Greetings, and welcome to The PNC Financial Services Group Second 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. 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. 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 on this call are PNC's Chairman, 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 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 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. As you've seen, we had a strong second quarter, and we generated $1.5 billion in net income, or $3.39 diluted earnings per share. Our results included a gain on a portion of our Visa Class B shares, which was substantially offset by other items in the quarter, including a securities repositioning. Rob is going to provide more details on that Visa gain financial results and outlook in a second, but I'll highlight a few items. First off, net interest income has moved past its trough, and both NII and NIM grew in the quarter. And by the way, this would have occurred independent of the $10 million impact that we got from the securities repositioning. Importantly, we are on a growth trajectory towards expected record NII in 2025. We continue to add new customers and see strong business momentum across our franchise, particularly in the new and expansion markets. Growth accelerated in our branches and we continue to add new corporate and commercial banking clients above historical rates. In our retail business, we launched our first new credit card in several years, PNC Cash Unlimited, a highly competitive card that offers 2% back on all purchases. We plan to launch several new cards in the months and years ahead. Average deposits held relatively flat to the first quarter levels, a little bit ahead of our expectations. And our expenses remained well controlled and we generated positive operating leverage during the second quarter. Rob is going to touch on this in a minute, but we have increased our continuous improvement program target for 2024 as expense discipline remains a top priority. The credit environment continues to play out as we have expected, including an increase in charge-offs within the CRE office portfolio, where we remain adequately reserved. Outside of CRE office, credit quality remains relatively stable. Finally, we further strengthen our capital levels during the quarter. Our strong balance sheet allows us to continue supporting our customers and communities, investing in our business and people, and delivering returns for shareholders. Our financial strength and stability are also reflected in the latest results from the Fed stress test in which we maintained our stress capital buffer at the regulatory minimum of 2.5%, and importantly for the second year in a row, PNC has had the lowest start to trough capital depletion in our peer group, further demonstrating our best-in-class resiliency. With this in mind, our board recently approved an increase in our quarterly stock dividend by $0.05. In summary, we delivered strong results in the second quarter and are well positioned to drive further growth and expansion into 2025 and beyond. Before I turn it over to Rob, as always, I just 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 quarter.

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average linked quarter basis. Loans of $320 billion were stable. Investment securities increased $6 billion or 4%. And our cash balances at the Federal Reserve were $41 billion, a decrease of $7 billion or 15%, primarily reflecting the deployment of cash into higher-yielding securities. Deposit balances averaged $417 billion, a decline of $3 billion or less than 1% due to a seasonal decline in corporate balances. Borrowed funds increased $2 billion or 2% and were 15% of total liabilities. At quarter end, AOCI was negative $7.4 billion and improved $600 million compared with March 31st. Our tangible book value increased to $89.12 per common share, a 4% increase linked quarter, and a 15% increase compared to the same period a year ago. We remain well capitalized and our estimated CET1 ratio increased to 10.2% as of June 30th. Regarding the Basel III end-game, we expect the inclusion of AOCI in the final rule and our CET1 ratio with the impact of AOCI would be 8.7%. And while we recognize the likelihood of changes to certain other aspects of the Basel III end-game NPR, under the currently proposed capital rules, our estimated fully phased-in expanded risk-based CET1 ratio would be approximately 8.4%. We continue to be well positioned with capital flexibility. We returned roughly $700 million of capital to shareholders during the quarter, which included $600 million in common dividends and $100 million of share repurchases. And as Bill just mentioned, our board recently approved a $0.05 increase to our quarterly cash dividend on common stock, raising the dividend to $1.60 per share. Our recent CCAR results underscore the strength of our balance sheet and as previously announced our current stress capital buffer remains at the regulatory minimum of 2.5% for the four quarter period beginning in October 2024. Slide 5 shows our loans in more detail. Compared to the first quarter, average loan balances were stable. Commercial loans were essentially flat as utilization remains well below both the pre-pandemic historical average of roughly 55% and the second quarter 2023 level of 52.5%. Importantly, we continue to grow customer relationships and CNIB loan commitments increased during the second quarter. Although the direction of the near-term economy remains uncertain, CapEx to sales levels and inventory growth rates remain below historical averages, both of which are typically leading indicators of eventual commercial loan growth. Average consumer loans declined approximately $600 million or less than 1%, driven by lower residential real estate and home equity loan balances. And the yield on total loans increased 4 basis points to 6.05% in the second quarter. Slide 6 details our investment security and swap portfolios. Average investment securities of $141 billion increased $6 billion, or 4%, reflecting the deployment of excess liquidity into higher-yielding securities, primarily U.S. treasuries. The securities portfolio yield increased 22 basis points to 2.84%, driven by higher rates on new purchases. As of June 30th, the securities portfolio duration was 3.5 years. During the second quarter, our forward starting swaps increased to $18 billion. With the addition of these swaps, we've locked in a portion of our fixed rate asset repricing through 2025 at a level that is approximately 300 basis points higher than maturity. The total weighted average received fixed rate of our swap portfolio, including the forward starters, increased 83 basis points to 3.13%, and the duration of the portfolio is 2.2 years. Slide 7 highlights the securities repositioning we executed during the second quarter. We sold securities with a book value of $4.3 billion and a market value of $3.8 billion. We recognized a $497 million loss on the sale and reinvested the $3.8 billion of proceeds into securities, with yields approximately 400 basis points higher than the securities sold. The reposition is expected to benefit our net interest income by $80 million in 2024, with roughly $10 million of that being realized in the second quarter. And the estimated earn-back period for this transaction is less than four years. Turning to Slide 8, we expect considerable runoff of low-yielding securities and swaps through the end of 2026, which will allow us to continue to reinvest into higher-yielding assets, providing a meaningful benefit to net interest income. Accumulated other comprehensive income improved to negative $7.4 billion on June 30th, compared to negative $8 billion on March 31st. The improvement was primarily due to the securities repositioning. AOCI will continue to accrete back as our securities and swaps mature, resulting in further growth to tangible book value. Slide 9 covers our deposits in more detail. Average deposits declined $3 billion or 1% reflecting seasonally lower corporate balances. Regarding mix, consolidated non-interest bearing deposits were 23% of total deposits in the second quarter, down less than 1 percentage point from the first quarter. Additionally, average non-interest bearing deposits had the smallest dollar decline in the second quarter of 2024 since the Fed began raising rates in 2022, which gives us confidence that the non-interest bearing portion of our deposits has largely stabilized. And our rate paid on interest bearing deposits increased by only 1 basis point during the second quarter to 2.61%. We believe our rate paid on deposits is approaching its peak level, but we do expect some potential to drift higher as interest rates remain elevated. Turning to the income statement, and as Bill mentioned, there were several significant items in the quarter, and I want to provide a bit more detail. Taken together, these significant items have a minimal impact to our earnings per share, totaling to a net EPS benefit of $0.09. As we previously disclosed, we participated in the Visa exchange program, allowing us to monetize 50% of our Visa Class B-1 shares and convert our remaining holdings to 1.8 million Visa Class B-2 shares. Through the exchange, we recognized a $754 million pre-tax gain. In addition, we had significant items that occurred in the second quarter that largely offset the gain, and they are as follows: First, as I mentioned earlier, we repositioned a portion of our securities portfolio, and through the sale of certain low-yielding securities recognized a $497 million loss. Second, we recorded a negative $116 million Visa derivative fair value adjustment associated with Visa Class B-2 shares, primarily related to the extension of anticipated litigation resolution. And lastly, we recognize the $120 million PNC Foundation contribution expense. The foundation supports our communities and early childhood education. Turning to Slide 11, we highlight our income statement trends. Second quarter net income was $1.5 billion or $3.39 per share. Total revenue of $5.4 billion increased $266 million or 5% compared to the first quarter of 2024. Net interest income grew by $38 million, or 1% in the second quarter. Notably, this is the first time NII has increased in six quarters, marking the beginning of an expected upward trajectory. And our net interest margin was 2.6% an increase of 3 basis points. Non-interest income increased $228 million, or 12%, and included $141 million of the significant items I previously detailed. Noninterest expense of $3.4 billion increased $23 million, or 1%, and included the $120 million foundation contribution expense. Notably, we generated positive operating leverage in both the linked quarter and year-over-year comparisons. Provision was $235 million in the second quarter, reflecting portfolio activity, and our effective tax rate was 18.8%. Turning to Slide 12, we highlight our revenue trends. Second quarter revenue was up $266 million or 5%, driven by higher non-interest income and net interest income. Net interest income of $3.3 billion increased $38 million or 1%, driven by higher yields on interest earning assets. Fee income was $1.8 billion and increased $31 million or 2% linked quarter. Looking at the detail, asset management and brokerage and non-interest income was stable late in the quarter, as the benefit of higher average equity markets was offset by lower annuity sales due to elevated first quarter activity. Capital markets and advisory fees increased $13 million or 5%, driven by higher M&A advisory activity and loan syndications, partially offset by lower underwriting fees. Card and cash management increased $35 million, or 5%, reflecting seasonally higher consumer transaction volumes and higher treasury management fees. Mortgage revenue declined $16 million or 11%, primarily due to lower residential mortgage activity. Other noninterest income of $332 million increased $197 million and included $141 million related to this quarter's significant items. Turning to Slide 13, our non-interest expense of $3.4 billion was well controlled, increasing by only $23 million or 1%. Expenses for the second quarter included the $120 million contribution to the PNC Foundation, while the first quarter of 2024 included $130 million FDIC special assessment. Importantly, non-interest expense excluding the foundation contribution declined $135 million or 4% compared with the second quarter of 2023. Notably, personnel declined as a result of the workforce reduction actions we took last year. As Bill mentioned, we remain diligent in our continuous improvement efforts. At the beginning of the year, we set a continuous improvement program goal of $425 million. Recently, we have identified initiatives that support increasing our CIP by an additional $25 million, raising our full-year target to $450 million. As you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 14. Non-performing loans increased $123 million or 5% linked quarter, primarily driven by an individual secured loan within our asset-based lending business. Total delinquencies of $1.3 billion were stable with March 31. Net loan charge-offs were $262 million in the second quarter and included $106 million of net charge-offs related to our CRE office portfolio. And our annualized net charge-off to average loans ratio was 33 basis points. Our allowance for credit losses totals $5.4 billion, or 1.7% of total loans on June 30th, stable with March 31st. Slide 15 provides more detail on our CRE office credit metrics. CRE office NPLs were stable in the second quarter, as charge-offs and paydowns offset inflows to non-performing loans. And the migration of criticized loans to non-performing status is an expected outcome as we work to resolve the challenges inherent to this portfolio. As expected, net loan charge-offs within the CRE office portfolio increased and totaled $106 million in the second quarter. Ultimately, we expect additional charge-offs on this portfolio, the size of which will vary quarter-to-quarter given the nature of the loans. As of June 30, our reserves on the office portfolio were 10.3% of total office loans, and inside of that, 15.5% on the multi-tenant portfolio. Accordingly, we believe we are adequately reserved. Importantly, we continue to manage our exposure down, and as a result, our balance has declined 4% or approximately $300 million linked quarter. In summary, PNC posted a solid second quarter 2024 and we're well positioned for the second half of the year. Regarding our view of the overall economy, we're expecting continued economic growth in the second half of the year, resulting in real GDP growth of approximately 2% in 2024, and unemployment to increase modestly to slightly above 4% by year-end. We expect the Fed to cut rates two times in 2024, with a 25 basis point decrease in September and another in December. Looking at the third quarter of 2024 compared to the second quarter of 2024, we expect average loans to be stable, net interest income to be up 1% to 2%, fee income to be up 1% to 2%, and other non-interest income to be in the range of $150 million and $200 million, excluding Visa and securities activity. We expect core non-interest expense to be up 3% to 4%. We expect third quarter net charge-offs to be between $250 million and $300 million. Regarding our full-year guidance, for ease of comparability to prior guidance, we exclude the first quarter FDIC special assessment, as well as the second quarter Visa gain and other significant items. Considering our reported first half operating results, third quarter expectations, and current economic forecasts, our full-year 2024 guidance is as follows: For the full year 2024 compared to full year 2023, we expect average loans to be down less than 1%, which equates to nominal loan growth in the second half of 2024. We recognize the potential for greater loan growth, and should that occur, it will be accreted to our full-year average. Despite lower expected loan volumes, we expect full year NII to be at the better end of our previous expectations, or down approximately 4%. We expect our securities repositioning and better than expected deposit dynamics to offset the impact of lower than expected loan volume. We expect non-interest income to be up 3% to 5%, slightly lower than our previous guidance due to continued softness and mortgage activity and to a lesser extent, loan-related capital market fees. As a result, total revenue is expected to be down 1% to 2% and inside the range of our previous guidance. We now expect core non-interest expense to be down approximately 1% versus our previous guidance of stable, in part due to our increased CIP target. 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.

Hey, good morning, Betsy.

I understand that you have guided to the upper end of the range for net interest income, despite experiencing slower loan growth, which is likely due to the improvement in your net interest margin. That's one reason for the guidance, but there are others as well. I'm curious about your thoughts on the securities restructuring moving forward. Is this something you're considering continuing, or should we view it as a one-time event related to the gains from Visa? I'm asking this to better understand the trajectory of the net interest margin going forward. Thank you.

You should think of it as a one-off. I mean, you never say never and I don't know what the future holds, but practically at this point, we don't have to do any restructuring on anything to hit that stated goal of the 2025 record NII.

And we don't have any plans to do that.

Okay, great. And then could you speak to how you're thinking about deposit pricing and levels? I mean, clearly there was tax-related outflows and things like that this quarter, and with loan growth being muted, should we be anticipating deposits stable to down, or are you going to be out there trying to get deposit growth, just again, asking from the context of how we should think about deposit pricing as we work through our models? Thanks so much.

Yes. Sure, Betsy. I would say the short answer to that is, stable to down is our expectation with an emphasis on stable. Things have really stabilized year-over-year as you know. So our expectation is, some downward drift but not anywhere near the level that we've seen in the last couple of years.

Got it. All right. Thanks so much. Appreciate it.

Sure.

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

Good morning.

Hi, John.

On your NII outlook, it's good to hear the NII inflection and the confidence there, excluding the $70 million benefits from the securities repositioning in the back half of this year. I mean, it appears that the underlying NII run rate for the back half was guided a bit lower. Is that mainly loan growth that's the driver? I mean, if you could just talk through that a little bit in terms of the factors impacting that run rate.

Well, I could.

If you ignore the restructuring, the guidance would still be higher. We made this assessment while downplaying our loan growth expectation because we were tired of saying that loan growth would eventually happen. So, we removed it from the forecast. If loan growth materializes, we will benefit like everyone else.

I think that's an important point. That's the big difference in this quarter. We changed our guidance for average loans to be up 1% or approximately 1% for the year, John. As you can see now, down less than 1%. We don't control that. There's a basis for some loan growth in the second half of the year. But the important point is, we've taken it out of our guidance and our NII improved to the better end of the previous guidance, not just due to the securities restructuring, but also the positive deposit dynamics and so forth.

Okay. All right. Thanks for the clarification. It helps. And then just separately on the capital front, clearly the AOCI benefit from the securities repositioning is certainly noted. How do you feel now in terms of the pace of buybacks as you look out, just given where you stand now on CET1 and from a fully phased in, how does it make you feel about the pace of buybacks here? Could it remain at the $100 million pace per quarter or possibly accelerate?

Yes, we are currently on track and we expect to maintain the pace we've had during the first couple of quarters. As you know, the new regulations are still being finalized, so we don't have complete clarity there. Additionally, the growth in loans will be a key factor as we determine the best use of our capital, which will play into our decisions regarding buybacks. Nonetheless, the key point is that we are actively buying back shares.

Yes, I think, John, just on buybacks, I mean, at some point, I got to believe loan growth comes back. But to the extent it doesn't, we're generating a lot of capital, obviously, in excess of our dividend. And we'll face that question. If we're not using that capital for loan growth, should we accelerate deployment and buybacks? We're not there yet, but that happens down the road if loan growth doesn't materialize because we're generating a lot of capital.

Got it. Okay, that's helpful. Thanks, Bill.

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

Hi. Good morning.

Good morning.

Good morning. Going back to Slide 9, I presume that the stabilization in deposit rates fade, which is quite notable as part of the upgrade of the core NII guide, even without the restructuring. And you answered Rob, Betsy's question, I gather, on a balances standpoint, but perhaps give us a sense on how you think deposit rate paid will trend from here and maybe under the scenario of rates staying where we are versus the scenario of what the forward curve is pricing and how quickly you may be able to reprice?

Yes, of course. Slide 9 is informative as it illustrates a decrease in the rise of the rate paid. To answer one of your questions, we anticipate that rates will increase slightly, but it's more likely to be just a few basis points compared to the previous quarters where we saw increases of 60, 50, or even 30 basis points. The pace of increase has slowed significantly. That's our short-term expectation. When it comes to rate cuts, we should be able to respond quickly regarding the high rates paid on commercial and other deposits. However, we still have interest-bearing consumer deposits that are below market rates, and those will gradually rise. This is something we've discussed previously and will need to monitor closely.

Got it. And my second question is, it refers back to Slide 6 in terms of the forward starters. When I look back at your 10-Q disclosure, it seems like you're largely neutral to interest rates. And I know that you and Bill have talked a lot about the different factors that drive the inflection point in the Nike Swoosh. I'm wondering if the addition of the $18 billion in forward starters with the received fix of $4.31 billion, does that impact the magnitude of the Swoosh for 2025?

That's a good question.

Well, my answer to that would not necessarily be the magnitude, but the certainty. So essentially what we've done is locked in some of the swoosh.

Probably 50 basis points ago. One of the issues, of course, when everybody talks about fixed rate asset repricing is, what is it repriced to? And of course, therefore, we are exposed to whatever that five-year rate is, a year and two out. And those forward starting swaps simply with a very opportunistic point locked in materially higher rates than where we are today. To Rob's point, that just locks in the certainty of what we'll be able to produce on a go-forward basis.

Got it. Bill, that's a great point. When people consider the repricing of fixed assets, they often misinterpret the $525 million versus what it might be at four by the end of next year. To your point, you've secured a level of certainty. Thank you.

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

Good morning, everyone. Thank you for the question. Rob, could you discuss the major fee components considering the software expectations? It seems like it's primarily related to mortgages, which is as expected. I'm interested in hearing what you think is performing well and what areas might require significant effort.

Yes, it's primarily an adjustment, Scott. For the full year guidance regarding the fees, we have revised our expectations for growth from an increase of 4% to 6% down to 3% to 5%. We're still seeing an increase, but it's a slight adjustment. Most of this is due to ongoing weakness in the mortgage sector, which we anticipate will continue in the second half of the year, slightly below our previous expectations. Additionally, the decrease in our loan guidance will impact our loan-related fees in the capital markets segment, particularly in loan syndication. Generally, fewer loans will lead to fewer loan syndication fees, creating a direct link to that guidance. If we do observe loan growth, those fees could bounce back. Otherwise, everything else is on track as planned.

Okay. Perfect. Thank you, Rob. And I wanted to ask a little bit of a kind of fine-pointed one on loan growth. I think, Bill, in your sort of prepared remarks, you noted the introduction of your first new credit card in a while, as well as plans to introduce more. Can you sort of contextualize your aspirations for that business and sort of the path to get there over time?

We aim to capture our fair share of consumer lending products for the clients we serve with our traditional DDA and other offerings, but we currently fall short. While we have a presence in home equity and are somewhat competitive in mortgages, we are lacking in auto loans and credit cards. Specifically, our credit card offerings have not been strong due to outdated technology and slow execution; therefore, we see this as an opportunity for improvement.

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

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

Good morning.

Good morning.

I guess, maybe, Rob, it looks like you've locked in a lot of asset repricing. As we think about where the NIM should normalize relative to 2.6%, give us a sense, I mean, you probably have this number. Do we hit 3% at some point next year in terms of what the normalized rate would be? And can we get to a 3% plus NIM next year, even with maybe four or five rate cuts?

Sure. So, we don't necessarily provide NIM guidance because it's more an outcome than anything. But to answer your question, we've operated in, call it a normal environment at a 3% NIM margin. So if we definitely expect to go up into 2025, if we approach those levels, it won't be like we haven't been there before. So it's reasonable.

Got it. And just one quick one on credit quality. I think I heard Bill say not a whole lot ex-CRE office, but give us a sense if you're seeing any cracks within the C&I customer base from the prolonged period of like just higher for longer rates, just how do you handicap the risk of a downturn or a recession over the coming months or the next year?

Yes. So, when we take a look at our total reserves and our total portfolio, CRE office aside, things are pretty stable. Maybe on a quarter-to-quarter basis, consumers are a little bit better, commercial non-CRE is a little bit worse, but not bad. So, definitely some more movements, some downgrades reflecting the higher rates, slower economic activity in our commercial book, but no patterns or any themes to point out.

An outlook for reserves is stable.

Reserves are stable, yes.

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

Thanks. Good morning, Bill and Rob. Following up on your NIM and NII commentary, is there a point as we start to get cuts where you would start to worry that those rate cuts would potentially begin to negate some of the repricing benefit? And then separately, amid the debate over whether the curve is going to steepen or flatten depending on the outcome of the election. Maybe could you just give us a little bit of a perspective on how PNC is positioned for either a flatter or a steeper yield curve environment?

Sure. We are largely indifferent. I mean, at the very, very margin, we benefit on the Fed cutting rates from a floating rate standpoint. Of course, we're exposed to the steepness of the curve because that plays in how we reprice maturing fixed rate assets and that's a variable. It's a variable for us. It's variable for everybody. It's one of the reasons we lock some of it in. My own belief in our positioning is such that even though we would expect the Fed to cut here. I think in the end, somewhat sticky inflation, the fact that deficits matter, it's going to cause the curve to steepen out. So we locked some of it in. I don't feel terribly worried about the need to lock the rest of it in. I just think we're in a good place. We're going to do fine.

Okay. That's helpful. And then on the asset quality side, Slide 14 shows that steady upward trajectory in NPLs, but the reserve rate is relatively stable to down slightly, as you mentioned. And so, it looks like the loss content that you see in the portfolio is stable. It's certainly not rising despite the rising NPLs. Maybe could you speak a little bit to that? And are there any implications of loan repricing that you are concerned about? For example, would you expect any impact on the credit performance of your customers as their loans begin to reset to higher rates?

The transition from criticized to nonperforming-related reserving and charge-offs in the office commercial real estate sector is proceeding as anticipated. This is the natural progression of that cycle, and we are not caught off guard. We have made the necessary provisions for it. Regarding credit quality in corporate America, it is important to consider when individuals with fixed loan rates will start facing higher payments. This will eventually influence how we assess creditworthiness. Taking multifamily housing as an example, rising rates have negatively affected coverage ratios. While it won't lead to losses, it has resulted in a downgrade of that asset class due to insufficient excess. I anticipate a similar impact on corporate America over time, but I am not particularly concerned about it.

And I'll just add that our reserves are adequate. The increase in the non-CRE NPLs in commercial really was one single large credit that is in our business credit fully secured. So...

Yes, not in the U.S.

Okay. Understood. Thanks, Bill and Rob. Bill, if I could squeeze in one last one for you. I wanted to get your thoughts on the FedNow Instant Payment Services, which has been getting some attention. Is there a fee opportunity there? I guess, what level of engagement are you seeing from PNC customers? Do you see potential for lower cost instant digital payments disintermediating debit? It'd just be helpful to hear your thoughts on the overall risk versus potential benefits of that to PNC.

I don't think FedNow has any impact on PNC. To be honest with you, we've been active with real-time payments in the Clearing House and the use cases, all the ones you can think about from insurers who want to pay real-time claims in a disaster through to certain payroll capabilities through to Zelle, for example. And FedNow doesn't add or subtract anything to that opportunity. The challenge you have with real-time payments, both at the Clearing House and FedNow at the Fed is they are not networks, they are a rail to move money. And the distinction between that is a network has very clear rules on who's responsible for items that don't transmit the right way, who's responsible for fraud, who's responsible for returns on and on and on. And neither of those two networks purposely were built to provide comfort in moving money, which is very different. So I don't think long term, it has much of an impact, to be honest with you.

Thank you for taking my questions.

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

Hey. Thanks a lot. Good morning. You guys gave us a great table last December with the repricing of fixed assets through 2025. And I'm just wondering, how much carry forward will there also be through 2026? Should we think about that kind of ratably? Obviously, it's been six months since you gave us that slide, but just wondering just how that rolls as we look further ahead. Thanks.

Well, Ken, we're going to refrain from 2026 guidance on the call here today. But it will continue to increase, but the real change in the dynamic occurs obviously in the first and second quarter of 2025 and then grows from there.

Okay. Yes. That's why I'm asking the building box question as opposed to NII question.

Sure. Yes. Sure.

Okay, understood. Regarding expenses, you all have been doing a great job managing them. I wanted to ask about the noticeable increase in expenses projected for the second half. What factors are contributing to this? It appears that expenses will be increasing at a faster rate than revenues in the second half, particularly compared to fees. Can you provide some insight into whether this is a cautious approach or if it's related to catching up on investments? Thank you.

Yes, sure, sure. No, we've outperformed on the first half, no doubt about it, and we feel great about that, and that's one of the reasons why we increased our CIP goal and also increased our guidance for the full-year expenses. In the third quarter, it doesn't all happen uniformly. In the third quarter, we do have some investments coming online, technology investments coming online that bring some depreciation expense. We've got an additional day, those sorts of things. So it's all part of the plan. It's just expenses don't fall uniformly throughout the year.

Okay. Got it. And then, obviously, as that plays forward and if NII is better next year, you can also afford more cost growth, but we'll hear about that later.

Yes. That's right.

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

Hi. Similar to some of the others, maybe this is like the game of jeopardy. I think the answer is, you have continued improvement program with expense savings going from $425 million up to $450 million. You have securities repositioning that's giving you a boost to NII for the rest of this year, and you have fixed asset repricing that helps your securities yield go up by 400 basis points. Your forward payment swaps go up by 180 basis points and a little bit some other things. So the answer is, all those things are going in the right direction, yet you still have a guide for negative operating leverage for this year. I guess, what is the question? Or why is that? Or you can't eke it out or...

Well, sure. So now the question...

And why should yes. Go ahead.

Yes. So just to keep with your jeopardy approach there, the question would be what loan growth going to be in the second half. So it did come down.

Okay, that's helpful. Bill, you were very clear about loan growth three quarters ago. If you achieve net interest income within your target range even without loan growth, I believe most people would prefer that outcome. However, we're hearing from major players in the capital markets who are enthusiastic about a significant recovery, suggesting that everything is back on track. H8 data has shown some improvement, but it seems you may have fallen short of that data regarding loan growth this quarter. So, is it that you're taking a more cautious approach and not finding the pricing you desire, or is the mix simply different, or perhaps your team's execution isn't meeting your expectations?

I think you're overanalyzing this. We're essentially at H8, and we might be slightly underperforming in consumer loans because our card portfolio hasn't expanded. Typically, when commercial and industrial lending returns, we perform better. We have been adding deposits held electronically, but they aren't being utilized yet, and we're acquiring clients. Essentially, we decided to remove any guidance regarding expected loan growth because we haven't observed it so far. If loan growth does materialize, it will enhance our overall performance. We are certainly not lagging; we are gaining clients at an unprecedented rate. The question is really about when they will start drawing on their lines of credit, and we got fatigued discussing it. When that does happen, we will benefit, and it will contribute positively to all the metrics you're analyzing.

And any meat on those bones about customer acquisition? You did mention 51% loan utilization. That seems a pretty low level versus 53% a year ago and 55% historical. So I guess, that would back up what you're saying, but how much are you growing loans? You expanded to so many MSAs and implemented teams and did all that stuff that helps sometimes and other times it doesn't help as much.

Yes, Rob, do you know the DHE number?

I don't know off the top of my head.

We've grown exposures, and we've won clients at a pace well beyond, particularly in the new markets, but overall, well beyond what we've managed to do historically. We ought to and we will produce some of those metrics for you.

Yes, that's all good. Additionally, Mike, CapEx sales ratios are low, and inventory levels are low. This indicates potential for loan growth, but it's not something we have control over.

Got it. Okay.

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

Good morning. Bill, I haven't heard you guys talk too much about credit card. You mentioned a new product and some more coming, and just thoughts on kind of the strategy for card going forward, and the targeted customer, and then any interest in acquiring portfolios, which has not really been the radar in the past. Thanks.

Yes, we're not going to acquire portfolios. The product that we have historically offered our existing clients and the service levels, websites, and processing that went along with it were less than what we aspire to. We have an ability to get higher penetration with our existing clients, offer them better products, and have better technology. Historically, we prioritized tech investments inside of our core retail space. So think online, mobile, real-time. And we just haven't put the same energy, although about a year ago we started to, into what we do in credit cards. Some of that is service technology, ease for customers, application, all of that stuff. Some of it is just getting better at approvals. And we're not going to change our credit box, but we're missing a lot of clients who are in that credit box because we make it too hard for them.

Yes, in simple terms, we're just under-penetrated relative to industry averages. Nothing hugely aspirational other than just to have our fair share.

Yes, that makes sense. And then just separately, I think you still have half of your original Visa stake. And what's kind of the plan on that? And I assume that's in the $750 million range, mark to market for Visa, net of hedges and stuff like that. But just frame what's left and the timing of it? Thanks.

I'm sorry, I missed the front part of that question.

Oh, just the remaining Visa.

What happens with the back half? So the 50% that we did not have the ability to monetize? Well, Visa controls that schedule. Some of its reliant on the litigation resolution and some of it's reliant on the schedule they've laid out, which is sort of a multi-year exchange. So we'll just continue to monitor it.

Okay. 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.

Hey, Gerard.

You guys have a good fortune of having insights into the commercial real estate business through Midland, your CNBS servicer. Can you give us some insights and color on what Midland is seeing in terms of their pipeline of increased special servicing, which of course I know has higher revenue, but more importantly, maybe directionally, shows us where accredited is heading.

Yeah, that's a good question, Gerard. Ironically, their special servicing balance has actually went down in the quarter, which is a little bit of a head scratcher. We don't think that's necessarily indicative of a trend. We do expect it to continue to go up. But from the start, and I think you've asked this question before, it's been much, much slower in terms of those increases, those balances than you would have expected.

I reviewed the forecasts regarding expectations for maturity bubbles and various property types. We do not anticipate that balance to increase at the rate one might expect.

Yes, and that we thought a year ago.

Things are being resolved and are selling off quickly. For assets that are in poor condition, there is still a significant amount of capital in the market. As a result, they are being sold faster than we initially anticipated.

Are they seeing any change in the product? Is it still primarily commercial office, or is it moving into any of the product areas?

It's mostly office.

Got it. Okay.

It's interesting. It's all of the above for all of the historical reasons. So there's still a little retail, there's hotels that will show up in there, there's multi-family that is in the multi-family that went to Freddie Fannie and then increasingly its office and the bubble down the road looks more like office.

Got it. And then just on your commercial real estate in the Slide 15, you give us obviously good detail and you've always told us about this multi-tenant office is the issue. It looks like obviously with 52% criticized, how far are you along in analyzing or reviewing that portfolio? Are you completely through it and now it's going a second time? Or any color there?

I mean, we are –

Oh, we've analyzed.

I mean, we're completely through it every quarter. I mean, a couple of things. I don't know we put this out there, but there's actually not that many loans. So we don't have thousands of small loans. These are typically larger loans. And so, we've gone asset by asset. And as anything gets close to being troubled, we look at two different appraisals, one of which is our own self-generated, using more extreme negative assumptions than what you might get from a commercial appraiser. We use higher vacancy rates, higher interest rates, longer time to lease up, higher cost to rehab, all that other stuff in our evaluation. So we go through this. We know all the properties. We keep looking at them. We know what's going to happen to them. We know the timelines. Look, it's not a great outcome, but there's nothing in there that I think is going to surprise us.

Very good. And just one last one on this, Bill. Geographically, are you guys finding certain parts of the country weaker than others? I know there's a lot of talk about the big urban markets, Class B and C buildings. How about from your vantage point, what are you guys seeing geographically?

It's a matter of individual properties. You could be in a challenging city, but if you're in the right location, you can still do well. So, I don't think it makes a significant difference.

Got it. Okay.

Well, thank you all for joining our call this morning. And if you have any follow-up calls, feel free to reach out to the IR team, and we'd be happy to jump on a call with you.

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.