PNC Financial Services Group, Inc. (The)

Greetings and welcome to the PNC Financial Services Group Q1 2026 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 during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Brian Gill, Executive VP and Director of Investor Relations. Thank you, Brian. You may begin.

Well, good morning. 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 Domchek, and Rob Riley, Executive Vice President and CFO. Today's presentation contains forward-looking information. Questionary 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 15th, 2026, 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're off to a really strong start this year. We achieved a great deal this quarter, and we continue to build upon the strength of our franchise. As you know, we completed the acquisition of First Bank early in the quarter, and we're well on our way to a mid-June conversion. Our financial performance was solid. Organic loan growth hit a three-year high. Net interest margin expanded meaningfully, and we had 13% year-over-year fee income growth. Our credit quality remained strong, and we returned significant capital to shareholders. Importantly, beyond the financial results, we continue to see strong momentum across our businesses. With notable increased client activities, we continue to make meaningful investments in our technology and our branch network. While we recognize that there are many market concerns out there from energy prices to AI to private credit, we are not seeing anything that suggests these issues are broadly impacting our customers or our credit quality in the near term. Specifically, in regard to the increased attention on banks' exposure to non-depository financial institutions, Rob's going to walk through some of the details as it relates to our exposure, but the soundbite you ought to walk away with here is that we don't see any lost content in this book and certainly don't see any exposure to a systemic event, which, by the way, we don't expect. But were there to be one, a systemic event in private credit? I can't speak to what other banks have in this category as the definition seems to capture random things. But we are very outsized in our corporate receivables financing relative to others, which is a low spread business with negligible risk. Importantly, the bulk of our loans actually have nothing to do with private credit despite the regulatory category in which they reside. Overall, our focus remains on discipline execution of our strategy, which is clearly reflected in our results this quarter. Looking ahead, we are entering into the second quarter with a lot of momentum, and we continue to be excited about the opportunities in front of us. Finally, as always, I want to thank our employees for everything they do for our company and our customers. 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. As Bill just mentioned, during the first quarter, we successfully completed our acquisition of First Bank. And as a result, our overall balance sheet growth includes the impact of the acquisition, which represented $15 billion in loans and $22 billion in deposits. For the linked quarter, loans of $351 billion grew by $23 billion, or 7%. Investment securities of $145 billion increased $2 billion, or 2%. Deposit balances were up $19 billion, or 4%, and averaged $458 billion. And borrowings increased by $3 billion, or 4%, to $63 billion. Our tangible book value was $109.42 per common share, down 3% link quarter due to the acquisition, but up 9% compared with the same period a year ago. We continue to be well positioned with capital flexibility, During the quarter, we returned $1.4 billion of capital to shareholders. Common dividends and share repurchases were approximately $700 million each. And we continue to expect quarterly repurchases to be in the range of $600 to $700 million going forward. We remain well capitalized with an estimated CET1 ratio of 10.1%, down 50 basis points from year-end 2025. The decline was primarily driven by the first bank acquisition, accounting for roughly 40 basis points, with the remainder attributable to strong loan growth. Regarding the recent Basel III proposal, we expect the changes to be a net positive for our CET1 ratio relative to the current framework. Our initial assessment reflects a reduction of approximately 10% of our RWAs, or $45 to $50 billion. The reduction amount is the same under both the revised standardized and the expanded methodologies in line with our previous expectations. Slide five shows our loans in more detail. Loan balances averaged $351 billion in the first quarter, an increase of $23 billion or 7% linked quarter. The growth reflected both higher commercial and consumer balances. Compared to the same period a year ago, average loans increased $34 billion or 11%, and the total average loan yield of 5.5% decreased 10 basis points linked quarter. On a spot basis, loans increased $29 billion or 9% from year end, including $15 billion from the first bank acquisition and $14 billion of growth in legacy PNC loans. Specific to our legacy business, CNI loans increased $15 billion, driven by broad-based growth across businesses, reflecting strong new production and higher utilization rates. CRE balances reached an inflection point and increased approximately $100 million, and we expect moderate growth through the remainder of the year. And consumer loans declined $1 billion due to lower residential mortgage balances. Slide 6 covers our deposit balances in more detail. Average deposits were $458 billion, up $19 billion, or 4%, driven by the addition of first bank balances and partially offset by a reduction in brokered CDs. Excluding those items, deposit trends were consistent with typical seasonality as growth in consumer balances more than offset a seasonal decline in commercial deposits. Non-interest-bearing balances continue to represent 22% of total deposits. and our total rate paid on interest-bearing deposits decreased 18 basis points to 1.96% in the first quarter, reflecting lower rates. Turning to slide seven, we highlight our income statement trends. Comparing the first quarter to the most recent fourth quarter, and again, including the impact of the first bank acquisition, total revenue was $6.2 billion and grew $94 million, or 2%. Non-interest expense of $3.8 billion increased $165 million, or 5%, of which $97 million was integration expense. Excluding integration costs, non-interest expense increased 2% and PPNR grew 1%. Provision was $210 million and our effective tax rate was 19%. As a result, Our first quarter net income was $1.8 billion, or $4.13 per common share, and $4.32 when adjusted for integration costs. Turning to slide eight, we detail our revenue trends. First quarter revenue increased $94 million, or 2%, compared to the prior quarter. Net interest income of $4 billion increased $230 million, or 6%. The growth was driven by the addition of First Bank, as well as lower funding costs and commercial loan growth. Our net interest margin was 2.95%, an increase of 11 basis points. Non-interest income of $2.2 billion decreased to $136 million, or 6%. Inside of that, fee income decreased $44 million, or 2%, linked quarter. Looking at the details, Asset management and brokerage increased $9 million, or 2%, due to higher average equity markets and client activity. Capital markets and advisory revenue declined $26 million, or 5%, reflecting lower M&A advisory activity off elevated fourth quarter levels, partially offset by higher underwriting and trading revenue. Card and cash management increased $5 million, or 1%, as higher Treasury management revenue was partially offset by seasonally lower credit card activity. Lending and deposit services decreased by $2 million, or 1%. Mortgage revenue decreased $30 million, or 20%, largely attributable to a $31 million decline in MSR valuations given the heightened rate volatility during the quarter. And other non-interest income of $125 million included $32 million of visa derivative costs, as well as negative private equity valuations, partially offset by $28 million of net security gains. Compared to the same period a year ago, we've demonstrated strong momentum across our franchise. Importantly, fee income grew $240 million, or 13%, driven by broad-based growth in our businesses. Turning to slide nine. First quarter expenses increased $165 million, or 5% linked quarter, which included $97 million of integration costs. Non-interest expense, excluding the impact of integration expense, increased $68 million, or 2%, as the addition of First Bank's operating expenses more than offset lower legacy P&C expenses. We remain focused on expense management, and as we've previously stated, we have a goal to reduce costs by $350 million in 2026 through our continuous improvement program, which is independent of the first bank acquisition. And this program will continue to fund a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide 10. Overall credit quality remains strong. Our NPL and delinquency ratios each improved on both a linked quarter and year-over-year basis, reflecting the strong credit quality we continue to see across our portfolio. And the linked quarter growth in balances was entirely attributable to the addition of First Bank. Non-performing loans increased $25 million, or 1%, and represented 0.62% of total loans, down from 0.67% last quarter. Total delinquencies increased $115 million to $1.6 billion, and our accruing loans past due declined to 0.43%, down from 0.44% last quarter. Total net loan charge-offs of $253 million included $45 million of purchase accounting related to the acquisition. Excluding these acquired charge-offs, our NCO ratio was 24 basis points. At the end of the first quarter, our allowance for credit losses totaled $5.5 billion, or 1.52% of total loans. I want to take a moment to cover the details of our NDFI loans, which are highlighted on slide 11. We've discussed this topic at recent investor conferences, and importantly, nothing has changed in terms of the composition of the book or the underlying risk. NDFI loans continue to represent our lowest risk loans. Approximately 90% of our NDFI loans are investment-grade or investment-grade equivalent and all have robust collateral monitoring requirements. Because there's been a lot of focus on the regulatory reporting category of business credit intermediaries, we've further broken out the components in detail on the slide. This category for PNC includes asset securitizations, primarily trade receivable securitizations, of which PNC is an industry-leading provider. These are loans to bankruptcy remote subsidiaries of corporate borrowers secured by diversified pools of receivables. These loans represent approximately 80% of the business credit intermediaries category for PNC. The remaining 20% of our business credit intermediaries category, approximately $7 billion, is mostly comprised of CLOs secured by private credit provider assets. These are well-structured assets, all supported by senior positions with substantial excess collateral. So again, we've been in these businesses for a long time, and we've experienced virtually no losses going back 25 plus years. We feel very good about the risk content of our NDFI loans, and based on the composition of these low-risk assets, expect zero losses going forward. To summarize, PNC reported a strong first quarter and we're well positioned for the remainder of 2026. Regarding our view of the overall economy, our base case assumes GDP growth to be approximately 1.9% in 2026 and the unemployment rate to drift slightly higher to 4.6% by year end. We do not expect the Federal Reserve to cut rates during 2026. Our outlook for the second quarter of 2026 compared to the first quarter of 2026 is as follows. We expect average loans to be up 2% to 3%, net interest income to be up approximately 3%, fee income to be up 2.5%, other non-interest income to be in the range of $150 to $200 million. Taking the component pieces of revenue together, we expect total revenue to be up approximately 3.5%. We expect non-interest expense, excluding integration expenses, to be up approximately 2%. And we expect second quarter net charge-offs to be approximately $225 million. Considering our first quarter operating results, second quarter expectations, and current economic forecast, our outlook for the full year 2026 compared to 2025 results is as follows. We expect full year average loan growth to be up approximately 11%, We expect full-year net interest income to be up approximately 14.5%. We expect non-interest income to be up approximately 6%. Taking the component pieces of revenue together, we expect total revenue to be up approximately 11%. Non-interest expense, excluding integration expenses, to be up approximately 7%. And we expect our effective tax rate to be approximately 19.5%. As a reminder, our expectation for non-recurring merger and integration costs is approximately $325 million. We recognize $98 million in the first quarter and anticipate approximately $150 million in the second quarter, with the remaining balance to be recognized in the second half of the year. 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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question 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 Ibrahim Poonawalla with Bank of America. Please proceed with your questions.

Hey, good morning. I guess maybe, Rob, Bill, just if you could talk about deposit growth. As we think about a period, we've not been here in a better part of the last 15 years where rates are higher for longer. I think, as you mentioned, in the forward curve, we may not get any rate cuts. Just give us a sense of the... algorithm to grow core deposits in this environment? Like, how do you think about it? What's the approach? And how difficult do you think it's going to be for PNC and the industry to actually grow low-cost core deposits?

I guess I would just frame it a bit different and talk about growth in DDA accounts and retail clients broadly, which in turn causes deposits to grow. So I don't know if you think about the average balance somebody holds as a function of how high rates are and how competitive outside alternatives are. Think about total shots on goal as a number of retail clients we have. So our focus has been on growing retail clients, which is the key to growing deposits long term. The particular rate environment where rates are just kind of steady for a period of time and People are fighting to expand. You see at the margin, and you've heard competitors talk about this, that in certain price categories, people are paying up to maintain balances and or attract new clients. But look, we're opening branches. We've opened eight so far this year. We're going to go, what's our total for the year? Another 50 or something? Our digital acquisition has been really strong, and we just need to continue that. That ultimately will lead to deposit growth.

And we do, Ibrahim, just as a reminder, we do have deposit growth expectations for the year, sort of staying at these levels. We had a good first quarter sort of staying at these levels with some incremental growth in the back half of 26.

Understood. Got it. And I guess maybe just separately around customer sentiment, I think all sorts of risks over the last month, including – what higher oil prices and energy prices would mean for the consumer. Just talk to us if we saw some decline in sentiment over the course of the last month, or are you as constructive when you think about just growth outlook? Obviously, the guidance suggests nothing's dramatically changed, but I'm wondering, we came in with a lot of excitement around the tax incentives for businesses, consumers. Is all of that more or less mostly intact?

Look, I don't know that we can square for you the headline surveys on consumer confidence or small business confidence, which are all not great, how we square that with what we actually see. So when you look through it, spending patterns, growth in savings, activity levels, loan growth, everything we see day to day in our business, is almost at complete odds with the surveys you see on confidence.

Yeah, I would just add to that. I mean, in terms of sentiment, obviously there has to be a higher level of concern. But to Bill's point, the activity hasn't changed.

Yeah. Everything's accelerated.

Yeah. That's actually a good comment. Thank you.

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

Morning, guys. Thanks for taking the question. Actually, I wanted to sort of follow up on that sentiment question and also about what it suggests for loan growth. You know, you had a pretty good performance in the first quarter. And when I look at the guys, it doesn't necessarily imply much growth in future quarters off the first quarter base. But, you know, I inferred at least that your commentary on utilization rates sounded good, sounded like they're increasing. Are you seeing anything specifically that would cause you to be conservative, or are you just sort of approaching with an abundance of caution?

Well, sure. I can answer that, Scott. Clearly, we saw more than what we expected in terms of loan growth in the first quarter. And on an average basis, that's going to pull into the second quarter. On a spot basis going into the second quarter, we actually see it sort of staying flattish because we do have some paydowns that are coming that will offset continued new production. So that gets you through the second quarter. And then when you look at the back half of the year, we're pointing to growth, but not at the rate that we've seen in the first quarter, nor that we expect in the second quarter. And to your point, that is related to you know, concerns that ultimately end up reducing the visibility of what can happen in the second.

Long story short, you followed us long enough. We're never going to go out there and say low growth is going to be this big number. We can't predict it, but we banked some in the first quarter. So we put that in the starting base and go forward. And, you know, if we're pleasantly surprised, that'll be great.

And that will be accretive. That's right.

Perfect. Okay, good. Thank you. And then, Rob, you know, maybe just some expanded thoughts on how capital management might change should these Fed proposals or NPRs indeed come through. You know, how much more aggressively much do you think about things, or what are sort of the governing factors you think about? You know, you get this big relief, but then unclear the ratings agencies are necessarily on board. So what are sort of the puts and takes you see or the kind of factors you think as you walk through that short?

Yeah, sure, Scott. So, you know, both methodologies, under both methodologies, we see a reduction in our RWAs of about 10%, as I mentioned in the opening comments, which is a good thing. We're still in the proposal stage or comment stage, rather, of the proposal. So we have to work through all the nuances there. But, you know, at first blush, because AOCI is blended in under both methodologies over the five years up front. There is no AOCI. It's, you know, close to a full point of capital for us.

The other issue, you mentioned the rating agencies, and inside of their rating methodologies, they look at risk-weighted assets. So I haven't actually thought through the notion of, hey, we have less, so does this actually just pull through to how they're going to look at us as well? But I kind of think it will.

But I don't know if we've gotten to that discussion point with the rating agencies. But, you know, they had adjusted their expectations with the change of these proposals. So, you know, they've worked the numbers down under the current framework. So it's logical to expect that it would extend into the new methodologies. Yeah.

Okay. Perfect. All right. Thank you guys very much. Cheers, Scott.

Thank you. Our next questions come from the line of Manan Ghazalia with Morgan Stanley. Please proceed with your questions.

Hey, good morning. Thanks for taking my questions. Maybe just to follow up on the capital question, so you noted that the ERBA adoption benefit is similar to adopting the revised standardized approach. Would it still make sense to adopt the ERBA as it relates to maybe the flexibility that it could give you in managing the business going forward? You know, maybe if you wanted to lean in on the investment grade credit side or lower LTV CRE, Just wanted to know how to think about this going forward.

Yeah, I think you're right. On the surface, the ERBA, because of the benefit coming through investment-grade equivalent loans, which are sort of our wheelhouse, that makes that methodology appealing. But we're still in the analysis stage here. There's still a lot of nuances to figure out. And obviously, in terms of if there's any changes after the comment period, But you're on the right track.

Got it. And maybe if I can ask the loan growth question and maybe compare it to the NII guide. So I guess you're pretty close to the 3% NIM number you had indicated, and you're taking the loan growth guide up by 3 percentage points, and then the NII guide is going up, but maybe to a lesser extent. Is there anything that we should be thinking about on loan spreads or deposit rates that you're baking in now that's different to where we were at the start of the year?

No. Let's start at the beginning. So I'd say the short answer to your question is it's loan mix on the new production piece. So if you go back to January when we called for 8% average loan growth, what we did is we just used average spreads on the new production through 2026. Where we find ourselves today after the first quarter is we've generated on a relative basis a much higher volume of higher credit quality deals. which by definition carry relatively lower spreads. Still attractive spreads, still attractive returns, particularly given the noncredit portion of those relationships. So it's just a mixed change that when we look out for the full year, we'll have higher volume on relatively lower spreads. And as you point out, that results in higher NII than we thought in January, which is a good thing. And then as far as MIM, Well, we might as well cover NIM because someone will ask the question. You know, we saw a nice increase there in the first quarter relative to our expectations. We still expect to go above 3% in the second half. But as you pointed out, we're at 295. So if we're going to be above 3% in the second half, you can do the math there in between. But most of the expansion of that is still coming from the fixed rate asset repricing that continues to be very strong.

That's great, Carlo. Thank you.

Sure.

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

Morning. Morning, John. On the fee side, I know your capital markets revs decreased a bit off the particularly solid fourth quarter, particularly on the M&A front. Can you maybe update us on the outlook here in terms of pipelines and how you'd be thinking about M&A and your other capital markets revenue, just given the current backdrop?

Thanks. Yeah, sure. I missed the first part of the question, but it was all about capital markets and sort of our – He was just saying that Harris-Williams – Harris-Williams. Oh, okay. Yeah, yeah. Sorry. No, I've got that. Yeah. So Harris-Williams had a strong quarter, actually, in the first quarter. It was off the elevated levels of the fourth quarter, but higher than what we expected. And the good news is their pipelines are strong. So going into the second quarter, we expect them to be at the levels that they've been at the first quarter, which, again, is more than what we thought. So strong activity there. And that is leading to the guide. So in the second quarter, we have capital markets essentially being at the same level. And then more importantly, for the full year, still up double digits.

Got it. Okay, great. And then on the capital front, appreciate the buyback color in terms of the expectation for the second quarter. Maybe just more broadly, if you could talk about capital allocation priorities. And, Bill, maybe if you could just give us the old update again on where you stand on M&A interest, just giving the backdrop around the activity and the regulatory posture to deals, just want to get your updated thoughts.

Thanks. Talk about capital.

But we asked you about M&A.

So, real simply, right, we obviously like to use our capital on clients and our business. We have increased our buyback just given capacity to do so. You know, we have and you should expect that we will continue to have healthy dividends. So, In the ordinary course, we'd otherwise be giving back more capital to shareholders than perhaps we have in the last handful of years, Rob. Is that accurate? Yeah. The M&A side, the noise and activity levels, forgetting about us, just kind of what I see going on around us seems to have died down. We're focused on growing our company organically. We have great momentum on that. We keep our eyes open. You know, you've heard me say it a lot of times. I just don't think there's going to be a lot of activity, particularly with us. It's an easy year for banks. People are happy to do what they want to do, and we're not going to push on a string, nor do we need to.

Got it. All right. Thanks, Phil. Appreciate it.

Thank you. Our next question has come from the line of Ken Oosten with Autonomous Research. Please proceed with your question.

Hi, thanks. Good morning. Hey, I was just wondering, obviously, we see the outlook for the cost still intact for the year and then higher first to second. Can you just remind us the expected closing of first bank and then the magnitude of saves you're expecting and then how that cascades to a run rate as you get through the rest of the year? Thanks.

Oh, yeah, sure, Ken. So, again, our full-year guide holds in terms of expenses up 7%, which includes the operating expenses of First Bank. You didn't ask the question, though, in terms of sort of how the expenses have fallen in the quarter. Some people have asked that. Relative to the first quarter, we spent a little less than we expected that will fall into the second quarter, largely around technology investments and the timing of those investments. On First Bank itself, everything's going well. We're still planning to convert mid-June. So everything's holding there. We expect, as I said, $325 million or so of integration charges. And then we'll see the decline of their run rate, obviously, in terms of the second half of 26. There'll be some residual integration charges in the second half, but the majority will be completed in the second quarter, which In my comments, I pointed out it'll be about $150 million. So that's all in our guidance. That's all there. It's on track, and we feel good about it.

Got it. And so then I would assume that the cost stage would run rate by the fourth quarter, and then that's giving you a – Yeah, yeah, that's right.

I think that's a good place to start.

Okay, cool. Great. And, Rob, can you actually dig on that point a little bit, just to push off of some spending from first to second? That was going to be my follow-up, actually. Yeah, yeah, yeah. Does that demonstrate the flexibility that you guys have? Or go ahead.

Thank you. No, I mean, well, of course we have flexibility, but that wasn't what drove it. It was just, you know, in terms of the timing. It can slip into the second quarter in terms of what we planned to do in the last couple weeks of the first quarter. Nothing major.

Okay, I got it. All right, thanks a lot.

Thank you. Our next question has come from the line of David Cheverini with Jefferies. Please proceed with your questions.

Hi, thanks for taking the question. So on deposit pricing competition, are there any differences in competitiveness by geography in your footprint? Not really.

I was going to say in our retail memo, Midwest, There were comments on just the Midwest being kind of tight with high promo offers by a few of the competitors. But it's, you know, it depends. In part of the country, you have people doing big promo CDs in other parts of the country. And it was with CD. It's on their money market funds. People are fighting for deposits and people are fighting for clients.

And not particularly harder in any geography.

Yeah, maybe. Yeah. But we're, you know, it relates to us. You can see our growth and our growth in clients has been really strong. And, you know, we don't have to go and lead with our faces here on price.

Yep. No, that's fair. Sounds like it's mostly stable. So that's good. And then shifting on to the loan side, can you talk about borrower sentiment, pipelines, and then the competitiveness on the loan pricing front?

Yeah, so again, first quarter was really strong. You know, it's always competitive. Like I said, our new production was skewed towards the higher credit quality, lower spread. And the pipelines look strong, a continuation of that into the second quarter, which I mentioned earlier. So pipelines are good.

The only thing we've really seen on spread widening as you get into any of this space, you know, what I'll I'll call leveraged lending. We don't do much of that. But in business credit, we've seen spreads move. You know, our partnership with TCW on cash flow lending, you know, those spreads have got 50 basis points, new production, just because of the kind of scare around what's going on. Yeah. Yeah.

This is a good thing. The other thing to mention around loans is that we did reach the inflection point on our commercial real estate balances, which we called for in the first quarter of 26. So as you know, that's been a headwind for a number of quarters, and we've reached that inflection point as we expected. Great. Thank you.

Thank you. Our next questions come from the line of Chris McGrady with KBW. Please proceed with your questions.

Great morning. Bill and Rob, you talked a lot about your confidence in the credit of the private credit portfolio and EFI lending. I guess where would that rank in the wall of worry within the company? It seems like the market's, to your point, overestimating the kind of lost content, but where in the risk curve does that lie?

It's not even on the curve. I mean, if you go through that whole bucket, The riskiest piece in the whole thing is that little $5 billion slice that is to REITs and leasing and this and that and the other thing. It's not like a AAA CLO senior tranche, you know, static maturity. To my memory, there's never actually been a loss in the history of the product of the AAA of a corporate company. The BDC exposure is really small. You know, even if that whole market blows up, which I don't think it's going to, that just causes that product to early M. You have to have massive corporate defaults and low recovery rates to ever get hit on that. So, you know, I just like, you know, you want to talk. Remember, you know, when we highlighted our real estate book, we said, hey, we're worried about this. We're working through it. We preserved a lot of it. Sorry, an office. Like this isn't even on the page of what we're looking at. This is nothing. I mean, it's great business. It doesn't worry me. I worry about trucking companies, and I worry about people who are dependent on fuel and what's going to happen to discretionary spending. This isn't in that list.

And just as a follow-up, that real estate piece that you brought to that's the most risk is very little risk. You know, so that's on a relative basis. But I think we had one loss back in 2014 in that category, and, you know, we're still talking about it.

Oh, on the REITs. Yeah, yeah. Yeah, it's – I mean, I get with Ian, the market has seen liquidity events in a small slice of what is private credit, and it has scared everybody. And, you know, maybe it should if you're somehow trying to get money out in a hurry, but that isn't where we are. We're a senior position against diversified pool of loans with a low advance rate. You know, we've been doing this for decades. 30 years.

And then just to add to that, and this is important because a lot of people focus on it, that category of business credit intermediaries, the vast majority of ours are trade securitization. So people sometimes mistakenly call that whole category private credit. And for us, it's quite the opposite.

So we stayed in, just to hammer out this point, way back in the financial crisis when Corporate receivable securitizations used to be done through CP. It kind of all stopped with the reversal at money funds. And a handful of us just started doing it on balance sheet. Really high credit quality, not a great spread, great return on economic risk, kind of lousy return on liquidity, decent return on regulatory capital. And we're by far the market leader in it. And that's what's blowing up that category for us when you look at comparisons of how much we have in the book. But it is not risky. It's a great business, and we're going to keep doing it. And, you know, as an aside, we're going to have some conversations with the regulators on the uselessness of what they've defined as NDFIs.

Great color. Thank you. Thank you for that. Just my follow-up, I think it was $350 million you talked about as the savings. You know, I'm interested beyond this year. You've got the cost savings. from this program and also the first bank deal. Is there more, I guess, is there more behind this potential to cut costs as you, as the narrative around AI and technology investments? Is there another benefit that yields in the next couple of years?

Yes, this is a short answer. You know, I don't like, I don't know that it's a standout structural change in the efficiency of banks in the sense that You know, we've been automating for years and years and years and largely kept our head kind of flat as we've doubled or tripled the size of the company. That sort of thing continues. AI allows that to continue. Maybe it accelerates through time. You know, maybe you can establish a competitive advantage early on, you know, be a leader in it, but everybody's eventually going to catch up and we're going to get to a place where banking, same trend we've been on forever and ever. You know, banking is going, the winner is going to be low-cost providers of really good products with trust behind it. You know, we're going to squeeze costs out of the production of what we basically offer to customers, and you're going to need to do that to win in a consolidated industry.

But that's likely over multiple years. So for 2026, our continuous improvement, $350 million of savings is part of our guide, which is up 7%.

Got it. Great. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star one 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 talk about your interest rate positioning right now and I guess how you're thinking about hedging? Because I feel like the best hedges are put on when maybe the market doesn't really know where rates might go, which is kind of where we're at right now, if you feel like that. So where are you right now, and what are you kind of more concerned about protecting, downside or upside?

Sort of technical answer. We are basically economic value of capital flat, so duration is zero in our equity. We're flat to overall rate movement inside of our balance sheet. Having said that, We have continued the process, as you've seen us do last year and this year, of locking in forward curve rates, particularly when we see some volatility to the upside, the belly of the curve. So we've done that well. It gives us greater certainty around some of our comments we've talked about with respect to Certainly with 26, but even 27 and into 28 as we lock down some of these rates.

So neutral in 26 and looking to lock in some in 27 and 28, similar to what we did last year.

Yeah. Part of this discussion, though, of course, is we're going to have really good NII trajectory for the next couple of years. We're going to do that despite being flat total rate exposure, which means we're not trading our futures. like five years out for the ability to produce really strong NII in the first couple of years.

Okay, that's helpful. And then I guess specifically within some of these MSR hedges, the residential and commercial, I understand this is not like the broader interest rate risk management, but I'm wondering is there anything kind of to read through there You've had pretty strong net gains the last several quarters, and this time I think it was more offsetting. Just anything interesting to point out there?

Look, we got chopped up, right? I mean, that's a massively negative convex book, and you're short options every which way you try to hedge it. And realize vol was way higher than implied as we tried to hedge out that risk, and we got chopped up. It happens, and you're exposed to it. Anytime you have rate swings as aggressively as we saw in the horse corner around some of the news. And you're right, through time, that tends to be, you know, an income-producing line item for us where, you know, usually we're plus, I don't know, It's not a driver. It's just we got chopped up.

This quarter, the heightened rate volatility was the driver of an unusually large negative for us.

But it wasn't like nobody screwed up. It wasn't a trading thing. It was literally realized volatility is higher than what was implied. So anything that has optionality in it, in effect, gets hurt in that environment.

Okay, yeah, and I realize the residential and commercial essentially offset each other, so that's not too bad getting chopped up. Okay, thank you.

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

Hey, to the extent that RWA with bottle three might be 10% less, How would you plan to use that extra capital? And when might you start leaning into using more capital? Or maybe you're doing so already. Clearly, you're leaning into using capital with that loan growth that you had and you expect. But maybe, you know, more buybacks, a deal. How do you think about using that excess capital and when? Thanks.

It's down the road. You know, we've increased our buyback. We've seen good deployment to our, you know, growth in the franchise. We'll see when this thing even gets, you know, comments are in and it gets approved and it gets done and then it'll be a whole new environment and we'll figure out what we do at that point in time. But it's a nice problem to have. You know, we're going to drop a point of capital into our pocket and we'll figure it out when it shows up.

How do you see competition? It seems like the industry is all playing offense or everyone's front-footed. You've been growing consistently. unused lines of credit, and I guess that's unused commitments, I mean, and that's playing out to a certain degree. So you've already been competing, but others are coming back more in force. And so how do you see competition generally, especially with regard to loan growth? How are you getting so much more loan growth than the industry? To what degree are you competing on price? And I don't know. It just seems like everyone has excess capital in those situations historically. You've seen competition swing a little too far. I don't think you're there, but just trying to take the pulse.

That is an art story. I mean, look, we're bringing all these new markets online. We have more shots on gold. So we're seeing more opportunities as opposed to trying to rebid the same deal I've been in for 22 years, you know, in our local market. So that's a big part of it. And that's why we, you know, you saw when we kind of went through the Southeast, now it's accelerating with, you know, BBVA and first bank markets. The other issue is we have a much more I don't know what to call it, specialty lending. Don't read that as high risk, but we're in a lot of lending products that aren't commodity capital. So whether it's our corporate receivables business or asset-based lending or equipment finance, we're in a lot of things that isn't simply throwing money out as a generic good. And I think at the margin, that always helps us outperform.

The other piece of that is, Oh, I'm sorry. It's just on the expansion of the new market, or what we call our expansion markets, for our market-based corporate loans. So our national businesses aside, they're now half our loans. Yeah, and growing at twice the pace. That's a big, big driver.

I'm sorry. I missed what you said there. How much do you want? What's half your loans?

51%, more than half. of our market-based loans. So we have national businesses that are not market-based. But in all the markets that we've entered within the last, you know, 12 years, half of our corporate loans are in those markets.

Oh, that's interesting. And what was that percentage, just say, a few years ago?

Forty. I don't know. I've been up to 30. It probably started at 30, depending on where you are. Yeah. But it's growing at 200 rates. Yeah.

It's growing two times the rate.

Okay. Yeah.

And you want to call out any of these expansion markets in particular being a little bit stronger than others?

Well, we've done very well in the Southeast where we've been, you know, the longest, but then certainly with the Southwest, Texas and California, Colorado now, because we're online there.

California has been in some ways shockingly strong. It's just a, it's a, hard to reach environment that the amount of commercial middle market clients that are within the zip codes of California. Yeah. Great clients, great fee. And the other thing I just remind you is we haven't done this by just doing loans. Like our fee income percentage in these new markets is actually equal to or higher than our legacy markets. Yeah. It's an excellent point. Yeah. So it's not like we're running out, throwing money at people where like it's an integrated relationship and, We're really good at it, and we're growing.

All right. That's helpful. Thank you.

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. Bill, following up on your comments about the focus on organic growth, can you share with us an update I think it was at the BAB conference in November, Robin Gunner gave us more details about the retail expansion that you guys are undertaking. Can you share with us, you know, how is that going? What are you learning from the process? And are you pleased with the pace in which you're growing it?

I'm chuckling here because Alex is going to be amused that his older brother gave the presentation. I apologize. It's all good. First of all, it's working. What have we learned through the process? It's actually hard to build 60 or 100 branches a year. You know, the site location, the teams that you need in each market to pull this off, we've kind of created a production factory around it. We've learned a lot about how to create a massive buzz around a new branch opening, you know, that is particularly when we're trying to, you know, in effect get our fair share in a newer market where we're building a lot of branches. Yeah. We haven't leaned into, you know, pricing to attract new customers necessarily, which is an accelerant if we want to use it. But they're working really well.

And have you – yeah, go ahead. Sorry.

No, you go ahead. And then on the metrics, have you kind of crystallized what you need in deposits or the type of deposits to bring a branch up to, let's say, break even? And generally, how long does it take to reach that point?

Yeah, so everything's on track, Gerard. And as Alex pointed out back in November, you know, we sort of pen in three years to kind of get to break even. Actually, we're running a little better than that right now. but everything, to Bill's point, is on plan, and we're excited about it.

Very good. Pivoting away from this growth, I know you know, Bill, because you've talked about it, there's been a change in the leverage lending guidelines by the FDIC and OCC. Have you been able to optimize any of your lending now that these – I think it went into effect in December that those restrictions went away. But are you seeing any benefits from that where you're winning new business because you're able to have some flexibility and optionality now?

That's a good question. Most of our struggle with that was that it was capturing business that we were going to do anyway no matter how much they yelled at us because it was really good business. And they, you know, they just had the definition wrong. I'm actually not, you know, maybe at the margin, we've seen some acceleration in some of that stuff. But, you know, mostly what that did is it opened the window for, you know, banks just to do good, smart business and not try to, you know, write a four paragraph description of what is a good or a bad loan, which you just can't do today.

Very good. Thank you very much.

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

Hi. Good morning. Just a few quick follow-ups. Bill and Rob, I know you were asked a lot about the deposit opportunity, which you answered fully. Just wondering, just pulling up, if the Fed doesn't cut this year, you know, how do you think deposit costs behave? Do you think that you could hold the line on deposit costs if the Fed doesn't cut?

Yeah, hey, Erica, this is Rob. Yeah, I do think, I think so. If the Fed doesn't cut, which is our expectations that they won't, deposit costs stay fairly steady through the second quarter and then maybe, by our estimates, maybe go up a basis point or two. But generally speaking.

The pressure up isn't from necessarily competition, but rather just repricing back book as things kind of roll. Yeah. So we're bringing, you know, back book customers to a closer to a market level, which kind of at the margin will cause our deposit cost to go up over the next period if the Fed doesn't move. But it's not, it's all in our guide and it's not material and

We'll still hit the 3%. And that back book repricing is a dynamic that's been in place for a while. That's not new. So it's generally steady. But, you know, obviously there's a risk if loan growth continues to exceed and there's pressure on those deposits. But that would be a good thing.

Got it. And just finally, Bill, one of your peers, David Solomon, actually talked about widening spreads in certain pockets of NDFI lending and Are you observing, you know, similar spread, you know, expansion in certain NDFI-type credits?

So drill down on that. We're inside of NDFIs, right, the spot everybody's focused on, you know, is in private credit and inside of our bucket in that. You know, our $7 billion is 90% CLOs. AAA tranches, I imagine, have widened. I imagine facilities to BDCs are going to widen as people, you know, as the fear factor steps in. We have like 500 million of them in the last season. So, you know, like the odds of me figuring out that there's a spread movement in there is kind of unlikely because we're huge in the flow.

Yeah, yeah, yeah, yeah. Got it. Perfect. Thank you.

Thank you. Our next questions come from the line of John McDonald with Truist. Please proceed with your questions.

Hi, thanks. Good morning. Rob, I was kind of wondering, as loan growth is picking up here, your reserve ratios look solid, but any need to start to provide a little bit for loan growth as we look ahead?

Yeah, well, sure. That would be part of it. In fact, that was – if you take a look at our provision increase quarter over quarter, that was largely driven by the loan growth that we saw. So, yeah, that comes along with loan growth. These tend to be – and what we've seen tend to be higher credit quality, so it's not as much. But I would expect provision expense to go up with the growth of loans. Okay.

And then on ROTCE, any updated thoughts? I think you talked earlier about exiting the year at kind of an 18% ROTCE, heading higher next year. Any updates there?

No, no. Same what we said back in January. So just to remind everybody, we finished the fourth quarter of 25 at approximately 18% ROTCE. That was elevated a little bit by the tax reserve release in the quarters. And then what we said, and we still believe we're going to go down during 26 because of the first bank acquisition and the impact on that. Then when we deliver everything that we intend to deliver in 26 along our guidance, we'll be back to that approximately 18% in the fourth quarter of 26. But the really important part is we would expect to drift higher as we go into 27. And that's, yeah, still the plan.

Got it. Got it. And that's just a function of operating leverage and growth next year in terms of moving higher?

Yeah, that's right.

Okay. Got it. Thank you.

You bet. Thank you. We have reached the end of our question and answer session. With that, I would like to turn the floor back over to Brian Gill for closing comments.

Well, thank you all for joining our call today and for your interest in P&C. And please feel free to reach out to the IR team if you have any additional questions.

Ladies and gentlemen, thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and enjoy the rest of your day.