Greetings, and welcome to the PNC Financial Services Group Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bryan Gill. Thank you, Bryan. You may begin.

Well, good morning, and welcome to today's conference call for the PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC, and participating in this call are PNC's Chairman and CEO, Bill Demchak; and Rob Reilly, 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 that are included in today's earnings release materials, 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 16, 2024, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Thank you, Bryan, and good morning, everyone. In the first quarter, we executed well and delivered solid financial results. We generated $1.3 billion in net income, adjusting for the FDIC special assessment to $3.36 per share. Rob will provide details on our results in a moment, but I'll start with a few thoughts. First, we continue to grow our business. In the first quarter, we added new customers across our segments and increased deposits on a spot basis. We're continuing to invest heavily in our franchise to drive growth and gain market share, particularly in our retail banking technology platform, payments businesses, and expansion markets. To that end, in the first quarter, we announced a multiyear investment of nearly $1 billion in our branch network to renovate more than 1,200 locations and open new branches in key locations, including Austin, Dallas, Denver, Houston, Miami, and San Antonio. Second, expenses were well managed during the quarter. As we've indicated, expense discipline remains a top priority, and we are on track to maintain stable core expenses in 2024. Third, credit quality remains stable during the quarter. The office portfolio remains an area of focus, but we are adequately reserved overall, particularly with respect to commercial real estate (CRE). We believe our thoughtful approach to managing risk, customer selection, and long-term relationship development will continue to serve us well. And fourth, we continue to build on our strong liquidity and capital position during the quarter, providing us with financial strength and flexibility to help us support our clients, grow our businesses, and capitalize on future opportunities. In summary, we delivered solid results during the first quarter and positioned ourselves well for the balance of 2024 and beyond. Last month, we launched a brand campaign celebrating our steady approach to banking. Obviously, we're using humor in the campaign to have a little fun and grab the public's attention. But within that humor is honesty about who we are, how we think about risk, and how we run our company. In short, it is everything we do to be steady and predictable. Finally, I just want to thank our employees for everything they do for our customers, for each other, and for all of our stakeholders. With that, I'll turn it over to Rob to take you through the quarter.

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average linked quarter basis. Loans are $321 billion, decreased by $4 billion or 1%. Investment securities declined by $2 billion or 1%. Our cash balances at the Federal Reserve were $48 billion, an increase of $6 billion or 13%. On a spot basis, our cash at the Fed was $53 billion, up from $43 billion in the prior quarter, reflecting higher period-end deposits. Deposit balances averaged $420 billion, a decline of $4 billion or 1%, reflecting seasonally lower commercial deposits. However, on a spot basis, deposits were up $4 billion, reflecting growth in both commercial and consumer deposits. Borrowed funds increased $3 billion to $76 billion, primarily driven by parent company debt issuances early in the quarter. At quarter-end, accumulated other comprehensive income (AOCI) was a negative $8 billion compared to a negative $7.7 billion at December 31, reflecting the impact of higher interest rates. Our tangible book value increased to $85.70 per common share, an 11% increase compared to the same period a year ago. We remain well capitalized with an estimated Common Equity Tier 1 (CET1) ratio of 10.1% as of March 31. While we recognize the likelihood of potentially substantial changes to the Basel III endgame NPR under the currently proposed capital rules, our estimated fully phased-in expanded risk-based CET1 ratio would be approximately 8.3% as of March 31, 2024. We continue to be well positioned with capital flexibility. Share repurchases approximated $135 million or roughly 1 million shares. When combined with $624 million of common dividends, we returned $759 million of capital to shareholders during the quarter. Slide 5 shows our loans in more detail. Compared to the fourth quarter, average loan balances decreased 1%, primarily driven by lower commercial loan balances. Commercial loans were $219 billion, a decrease of $3.4 billion, driven by lower utilization as well as soft loan demand. Within the corporate and institutional bank, utilization rates have remained below 2023 year-end levels and have not increased in the first quarter as is historically typical. We expect utilization to increase throughout the year. Notably, each percent of utilization within CNIB equates to $4 billion of loan growth. Consumer loans declined approximately $600 million, driven by lower credit card and home equity balances, and total loan yields increased 7 basis points to 6.01% in the first quarter. Slide 6 details our investment, security and swap portfolios. Average investment securities of $135 billion decreased 1% as curtailed purchase activity was more than offset by portfolio paydowns and maturities. The securities portfolio yield increased 3 basis points to 2.62%, reflecting the run-off of lower yielding securities. As of March 31, the securities portfolio duration was four years. Our receive-fixed swaps pointed to the commercial loan book totaled $37 billion on March 31. The weighted average receive-fixed rate of our swap portfolio increased 20 basis points to 2.3%, and the duration of the portfolio was two years. Through the end of 2024, 13% of our securities and swap portfolio is scheduled to mature, allowing us to reinvest into higher yielding assets, providing a meaningful benefit to net interest income in the second half of the year. Accumulated other comprehensive income was negative $8 billion at March 31, which will accrete back as our securities and swaps mature, resulting in continued tangible book value growth. Slide 7 covers our deposits in more detail. Average deposits decreased by $4 billion to $420 billion during the quarter, with growth in consumer deposits more than offset by a seasonal decline in commercial deposits. Regarding mix, consolidated, non-interest-bearing deposits were 24% in the first quarter, down slightly from 25% in the fourth quarter. Notably, on a spot basis in the first quarter, non-interest-bearing deposits experienced the smallest dollar decline since the Fed began raising rates in 2022, which gives us confidence that the non-interest-bearing portion of our deposits has largely stabilized. Our rate paid on interest-bearing deposits increased to 2.6% during the first quarter, up from 2.48% in the prior quarter. As of March 31, our cumulative deposit beta was 45%, consistent with our expectations. We believe our deposit betas have approached their peak levels, although we do expect some potential drift higher through the period leading up to a Fed rate cut, which we currently expect to occur in July. Regarding the timing and amount of potential rate cuts, we recognize there is a lot of fluidity and uncertainty. However, our 2024 net interest income will largely be unaffected by any short-term interest rate movement or lack thereof. This is because our floating rate assets are aligned with our floating rate liabilities, including our high beta commercial interest-bearing deposits and our long-term debt, which is almost entirely swapped to floating rates. Importantly, going forward, we remain well positioned for the net interest income benefit of repricing low yielding fixed rate securities and loans maturing during the latter half of 2024 and into 2025. Turning to the income statement on Slide 8. First quarter net income was $1.3 billion or $3.10 per share, which included a pretax, non-core, non-interest expense of $130 million or $103 million after tax related to the increased FDIC special assessment. Excluding non-core expenses, adjusted EPS was $3.36 per share. Total revenue of $5.1 billion decreased by $216 million or 4% compared to the fourth quarter of 2023. Net interest income declined by $139 million or 4%, and our net interest margin was 2.57%, a decline of 9 basis points, resulting primarily from higher funding costs. Non-interest income decreased by $77 million or 4%. Non-interest expense of $3.3 billion declined by $740 million or 18% and included the $130 million FDIC special assessment. Importantly, core non-interest expense was $3.2 billion and decreased by $205 million or 6%. Provision was $155 million in the first quarter, reflecting portfolio activity and improved macroeconomic factors, and our effective tax rate was 18.8%. Turning to Slide 9. We highlight our revenue trends. First quarter revenue was down $216 million or 4%, driven by lower net interest income and partly by a seasonal decline in fee income. Net interest income of $3.3 billion declined by $139 million or 4%, reflecting increased funding costs, lower loan balances, and one less day in the quarter. Fee income was $1.7 billion and decreased by $74 million or 4% linked quarter. Looking at the detail, asset management and brokerage revenue was up $4 million or 1%, reflecting higher average equity markets. Capital markets and advisory fees declined by $50 million or 16%, driven by lower M&A advisory activity, offset by higher underwriting fees. Card and cash management decreased by $17 million or 2%, driven by seasonally lower consumer transaction volumes, partially offset by higher treasury management fees. Lending and deposit-related fees declined by $9 million or 3%, reflecting the reduction of customer fees on certain checking products. Residential and commercial mortgage revenue declined by $2 million or 1%, including lower residential mortgage activity. Other non-interest income of $135 million decreased by $3 million or 2%, reflecting lower gains on sales. The first quarter also included a negative $7 million Visa fair value adjustment compared to a negative $100 million adjustment in the fourth quarter. Turning to Slide 10. Our core non-interest expense at $3.2 billion decreased by $205 million or 6% linked quarter, reflecting strong expense management. Importantly, compared to the first quarter of 2023, core non-interest expense declined by $117 million or 4%, with a decline in every expense category. This broad-based result reflects the impact of expense actions taken in 2023. As we've previously stated, we implemented expense management actions that will drive $750 million of cost savings in 2024. These actions include the $325 million workforce reduction effort last year, realized in our first quarter expense run rate, and our $425 million 2024 continuous improvement program goal, which we're well on track to achieve. We remain diligent in our expense management efforts, and these actions give us confidence that we will keep our year-over-year expenses stable. Our credit metrics are presented on Slide 11. While overall credit quality remains resilient, the pressure we anticipated within the commercial real estate office sector has continued. Non-performing loans increased by $200 million or 9% linked quarter, almost entirely driven by commercial real estate, which increased by $188 million. And within that, approximately $150 million was related to the CRE office portfolio. Total delinquencies of $1.3 billion decreased by $109 million or 8% linked quarter, driven by lower consumer and commercial delinquencies. Net loan charge-offs were $243 million in the first quarter, and our annualized net charge-offs to average loans ratio was 30 basis points. Our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on March 31, stable with December 31. Slide 12 provides more detail on our CRE office credit metrics. While non-performing loans have increased over the past few quarters, our criticized balances have remained relatively consistent. The migration of criticized loans to non-performing status is an expected outcome as we work to resolve the occupancy and rate challenges inherent to this portfolio. In the first quarter, net loan charge-offs within the CRE office portfolio were $50 million, essentially in line with the previous quarter level. Ultimately, we expect continued charge-offs on this portfolio, and accordingly we believe we are adequately reserved. As of March 31, our reserves on the office portfolio were 9.7% of total office loans, and within that, 14.4% on the multitenant portfolio. Importantly, we continue to manage our exposure down, and as a result, our balances declined by 3%, or approximately $200 million linked quarter. In summary, PNC reported a solid first quarter 2024, and we're well positioned for the remainder of the year. Regarding our view of the overall economy, we're expecting economic expansion in the second half of the year, resulting in real GDP growth of approximately 2% in 2024, and unemployment to increase modestly to 4% by year-end. We expect the Fed to cut rates two times in 2024, with a 25 basis point decrease in July and another in November. Looking at the second quarter of 2024 compared to the first quarter of 2024, we expect average loans to be stable, net interest income to be down approximately 1%. As I mentioned previously, we expect net interest income and net interest margin to reach their lowest point in the second quarter. Fee income is expected to be up 1% to 2%. Other non-interest income is projected to be in the range of $150 million and $200 million, excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be stable. We expect total core non-interest expense to be up 2% to 4%. We expect second quarter net charge-offs to be between $225 million and $275 million. As a reminder, PNC owns 3.5 million Visa class B shares with an unrecognized gain of approximately $1.6 billion. Under the terms of Visa's current exchange program, scheduled to close on or about May 3, class B shareholders will have the opportunity to monetize 50% of their holdings. We've not included the impact of monetizing the Visa gain in our forecast. Turning to Slide 14. Our full year 2024 guidance is unchanged from our January earnings call. As a reminder, for the full year 2024 compared to the full year 2023, we expect average loan growth of approximately 1%. Total revenue to be stable to down 2%. Inside of that, our expectation is for net interest income to decline in the range of 4% to 5%, and non-interest income to increase by 4% to 6%. Core non-interest expense, which excludes the FDIC assessment, is expected to be stable, and we expect our effective tax rate to be approximately 18.5%. With that, Bill and I are ready to take your questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

Hi. Good morning.

Good morning.

Okay. Just want to make sure you can hear me okay.

Sure.

Yeah. No. This is great. The first question I have just has to deal with how you're thinking about the net interest income trajectory, indicating that the second quarter may be the lowest point, improving from there. I would think that the majority of that improvement is coming from loan growth. But correct me if I'm wrong; how are you thinking about that net interest income trajectory into the second half of the year? And then, I'll start there.

Okay. Yeah. Good morning, Betsy. This is Rob. So in terms of net interest income and the trajectory that we're on, we knew at the beginning of the year that we would reach our lowest point around this time in the second quarter, and that's exactly what's happening. We expect to grow from that trough level based on the repricing of our fixed rate assets as rates settle down. There is some reliance on the back half for loan growth, but all consistent with our full year guidance of average loans up 1%.

And just on that loan growth fees. You go ahead, sir.

I was just going to say that the largest driver is the repricing of fixed rate assets. We expect some loan growth, but it's not a heroic number in there. It's simply the roll down of our securities book.

Okay. Got it. Yeah. All right. And on the loan side, it is interesting to see the utilization rates ticking down here. Do you think that's just a function of Fed funds at 5.5 and that's the base rate from which commercial and industrial is priced off of, or are there other dynamics at play besides just rate?

It's a variety of factors. I think the capital markets activity in the first quarter in investment-grade debt put a lot of cash into the system, and you saw companies that could hit that market pay down revolvers. That was a near-term impact. Looking ahead, there hasn't been any real inventory build, which I would expect given retail sales. Also, there hasn't been much capital expenditure, and capacity utilization has been holding constant at a pretty high level. At some point, this needs to turn, but I think the first quarter kind of surprised us, and my best guess was that was on the back of just how liquid the public markets were.

Okay. Got it. Thanks so much. Really appreciate it, Bill.

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

Good morning.

Hey. John.

On the expense front, it looks like within expenses they came in a bit better than expected, maybe on the compensation side and other areas, and you cited the solid expense management and your cost savings effort. Did you say that the trends are coming in perhaps a bit better than you had forecasted as you look at your expense phase, and is there any thought process that potentially your full year '24 outlook could prove conservative in terms of your stable expectation?

John, this is Rob. For the full year, we're still planning and guiding towards stable. In the first quarter, you're right, we're off to a good start in terms of realizing the expense actions that we took last year and our continuous improvement program this year. However, it's still early in the year to roll that all forward. While we're off to a good start, we are well positioned for stable expenses.

Okay. Thanks, Rob. That's helpful. And then just separately on the credit side, you can see the commercial real estate stress that you mentioned, and you prudently added to the office reserve in the quarter, but relatively stable or down a little bit in terms of your firm-wide reserve. Are you seeing progression in credit in other areas? Do you see mounting stress at all in commercial and industrial that could potentially keep the reserve currently stable, or could you continue to bleed the reserve here?

Bleed is a bad word. The credit action at the moment is in the real estate book and specifically inside of the office sector. Consumer credit is a little bit worse, but there isn't anything systematic happening in commercial and industrial that would cause us to have any different expectations of what we currently see, and we're reserved appropriately based on our economic forecast.

Yes. The pressure is in the commercial real estate book, specifically the office book.

Okay. And then just related to that, are you seeing migration in the office book that is surprising, given your forecast on the added notably to the office reserve? Is there anything that has surprised you in terms of your reappraisals or your work on that front?

No surprises. Everything is progressing as we expected. We started with the criticized, and while NPLs are up a little bit, everything is consistent with what we've been saying.

Got it. All right. Thanks, Rob.

Thank you. Our next questions come from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.

Good morning. Looking at Slide 6 here, where you show the runoff of the fixed-rate securities and swaps. Is there any way to size the revenue pickup from this, either anchoring to the forward curve or current rates? You put out some rough analysis indicating about a $2 billion impact and just said it was linear. So half this year and half next, but obviously it's a rough cut, so I don’t know if you have any comments on that or if you can frame it using your estimates. Thanks.

No, I would say, so we laid it out in the slides in terms of what we see in terms of runoff. Obviously, the projected AOCI burned down as it relates to capital is all in our guidance. So in terms of what our expectations are regarding that behavior, that is included in our full year net interest income guidance, which is down 4% to 5%. But it underscores what we were saying earlier. Going forward, the biggest variable is the repricing of our fixed-rate assets, especially securities.

Matt, I think what everybody's struggling with here is this notion of what the Fed is going to do in the next period of time. Is it new cuts, no cuts, or three cuts? We started out with six cuts.

We did not.

Yes. The market did. We know based on forward curve the repricing of our fixed-rate assets, the amount of incremental money we will earn from that has increased because term rates have risen. At the same time, the assumption that the Fed will maintain rates longer causes us to pause on what happens to deposit pricing over time. There's a trade-off: higher rates in the long run obviously help us earn on our fixed-rate assets. Deposit repricing continues on if the Fed holds steady. A much slower pace than it's been in the past, but it would be a bit of a heroic assumption for anyone to say deposit costs will creep up in the face of a steady Fed. That's the trade-off in the near term. Longer term, the repricing of fixed-rate assets vs. the repricing of deposits is what we consider. That’s why we say, in the second quarter we were at our lowest and then we can expect growth from there.

To 2025.

That makes sense. And then, sorry if I missed it earlier, but did you reiterate your view that 2025 net interest income would be at record levels? If you did, what would derail that? If rates are higher for longer or if there’s too much decline, just what would be the risk of achieving that view?

The biggest risk would be a massive curve inversion, such that we were repricing fixed-rate securities at lower yields than they are today. If they were to fall well below where they were three months ago, we would be at risk of not hitting that record number, though still a high number.

And Matt, this is Rob. I'll take the opportunity to reiterate our view that 2025 will be a record net interest income year.

Okay. Thank you very much.

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.

Hey, Gerard.

Hey, Gerard.

Rob, you talked about the utilization of the commercial and industrial loans being lower in the first quarter while normally it tends to tick up a bit. Regarding that, do you think your customers are just uncertain about their outlooks, which has kind of held them back from drawing down on lines of credit, or do you think that they're having access to other lenders, meaning private credit markets or the public markets that have taken away opportunities for banks to increase those lines of utilization?

Yes. I think it's both. The capital markets activity in the first quarter was wide open. By the way, our fees were up in that space for serving clients that way, but naturally, at the margin, that causes our utilization to decrease. The other issue to note is that we've seen capital spending and inventory build to be next to nothing, even though capacity utilization is high. Eventually, that has to give. However, I do think there continues to be hesitation among manufacturers in particular, just in the face of this economy, which factors into it.

And they are looking for a stability factor, which will help.

Very good. And then, Rob, I know you touched on it in response to a question about the commercial real estate outlook, particularly the office sector. You've mentioned that everything appears to be on track with your expectations. What kind of pricing declines in appraisals have you encountered, and where you've had to reappraise certain properties? Are you seeing price declines of 10%, 15%, 20% on those appraisals or more? Any color there?

I mean, it's much higher than that.

Okay.

Of variance.

The variance is all over the place. But practically speaking, if we initially underwrote at the start at $0.50 to $0.55 based on the appraised value, a large portion of the book is currently effectively at par. When we look at resolutions, we've had everything from exiting whole to losing $0.75 on the $1 on a given loan.

That's the variance factor.

So, it's building specific, and market-specific factors are driving this. Loss rates are significantly higher. If you evaluate office properties and say how much values are falling, it's a lot higher than 15%. Personally, I believe it's closer to 30 or 40% or even more.

And you're thinking ahead based on where we are going.

Well, it's not showing up in appraisals here. We're only seeing it in the actual resolutions of properties.

Got it. Thank you.

Thank you. Our next questions come from the line of Dave Rochester with Compass Point. Please proceed with your questions.

Hey. Good morning, guys. Just back on the net interest income guidance, you mentioned that the largest driver of the growth you're looking for in the back half of the year is coming from the repricing, and you've got the loan growth as another factor. I was just wondering what you're assuming for deposit flows within that as well? I would assume this could be a little bit better from a seasonal perspective in the back half of the year. Also, regarding the securities rolling off, how much of that liquidity is getting plowed back into the securities book, and what kind of yields are you targeting at this point on purchases?

I’ll let Rob address deposits in a second. Of course, we have roll off both fixed-rate loans and fixed-rate securities. The yields we assume in our forecast at this point are just the forward curve adjusted to whatever the right spread is of the asset we would be replacing, so like-for-like.

Regarding deposits, at the beginning of the year, we expected deposits to decline year-over-year in low single digits. We still expect that, albeit in the first quarter, we slightly outperformed that, but our expectations remain for slightly lower deposits throughout the year.

Okay. And then on the loan growth outlook, which you talked about, on an end-to-period basis last quarter. Does higher for longer impact that expectation at all, and what's your outlook for the longer end of the curve through the year?

No. I haven’t considered how higher for longer impacts loan growth. Our official outlook now includes two cuts starting in July, and the curve should largely stay where it is. Our net interest income forecast isn't terribly sensitive to what we are assuming for this year because the incremental amount we would gain from higher yields on bonds and loans repricing would mostly be offset by deposit cost leakage if the Fed does not cut rates. We aren't making heroic assumptions on rates, so we don't care where they go in the near term. What we know is that once we get through the second quarter, the repricing of fixed rate assets starts to benefit us.

Got it. Great. Thanks, guys.

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

Good morning. I guess maybe the tenth question on your loan growth outlook for the back half. I think the macro concern is that higher rates for a longer time will eventually tip this economy into a recession. I would love to hear your perspective on that based on what you are hearing from your bankers and clients. If we don't get any rate cuts for the year based on what you're seeing, could we have a blind spot where the economy really tails off, where a lot of these things catch up, and we enter some version of a stagflation? How do you handicap that downside risk heading into the back half of the year?

Look, I think that's a possibility. One peculiar aspect of utilization is that when credit conditions tighten, utilization actually increases. It's one of the primary drivers of utilization. So bizarrely, loan growth would increase if we face that scenario because utilization would rise. But I do worry about that. If the only way to get rid of inflation is to seriously hurt the economy, my concern is less about loan growth and more about long-term credit losses for the whole industry. Right now, everyone is planning for a soft landing.

Got it. And you still consider soft lending the base case in terms of the most likely outcome right now?

Yes.

Got it. And separately, one, I think thanks for your advocacy on bank M&A. Just wanted to follow up on the letter you wrote to the OCC. Are you finding any sympathy within the regulatory apparatus around the case for allowing larger bank mergers and acquisitions? Is there any possibility that we could see deal-making pick up ahead of the elections?

Sorry, could you repeat that?

Of deal-making picking up ahead of the November elections?

Look, the letter was self-explanatory, and we've kind of beaten this topic to death. What I would suggest is that I think the banking industry is set up to do well over the next 18 months simply through normalizing rates, assuming banks are not significantly exposed to real estate, specifically in office. In the near term, everyone is focused on performance. Looking long term, some of the charts we included in that letter indicate the growth of the two largest US banks in the last four years compared to others. It's important to note that if regulators are determined to freeze M&A across the country for any bank over $50 billion, we could face massive consolidation towards larger national banks. That was the core point of my letter.

Got it. And do you see the backdrop conducive for deal-making over the coming months or quarters?

No, I don't think most banks are in a rush for M&A in the next 18 months because their earnings are expected to improve, and their internal forecasts look good. I worry more about the years beyond that. But in the immediate future, most banks appear to be in a good spot.

And we don't control others’ timing, so that's up to them.

That's right. Got it. Thank you so much.

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

Thanks. Good morning, Bill and Rob. Following up on your comments around soft loan demand and utilization rates, assuming we avoid recession and the soft landing scenario plays out, how would you respond to the view that the ingredients may not be in place for a reacceleration in loan growth given the environment where Fed funds is running above CPI and the Fed can't cut amidst sticky inflation? We spent most of the post-GFC period with Fed funds running below CPI and achieving mid-single-digit loan growth, but I would love your thoughts on the risk that loan growth may not significantly rise if the Fed can't cut rates below CPI? And do you lean more heavily into your fee-based businesses if that happens?

I'm not sure the Fed funds versus CPI even factors significantly into loan growth. Ultimately, loan growth is driven by the economy, which has been running hotter than most assumed. It's been running with low inventory builds. If you look at fourth quarter GDP, there was a notable drawdown on inventories, which are directly correlated with utilization and loan growth, while capital expenditure remains muted. If the economy slows down significantly, that could hinder loan growth. However, if the economy remains strong, as demonstrated by impressive retail sales, it will eventually translate into loan growth irrespective of positive real rates.

It's a strong correlation there.

That's helpful. Thank you. And as a follow-up on your comments about the Visa B shares, how should we think about the dollar amount and the use of proceeds?

As I mentioned, our holdings allow us to monetize 50% of our shares, which roughly equates to $1 billion in unrealized gains. That capital would be managed within our overall excess capital strategy.

Got it. Thank you for taking my questions.

And monetizing half of the $1.6 billion.

Thank you. Our next questions come from the line of Ken Usdin with Jeffries. Please proceed with your questions.

Hey, guys. Good morning. Just to follow up on the fee side, I believe when you spoke in January, you anticipated a slowdown in capital markets and M&A at the start of the year. Additionally, you were targeting about 20% growth overall. I'm curious about how that is looking in terms of the feedback you are receiving from your middle market clients at Harris Williams? Do you have any insights on other potential drivers of fees as well?

The Harris Williams pipeline at the moment is larger than ever. In fact, it larger than it was last year during the first quarter.

So, Ken, we are sticking to the 20% expectation for growth in capital markets year-over-year. Bill is correct; the first quarter was better than the fourth quarter results. However, in terms of the comp, last year in the second and third quarters, capital markets was particularly weak. With the current projections, we won't see a repetition of that. We'll see growth above those subpar levels.

Okay. Got it. All right. And lastly, is asset and wealth management an area where you can add organically over time? I know it's tough to acquire due to multiples and whatnot, but you've had notable success with organic growth in the past, correct?

That business is challenging to add to inorganically due to cultural differences, market strategies, pricing, goodwill, and return on equity concerns. Historically, the opportunity for growth organically has proven stronger than acquiring those businesses.

Okay. Got it. Thank you.

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

Hi. It looks like we're leaning into the expense control this quarter; however, I'm trying to gather some details there. You mentioned $750 million of cost savings for this year. How much of that was realized in the first quarter? You also mentioned $1 billion of additional spending for branches. How much of that was accounted for in the first quarter? How should we interpret the offsets? Does the potential for positive operating leverage feel any better or is it the same as three months ago?

We'll break that down. Beginning with the positive operating leverage, we still think that's pretty tough to achieve not accounting for any Visa gains, primarily due to the net interest income and other running rates. We feel confident regarding expenses. We projected and guided towards stable year-over-year expenses. We're off to a reasonable start in the first quarter, slightly ahead of expectations, but we have a long way to go. All the items you mentioned are accounted for in there, but the guidance remains stable year-over-year, which is key for us.

Okay. I'll shift gears back. Bill, you were discussing commercial real estate. You reserved 10% for office, and you observed that the value of the underlying properties is probably down 30% to 40% or more. I take it this is reflected in your reserving, which seems to be more than the average bank. Can you share any variance by region or subregion?

Yes, no surprise here; areas in California are struggling the most. However, the situation truly depends on the specific building and its location. For instance, a building in the right part of Pittsburgh can do well, while another in a poor location could be worthless. We feel we've been ahead of this curve, correctly reserved, and had the chance to do so. The outcome will unfold over time, and it's visible seeing high vacancy rates. I think both ourselves and many large banks have acknowledged it's an ongoing concern. It's not a massive business segment for us, and I'm not particularly worried about it, but it will certainly affect smaller banks significantly.

And as a quick follow-up, if rates remain high longer, do you expect these pressures to bleed over from office to other areas of commercial real estate?

At the margin, yes. However, other property types are primarily cash flowing. They might not cash flow to support the original debt amounts, but in many cases, they still have some cash flow. The challenge with office real estate is that, in many cases, there is minimal cash flow, which makes it a unique situation.

Great. Thank you.

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

Hey, guys. Just touching base on your approach to capital buildup, obviously, you're building capital organically. You've got some Visa capital that should add 14 to 15 basis points next quarter, I guess. Are you thinking of gradually building from this 10% reported and 8.3% fully loaded to around 9% or 10% over the next year? Are you contemplating some buybacks as well? What's the plan there?

You've posed the question perfectly, so congratulations. Within the NPR on Basel III endgame, the one consistent factor is AOCI. Assuming that remains consistent, then our printed A3 number becomes a real number, which indicates we must build over time. Some of that will arise from the rundown of the book, while some will come from our organic capital growth. We haven’t firmly set where we should be on the Basel III endgame, but it's clear it will always be in excess of our current A3 situation.

And we're fortunate to possess capital flexibility, as you know, John. That's the ideal position to be in considering the ongoing changes.

For the near term, Rob, is the ballpark around $100 million a little bit north of that?

Yes, that’s right.

Yes.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Bryan Gill for closing comments.

Well, thank you all for joining the PNC call this morning. If you have any follow-up questions, please feel free to reach out to the Investor Relations team. Take care.

Thank you.

Sorry about that. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.