got it. So nothing here in Portland, Maine then, huh?

We're going to get back to you on that one. Okay.

Thank you, guys.

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

Thanks. Good morning, Bill and Rob. Following up on the – you mentioned, Bill, that you're close to rolling out your online banking platform. Is that in relation to your expansion markets? I was hoping you could maybe just speak to how that complements your existing physical and digital channels.

It's one of the pieces of the puzzle of basically making everything we do cloud-native and microservice-based. So it'll be a better experience for our customers in the sense that it's more easily navigable. There's more self-service. But the biggest thing that it does for us is it allows us to change and introduce products on the fly. So we can pull what used to be a six month process to update something on online banking, we could literally do overnight with a new system. Highly complex, a big investment that we've been at for a couple of years. And ultimately it just, it will raise our scores with consumers on online. One of the things, go on a little bit here. When we do customer surveys and get feedback on experience with PNC, we score off the charts on our branch experience, and we're no better than average with our online and mobile, and we need to do better than average, which is why we're pursuing this.

That's helpful. Rob, I wanted to ask if you could discuss what drove the valuation adjustments that led to an increase in reserves for the office portfolio. How are you thinking about the risk of similar adjustments leading to incremental reserve building from here, particularly if we don't get any more cuts?

Yeah. So, you know, as I had mentioned, we're adequately reserved in terms of how we look at things. Credit looks good. You know, commercial non-CRE in particular, you know, improved during the quarter. Our outlook improved. Consumer is pretty good. Within the CRE office space, we've got some moving parts there. The good news is that the outstandings are coming down. We're managing it. There's some idiosyncratic pieces there where the reserves moved a little bit in percentage, but really not a big change there. We just continue to work through it.

I think every quarter we have the same discussion around the reserve in the sense that we have a high percentage relative to many of our peers in terms of what we reserve. And we do that largely because there really isn't a market established yet like a clearing market where properties trade. There just hasn't been that much that has moved. There's been extensions, there's been paydowns, there's been a variety of different things, but there's not a stabilized market, which is why we remain concerned and remain low reserve.

And the good news for us, as you know, Bill, it's a small percentage of our overall loans. So you know, there's some lumpiness in there from quarter to quarter. So we actually, our charge-offs on office went down in the fourth quarter from the third quarter. We didn't expect that. We do expect more. So we just need to work through it.

That's helpful. Thanks. If I could squeeze in one more on your hedging strategy, can you discuss the uptick in forward starting swaps that we saw this quarter and how you're thinking about potentially putting on new forward starters as we looked ahead from here?

Yeah. I mean, it's actually pretty straightforward. So our roll-off of fixed-rate assets, you know, and we've put that out publicly before on how much securities or loans. When we look at the forward curve available, you know, at any given point in time, we can choose to lock in that rate on that replacement yield. So if it's a treasury that's going to mature in a year and a half, with a 2% coupon, I can effectively choose to buy that treasury, you know, forward at a 4.5% coupon. And so, we've been gradually biting off. That's why we say we're, you know, really comfortable with where we are in 25 because we've used swaps like that to effectively lock in these maturing fixed-rate assets. And we continue to look at and will start biting off pieces of 26 and 27 because it continues. What we see through 25 ought to continue through the next couple of years if rates follow the forward curve. So there's big opportunity there, and you'll see us using that tool to lock some of that in over time.

Throughout the balance of 25 as we lock in the future years.

Yes. That's helpful. Thank you for taking my questions.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.

Good morning. Can you guys remind us, do you have a targeted capital level, either on a stated CGT-1 or adjusted for AACI?

We don't – hey, Matt, it's Rob. We don't have a stated target, but, you know, obviously we continue to build levels. We're at 10.5 CT1, 9.2 on the revised, our minimum requirement is 7. So, you know, we've got a lot of flexibility, but we don't have an explicit target, and part of that is because the rules are still in flux. Okay.

Yeah, I mean, it seems like – I know it's been kind of covered, but It was impressive that the adjusted capital was stable despite the moving rates. So you have a lot of disclosure on the securities book. The duration didn't really extend. So it feels like with sluggish loan growth and, you know, your buyback assumptions, the capital ratios are continuing to bail it off to already high levels.

Yes.

Yeah. And then separately on the expenses, I mean, obviously the operating leverage is strong, but the kind of 1% growth includes some of the lumpies in the base. And I guess the punchline is on a core basis, the expenses are going up 3%, and obviously you're leaning in to some areas on investment. Is that kind of a good medium-term run rate, or is it just maybe a step up for a short period of time as you fully load those expansion efforts?

I think you've got a handle on it. You know, we got it up to the 1% off the reported numbers just because it's easier that way as we talk about it through the balance of 25. But, you know, expenses up in that 3% range is, you know, typical for us and obviously reflects, on a core basis, obviously reflects a lot of investment.

Yeah, it's, importantly, the investment that we are making is not at all catch up to something we should have done. This is, you know, new branches, it's new technology, it's larger data centers that are more resilient. It's, you know, it's everything positioning us to accelerate our organic growth. So these are all dollars spent to make money.

Got it. Makes sense. Okay, thank you.

Thank you. Our next questions come from the line of Ibrahim Poonawalla with the Bank of America. Please proceed with your questions.

Hey, good morning. I guess maybe the – Remind us of your thoughts around, we talked about regulations earlier. Absent significant pickup in loan demand, it doesn't seem like the operating backdrop on the revenue side is going to be that great for the banks. How does that inform your view in terms of the window of opportunity from a regulatory political backdrop to do a transformational M&A? And you've talked about it in the past in terms of competing with the big banks. having sort of a national presence. What are the odds where those opportunities come up and you actually tap into that? Understanding will be disciplined, you know the math, so I appreciate all of that.

I think, look, at the margin, my guess is it's gotten easier to get a deal approved, although I think we could have been approved with the old administration. you know, the challenge is, and you're going to hear this on every earnings call, everybody's an acquirer, nobody's a seller. There's, you know, wind at the back on bank earnings as a function of, you know, the rate turnover. Credit's not bad. So I think the mindset you run into is, hey, we'll hang out, we'll make more money next year, and we'll worry about whether we have a long-term franchise somewhere later. It's not our problem today. And that's an environment where as a you know, an honest buyer that's growing, you know, it's tough to force an outcome and we don't tend to try to do that.

Got it. All right. So your response is like short-termism overtakes shareholder value creation in terms of... Look, I think, yes.

So I think, you know, the structural issues in the banking industry are just you know, violently apparent when you look. The deposit shifts to the largest banks, the growth in DDA accounts. By the way, we grew DDA this year at a pace we haven't maybe ever. But we're one of a handful of banks across the whole industry that was actually able to do that. And so when you just look at the fundamentals underlying, you know, the amount of, you know, the cost of funding, the increased balances of broker deposits, lack of fee income and products to sell that some of the smaller banks run into. You ought to see consolidation, yet we're in a period where everybody thinks they're gonna be the consolidators. So I don't know what's gonna happen.

Fair point, I agree. And I guess maybe just a quick one, following up on credit quality. If we don't get any Fed rate cuts, employment holds up okay. Is it your sense that credit quality is generally okay? There are no real stress points in that backdrop?

Yeah, I think that's right. Our expectation, my expectation for a while, is kind of playing out. I don't think even if they get a couple of cuts, we're going to be there for a while, and I think the back end is under pressure. So what happens through time is a lot of the locked-in low interest rates that corporate America has done You know, we'll roll off and you'll see their debt coverage ratios decline a bit down the road. But not their solvency, not actual lost content because of the strength of the economy. So I think we're absolutely fine. You know, bluntly, I think the Fed has landed this and we're in a good place.

Thank you.

Yep. Thank you. There are no further questions at this time. I would now like to hand the call back over to Brian Gill for closing comments.

Well, thank you, Daryl. And thank you all for joining our call today and your interest in PNC. And please feel free to reach out to the IR team if you have any follow-up questions.

Thanks, everybody. Thank you.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.