Q3 2024 The PNC Financial Services Group Inc Earnings Call

Speaker Change: Greetings. Welcome to the PNC Finance Services Group Q3, 2024 earnings conference call. At this time, all participants are in a listen only vote. A question and answer session will follow the formal presentation.

Operator: 24 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation.

Operator: If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded.

Speaker Change: Thank you.

Bryan Gill: I will now turn the conference over to Bryan Gill, Executive Vice President and Director of Investor Relations. Thank you. You may begin.

Speaker Change: Please note that this conference is being recorded. I will now turn the conference over to Bryan Gill, Executive Vice President and Director of Investor Relations. Thank you. You may begin.

Bryan Gill: Well, good morning. Welcome to today's conference call for the PNC Financial Services Group.

Bryan Gill: I am Bryan Gill, the Director of Investor Relations for PNC, and participating on this call are PNC's Chairman, the CEO, Bill Demchak, and Rob Reilly, Executive Vice President and CFO.

Speaker Change: Well, good morning. Welcome to today's conference call for the PNC Financial Services Group. I am Bryan Gill, the Director of Invest Relations for PNC, and participating on this call our PNC's Chairman, the CEO, Bill Demchak, and Rob Reilly, Executive Vice President of CFO.

Bryan Gill: Today's presentation contains forward-looking information, cautionary statements about this information, as well as reconciliation 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.

Speaker Change: Today's presentation contains forward-looking information, cautionary statements about this information as well as reconciliation of non-get measures are included in today's earnings-related materials, as well as our SEC filings and other investor materials.

Bryan Gill: These statements speak only as of October 15th, 2024, and PNC undertakes no obligation to update them.

Speaker Change: These are all available on our corporate website, PNC.com under Investualations. These statements speak only as of October 15, 2024, and PNC undertakes no obligation to update them. Now I'd like to turn to call over to Bill.

William Demchak: 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 very good third quarter. We executed well and saw a strong momentum across our franchise. We generated one and a half billion in net income, or $3.49 diluted earnings per share. Rob will take you through the details shortly, but I wanted to highlight a few points. First, we generated positive operating leverage for the third consecutive quarter, and as an aside, our strong performance has positioned us to deliver positive operating leverage for the full year of 2024.

Bill Demchak: Thank you, Bryan, and good morning, everyone. As you've seen, we had a very good third quarter. We executed well and saw a strong momentum across our franchise. We generated one and a half billion in that income, we're $3.49 to looted earnings per share.

Bill Demchak: Rob will take you through the details shortly, but I wanted to highlight a few points. First, we generate a positive operating leverage for the third consecutive quarter, and is in the side, our strong performance has positioned us to deliver positive operating leverage for the full year of 2024.

William Demchak: Inside of the third quarter performance, NII grew 3% as we continue our growth trajectory towards expected record NII in 2025. Our PNC come grew 10% with a very strong quarter in capital markets, and we remain disciplined on the expense front. Second, we continue to see strong growth and activity across our franchise. CNIB continues to have great momentum as new loan production and commitments increased this quarter. While overall loan utilization has remained soft, the recent Fed actions to lower interest rates and the expectation of further cuts is likely to spur greater demand as we move ahead.

Bill Demchak: Inside of the third quarter performance, NI-I grew 3% as we continue our growth trajectory towards expected record NI-I in 2025. Our Fiancum grew 10% with a very strong quarter in capital markets, and we remain disciplined on the expense front.

Bill Demchak: Second, we continue to see strong growth and activity across our franchise.

Bill Demchak: CNIB continues to have great momentum as new loan production and commitments increased this quarter. While overall loan utilization has remained soft, the recent Fed actions to lower interest rates and the expectation of further cuts is likely to spur greater demand as we move ahead. Importantly, we are well positioned to serve our customers when loan growth returns.

William Demchak: Importantly, we are well positioned to serve our customers on loan growth returns. Within retail, we continue to invest heavily in our branch network to build density in our most attractive growth markets, and we are seeing success. We continue to grow customer households in checking accounts with the highest customer growth being realized in the Southwest markets. AMG is accelerating growth in high opportunity markets and benefiting from favorable equity markets. Third, our overall credit quality remains relatively stable, reflecting our thoughtful approach to managing risk, customer selection, and long-term relationship development. While we expect additional charge-offs and the CR re-office segment were adequately reserved.

Bill Demchak: Within retail, we continued to invest heavily in our branch network to build density in our most attractive growth markets and we are seeing success. We continued to grow customer households and checking accounts with the highest customer growth being realized in the southwest markets.

Speaker Change: AMG is accelerating growth in high opportunity markets and benefiting from favorable equity markets.

Speaker Change: Third, our overall credit quality remains relatively stable, reflecting our thoughtful approach to managing risk, customer selection, and long-term relationship development. While we expect additional charge-offs and the CRA office segment, we're adequately reserved.

William Demchak: Lastly, we continue to strengthen our capital levels during the quarter, and with the ongoing improvement in NAOCI, or tangible book value per share, increased 9%. In summary, we delivered strong results in the quarter, and we remain well positioned to continue our momentum.

Speaker Change: Lastly, we continued to strengthen our capital level during the quarter and with the ongoing improvement NALCI or tangible book value per share increase 9%.

Speaker Change: In summary, we delivered strong results in the quarter and we remain well positioned to continue our momentum. In fact, we're in the middle of our strategic planning process and I can't recall a time when our organic growth opportunities have ever been more attractive. Before I turn it over to Rob for more detail in the financial results, and outlook, I'd like to say thank you to our employees for everything they do for our customers.

William Demchak: In fact, we are in the middle of our strategic planning process, and I can't recall a time when our organic growth opportunities have ever been more attractive.

William Demchak: Before I turn it over to Rob for more detail on the financial results and outlook, I'd like to say thank you to our employees for everything they do for our customers and our company.

Robert Reilly: With that, I'll turn it over to Rob to take you through the quarter. Rob.

Robert Reilly: Thanks, Bill, and good morning, everyone. Our balance sheet is on slide 4, and is presented on an average linked quarter base. Loans of $320 billion were stable, investment securities increased slightly by $1 billion or 1%, and our cash balances that the Federal Reserve for $45 billion in increased of $4 billion or 10%. Depots of balances grew $5 billion or 1% and averaged $422 billion. At quarter end, AOCI was negative $5.1 billion and improvement of $2.4 billion, or 32%, compared with June 30th. Our tangible book value increased to approximately $97 per common share, which was a 9% increase linked quarter and a 24% increase compared to the same period a year ago.

Speaker Change: in our company. It will 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 flight for and is presented on an average linked quarter basis.

Rob Reilly: Loans of $320 billion were stable, investment securities increased slightly by $1 billion or 1%. And our cash balances at the Federal Reserve are $45 billion and increase the $4 billion or 10%.

Rob Reilly: Depots the balance is grew $5 billion or 1% and average $422 billion.

Rob Reilly: Barred funds decreased $1 billion or 2% primarily due to the maturity of FHLB advances, partially offset by parent company debt issuances.

Rob Reilly: At quarter end, AOCI was negative $5.1 billion, and improvement of $2.4 billion, or 32% compared with June 30th.

Rob Reilly: Our tangible book value increased to approximately $97 per common share, which was a 9% increase linked quarter, and a 24% increase compared to the same period a year ago.

Robert Reilly: We remain well capitalized, and our estimated CET-1 ratio increased to 10.3% as of September 30th. Regarding the Basel 3N game, while certain aspects of the proposed rules are likely to change, we estimate our revised standardized ratio, which includes AOCI, to be 9.2% at quarter end. We continue to be well positioned with capital flexibility, and we return roughly $800 million of capital to shareholders during the quarter through common dividends and share repurchases.

Rob Reilly: We remain well-capitalized and are estimated CET-1 ratio increased to 10.3% as a September 30th.

Rob Reilly: Regarding the Bible 3N game, while certain aspects of the proposed rules are likely to change, we estimate our revised standardized ratio, which includes AOCI, to be 9.2% at quarter-end.

Rob Reilly: We continue to be well-positioned with capital flexibility, and we return roughly $800 million of capital to shareholders during the quarter through common dividends and share repurchases.

Robert Reilly: Slide 5 shows our loans in more detail. Average loan balances of $320 billion were flat compared to the second quarter, as well as the same period a year ago. The yield on total loans increased 8 basis points to 6.13% in the third quarter. Commercial loans were stable at $219 billion linked quarter, as utilization rates remained low and well below the historical average of roughly 55%. We continue to have confidence that commercial loan demand will return in the coming quarters, as our loan commitments continue to increase, and we expect business investment to return to historical levels.

Rob Reilly: Fly 5 shows our loans in more detail. Average loan balances of $320 billion were flat compared to the second quarter, as well as the same period a year ago.

Rob Reilly: and the yield on total loans and crefate basis points to 6.13% in the third quarter.

Rob Reilly: Commercial loans were stable at $219 billion linked quarter, as utilization rates remained low, and well below the historical average of roughly 55%.

Rob Reilly: We continue to have confidence that commercial loan demand will return in the coming quarters, as our loan commitments continue to increase, and we expect business investment to return to historical levels.

Robert Reilly: Consumer loans averaged $101 billion and were stable with the second quarter, as growth in auto loans was mostly offset by a decline in residential real estate balances.

Rob Reilly: Consumer Loans average 101 billion dollars and we're stable with the second quarter. As growth in auto loans was mostly offset by a decline in residential real estate balances.

Robert Reilly: Slide 6 details our investment security and swap portfolios. Average investment securities of $142 billion increased $1 billion, or 1%. The securities portfolio yield increased 24 basis points to 3.08%, driven by higher rates on new purchases and the full quarter impact of the securities repositioning. As of September 30, our securities portfolio duration was approximately 3.3 years. Our active receive fixed rate swaps points to the commercial loan book totaled $33 billion on September 30, and the weighted average rate increased 58 basis points to 3.08%. Our forward starting swaps were $15 billion with a weighted average received rate of 4.26%.

Rob Reilly: Flight 60 tales are investment security and swap portfolios, average investment securities of $142 billion increased $1 billion or 1%.

Rob Reilly: The Securities portfolio yield increased 24 basis points to 3.08 percent, driven by higher rates on new purchases and the full quarter impact of the securities repositioning.

Rob Reilly: As of September 30th, our securities portfolio duration was approximately 3.3 years.

Rob Reilly: Our active received fixed rates swaps, pointed to the commercial loan book totaled $33 billion on September 30th and the weighted average rate increased 58 basis points to 3.08 percent.

Rob Reilly: Our forward starting swaps were 15 billion dollars with a weighted average received rate of 4.26%.

Robert Reilly: Importantly, with our forward starting swaps, we've locked in the replacement yield on the majority of our 2025 swap majorities at levels higher than existing swaps in current market rates.

Rob Reilly: Importantly with our forward starting swaps, we've locked in the replacement yield on the majority of our 2025 swap maturitys at levels higher than existing swaps in current market rates.

Robert Reilly: Turning to slide 7, we expect considerable runoff of lower yielding securities and swaps, which will allow us to continue to reinvest into higher yielding assets over the next couple of years. Accumulated other comprehensive income improved by approximately $2.4 billion or 32% to negative $5.1 billion on September 30th, compared to negative $7.4 billion on June 30th. The linked quarter improvement in AOCI was primarily due to lower rates, which benefited our swap and available for sale portfolio evaluations. Going forward, AOCI related to these securities and swaps, as well as our held to maturity portfolio, will accrete back as they mature and prepay, resulting in further growth to tangible book value.

Rob Reilly: Turning the flag 7, we expect considerable runoff of lower yielding securities and swaps, which will allow us to continue to reinvest into higher yielding assets over the next couple of years.

Rob Reilly: Accumulated other comprehensive income improved by approximately $2.4 billion or 32%. To negative $5.1 billion on September 30.

Rob Reilly: and compared to negative $7.4 billion on June 30th.

Rob Reilly: The Link's Quarter Improvement Neocii was primarily due to low rate, which benefited our swap and available for sale portfolio valuations.

Rob Reilly: Going forward, AOCI related to these securities and swaps, as well as our held de-macherity portfolio, will accrete back as a mature and pre-pay, resulting in further growth to tangible both value.

Robert Reilly: Slide 8 covers our deposit balances in more detail. Average deposits increase $5 billion or 1%, reflecting an increase in interest-bearing commercial balances, as well as higher time deposits. Regarding MIX, non-interest-bearing deposits were stable at $96 billion and remained at 23% of total average deposits. Our rate paid on interest-bearing deposits increased to 11 basis points during the third quarter to 2.72%, reflecting growth in commercial interest-bearing deposits. We believe our total rate paid on deposits has reached its peak level, and with the 50 basis point cut in September, we've already begun to reduce deposit pricing. Looking forward, we expect the Federal Reserve to cut the benchmark rate by 25 basis points at both the November and December meetings, which will accelerate deposit repricing, particularly within our high beta commercial interest-bearing deposits.

Rob Reilly: Flight 8 covers our deposit balances and more detail, average deposits increase $5 billion or 1% reflecting an increase in interest-bearing commercial balances as well as higher time deposits.

Rob Reilly: for regarding Mix, non-inspiring deposits for stable at $96 billion and remained a 23% of total average deposits.

Rob Reilly: Our rate paid on interest bearing deposits increased to 11 basis points during the third quarter to 2.72% reflecting growth and commercial interest bearing deposits.

Rob Reilly: We believe our total rate paid on deposits has reached its peak level, and with the 50 basis point cut in September, we've already begun to reduce deposit pricing.

Rob Reilly: Looking forward, we expect the Federal Reserve to cut the benchmark rate by 25 basis points said both in November and December meetings, which will accelerate deposit repricing, particularly within our high beta commercial interest-bearing deposits.

Robert Reilly: Turning to slide 9, we highlight our income statement trends. Third quarter net income was $1.5 billion or $3.49 per share. Comparing the third quarter to the second quarter, total revenue of $5.4 billion increased $21 million. Net interest income grew by $108 million or 3%, and our net interest margin was 2.64 percent and increased to 4 basis points. Fe income increased $176 million or 10%; other non-interest income was $69 million and included negative $128 million of visa-related activity. Non-interest expense at $3.3 billion decreased $30 million, or 1%. As a result, PPNR grew 2% length quarter, and we generated positive operating leverage for the third consecutive quarter.

Rob Reilly: Turning the slide nine, we highlight our income statement trends.

Rob Reilly: Third quarter net income was one and a half billion dollars or three dollars and 49 cents per share.

Rob Reilly: Comparing the third quarter to the second quarter, total revenue of $5.4 billion increased $21 million.

Rob Reilly: and that interest income grew by a hundred and eight million dollars or three percent. And our net interest margin was 2.64 percent in increase of four basis points.

Rob Reilly: CNC increased $176 million or 10%. Other non-interest income was $69 million and included negative $128 million of visa-related activity.

Rob Reilly: Not an interest expense of $3.3 billion, decreased $30 million or 1%.

Rob Reilly: As a result, PPNR grew 2% linked quarter and we generated positive operating leverage for the third consecutive quarter.

Robert Reilly: Prevision was $243 million, reflecting portfolio activity, and our effective tax rate was 19.2%.

Rob Reilly: Provision was $243 million reflecting portfolio activity and our effective tax rate was 19.2%.

Robert Reilly: Turning to slide 10, we highlight our revenue trends. Third quarter revenue increased $21 million driven by higher fee and net interest income, partially offset by lower other non-interest income. Other non-interest income included negative $128 million of Visa-related activity. Net interest income of $3.4 billion increased $108 million, or 3%, driven by higher yields on interest earning assets. Fe income was $2 billion and increased $176 million or 10% length quarter. Looking at the detail, asset management and brokerage income grew $19 million or 5%, reflecting favorable equity and 6-income market performance. Capital markets and advisory fees increased approximately $100 million, or 36%.

Rob Reilly: Turning to fly 10, we highlight our revenue trends.

Rob Reilly: 3rd quarter revenue increased $21 million, driven by higher fee and net interest income, partially offset by lower other non-interest income.

Rob Reilly: Other non-interest incoming included negative $128 million of visa-related activity.

Rob Reilly: Net Interest income of $3.4 billion increase the $108 million or 3% driven by higher yields on the Interest Learning Act.

Rob Reilly: C.N.COM was $2 billion and increased $176 million or 10% linked quarter.

Rob Reilly: Looking at the detail, asset management and brokerage income grew $19 million or five percent, reflecting favorable equity and fixed income market performance.

Rob Reilly: Capital Markets and Advisory Fees increased approximately $100 million or $36. Driven by higher M&A advisory activity, as well as broad growth across most categories.

Robert Reilly: Driven by higher M&A advisory activity, as well as broad growth across most categories. Card and cash management decreased $8 million or 1% with higher treasury management revenue was more than offset by credit card origination incentives. Lending into positive revenue grew $16 million, or 5%, due to increased customer activity. Mortgage revenue was up $50 million length quarter driven by a $59 million increase in the valuation of net mortgage servicing rights. Other non-interest income of $69 million included Visa derivatives fair value adjustments of negative $128 million, primarily related to Visa's September announcement of a $1.5 billion litigation escrow funding.

Rob Reilly: Card and Cash Management Decree, Faith Million Dollars, or 1% is higher treasury management revenue was more than offset by credit card origination incentives.

Rob Reilly: Lending into positive revenue grew $16 million or 5% due to increased customer activity.

Rob Reilly: Morgan's revenue was up $50 million, Link Quarter, driven by a $59 million increase in the valuation of net mortgage servicing rights.

Rob Reilly: Father, not an interest income of $69 million, included visa-derivative fair value adjustments, of negative $128 million. Primarily related to visa September announcement of a $1.5 billion litigation-escrew funding.

Robert Reilly: Notably, we continue to see strong momentum across our lines of business and throughout our markets, and year-to-date non-interest income of $6 billion grew approximately $400 million, or 7%, compared to the same period last year.

Rob Reilly: Notably, we continue to see strong momentum across our lines of business and throughout our markets and year to date, not interested in come a $6 billion grew approximately $400 million, or 7% compared to the same period last year.

Robert Reilly: Turning the slide 11, our non-interest expense of $3.3 billion to climb $30 million, or 1%. Excluding the second quarter $120 million contribution expense to the PNC Foundation, non-interest expense increased $90 million, or 3%, length quarter. Personal expense increased $87 million or 5%, reflecting higher incentive compensation related to increased business activity. Importantly, all other categories declined or remains stable. Year-to-date non-interest expense has increased by $80 million, or 1%. Excluding the $130 million FDIC special assessment and $120 million foundation contribution expense in 2024, non-interest expense is down 2% compared to the same period a year ago. We remain diligent in our continuous improvement efforts.

Rob Reilly: Turning to slide 11, our non-inch expense of $3.3 billion to climb $30 million or 1%.

Rob Reilly: Excluding the second quarter, $120 million contribution expense to the P&C Foundation, non-ajure expense increased $90 million or 3% linked quarter.

Rob Reilly: Personnel expense increase 87 million dollars or 5%.

Rob Reilly: Reflecting higher incentive compensation related to increased business activity.

Rob Reilly: Importantly, all other categories declined or remained stable. Here today, non-ajus expense has increased by $80 million or 1%. It's including a $130 million FTIC special assessment and a $120 million foundation contribution expense in 2024. Non-ajus expense is down to percent compared to the same period a year ago.

Robert Reilly: We increased our CIP goal last quarter from $425 million to $450 million, and we're on track to achieve that goal in 2024. As you know, this program funds a significant portion of our ongoing business and technology investments.

Rob Reilly: We remain diligent in our continuous improvement efforts, we increase our CIP goal last quarter from $425 million to $450 million. Then we're on track to achieve that goal in 2024.

Rob Reilly: As you know this program funds a significant portion of our ongoing business and technology investments.

Robert Reilly: Our credit metrics are presented on Slide 12. Non-performing loans increased $75 million or 3% length quarter, primarily driven by an increase in CRE office loans. Total the lengthens of $1.3 billion were stable with June 30th. Net loan charge-offs were $286 million. The $24 million link quarter increased was driven primarily by lower commercial recoveries, and our annualized net charge-offs average loans ratio was 36 basis points. Our allowance for credit losses total $5.3 billion or 1.7% of total loans on September 30th, stable with June 30th.

Rob Reilly: are credit metrics are presented on slide twills.

Rob Reilly: Non-performing loans increase $75 million or 3% linked quarter, primarily driven by an increase in CRU office loans.

Rob Reilly: Total of the Lankwen Seas of $1.3 billion were stable with June 30th.

Rob Reilly: Met loan charge costs for $286 million, the $24 million linked quarter increase was driven primarily by lower commercial recoveries.

Rob Reilly: and our end-of-life net charge off-savvage loans ratio with 36 basis points.

Rob Reilly: Our allowance for credit loss is total $5.3 billion or $1.7% of total loans on September 30, stable with June 30.

Robert Reilly: Slide 13 provides more detail on our CRE office credit metrics. We continue to see stress in the office portfolio, given the challenges inherent in this book and a lack of demand for office properties. CRE office criticized loans were essentially stable in quarter, but NPLs increased due to the migration of criticized loans to non-performing status. Net loan charge-offs within the CRE office portfolio were down slightly. However, going forward we expect additional charge-offs on this book, the sides of which will vary quarter to quarter given the nature of the loan. As of September 30, our reserves on the overall office portfolio were 11.3 percent, and inside of that 16 percent on the multi-tenant portfolio, both up slightly from the prior quarter.

Rob Reilly: Slide 13 provides more detail on our CRA office credit metrics.

Rob Reilly: We continue to see stress on the Office for Folio giving the challenges and heron in this book and a lack of demand for office properties.

Rob Reilly: C.R.E. office criticized loans were essentially stable in quarter but NPL has increased due to the migration of criticized loans to non-performing status.

Rob Reilly: Metloan charge-offs within the CR-E office portfolio were down slightly. However, going forward, we expect additional charge-offs on this book. The sides of which will vary quarter to quarter given the nature of the loans.

Rob Reilly: As a September 30th, our reserves on the overall office portfolio were 11.3% and inside of that 16% on the multi-tinent portfolio, both up slightly from prior quarter.

Robert Reilly: The modest increase in reserves reflects the continued valuation adjustments across the portfolio and specific reserves for certain credits. Furthermore, CRE office balance is declined 4 percent, where approximately $270 million linked quarter as we continue to manage our exposure down. Accordingly, we believe we are adequately reserved.

Rob Reilly: The Modus increase in reserves reflects the continued valuation adjustments across the portfolio and specific reserves for certain credits.

Rob Reilly: For other more CRE office balances to climb 4% who are approximately $270 million, linked quarter as we continue to manage our exposure down.

Robert Reilly: In summary, PNC reported a solid third quarter. Regarding our view of the overall economy, we're expecting continued economic growth in the fourth quarter, resulting in real GDP growth of approximately 2 percent in 2024, and unemployment remains slightly above 4 percent through year end. We expect the Fed to cut rates two additional times in 2024, with a 25 basis point decrease in November and another in December. Looking at the fourth quarter of 2024 compared to the third quarter of 2024, we expect average loans to be stable, net interest income to be up approximately 1 percent, and fee income to be down 5 to 7 percent due to the elevated third quarter capital markets and MSR levels.

Rob Reilly: Accordingly, we believe we're adequately reserved.

Rob Reilly: In summary, PNC reported a solid third quarter, regarding our view of the overall economy, we're expecting continued economic growth in the fourth quarter, resulting in real GDP growth of approximately 2% in 2024. An unemployment to remain slightly above 4% through year end.

Rob Reilly: We expect the Fed to cut rates two additional times in 2024, with a 25 basis point decrease in November and another in December.

Rob Reilly: Looking at the fourth quarter of 2024 compared to the third quarter of 2024.

Rob Reilly: We expect average loans to be stable, and that interest income to be up approximately 1%.

Rob Reilly: Fian come to be down 5% due to the elevated third quarter capital markets and MSR levels.

Robert Reilly: Other non-interest income to be in the range of $150 and $200 million, excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be stable. We expect total non-interest expense to be up 2 to 3 percent, and we expect fourth quarter net charge-offs to be approximately $300 million. Importantly, considering our year-to-date results and fourth quarter expectations, we were on track to generate a full-year positive operating leverage.

Rob Reilly: Other non-interess income to be in the range of $150 and $200 million, excluding visa activity.

Rob Reilly: Taking the component pieces of revenue together, we expect total revenue to be stable.

Rob Reilly: We expect total non-interest expense to be up to 3% and we expect fourth quarter net charge off to be approximately $300 million.

Rob Reilly: Importantly, considering our year-to-date results in fourth-quarter expectations, we're on track to generate full-year positive operating leverage.

William Demchak: And with that, Bill and I are ready to take your questions. Thank you.

Speaker Change: and with that, Bill and I are ready to take your questions.

Operator: 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 to indicate your line is in the question queue. You may press star 2 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 pull for your questions.

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Speaker Change: You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hands at before pressing the star keys. One moment, please, while we pull for your questions.

Erika Najarian: Our first questions come from the line of Erica Najarian with UBS. Please proceed with your questions.

Speaker Change: Our first questions come from the line of Erica and Ejarian, but UBS, please proceed with your questions.

Erika Najarian: Hi. Good morning.

Erika Najarian: If you could unpack a little bit of the commentary you made on the swap. So I guess the first part of this question is, I noticed that the receive fixed rate on your asset on your active swaps went up quite a bit, quarter to quarter, implying that what's rolling off is, well, sub 1. You went from 250 to 308, so I'm wondering if you could confirm that.

Speaker Change: Hi, good morning, Ron, if you can pass a little bit of the commentary you made.

Erica: on this swap. So I guess first part of this question is, I noticed that the receive fixed rate on your asset, on your active swamps.

Erica: went up quite a bit, quarter to quarter, implying that what's rolling off is well sub one. You went from 250 to 308, so I'm wondering if you could confirm that. And looking forward, I think you said something in your prepared remarks about replacing expiring 25 swaps at a higher fixed rate, receive fixed rate, then you thought to maybe just clarify that statement as well.

Erika Najarian: And looking forward, I think you said something in your prepared remarks about replacing expiring 25 swaps at a higher fixed rate, receive fixed rate. Then you thought to maybe just clarify that statement as well.

William Demchak: Well, sure.

William Demchak: Good morning, Erica. So, yeah, you're right. And again, all of this, in terms of your question, points to what is occurring, which is that our reprising of our fixed rate assets, including our securities loans and swaps, is occurring at higher rates. So that's all of what we've been talking about before a while. True in terms of the swaps, new swaps are at a higher rate than the old swaps.

Speaker Change: Well, it's a chair. Good morning, Erica. So yeah, you're right. And again, all of this in terms of your question.

Speaker Change: at points to what is occurring, which is that our reprising of our fixed rate assets, including our securities loans and swaps, is occurring at higher rates. So that's all of what we've been talking about for a while. True in terms of the swaps, new swaps are at a higher rate than the old swaps. And then as you recall back in the spring.

William Demchak: And then, as you recall back in the spring, we did execute some forward swaps that locked in rates for maturing assets in 25 that contribute to our statement, which we might as well confirm up front: our NII, being record levels in 2025, we're sticking to it.

Speaker Change: We did execute support swaps that locked in rates for maturing assets and 25 that contribute to our statement, which we might as well confirm upfront our NII being a record level in 2025.

Erika Najarian: Okay, and just the second part of my question: that's the mechanical side. Now, on the strategic side.

Speaker Change: and his family.

Speaker Change: Okay, and just the second part of my question, that's the mechanical side now on the strategic side. Bill, it's been such a long time since the market has seen a neutral rate of not zero. Everybody's talked about deposit betas, but as we think about what the natural deposit cost is for PNC, how should we think about what the spread is? Let's say we settle at 2.75% 3% in terms of fed funds. [inaudible]

Erika Najarian: Bill, it's been such a long time since the market has seen a neutral rate of not bureau. You know, everybody's talked about deposit betas, but as we think about what the natural deposit cost is for PNC, how should we think about what the spread is, let's say we settle at 2.75, 3% in terms of Fed funds? What's the spread in terms of Fed funds versus your funding costs naturally.

Speaker Change: What's the spread in terms of Fed funds versus your funding costs naturally and additionally just the quick follow-up to Rob is we're in the liabilities side of the balance sheet, you know, is there, you know, what drove the strength and deposits and, you know, was that mostly corporate and is that permanent balances or is that sort of some corporate balances just parked for now given in Indian certainty in the market?

William Demchak: And additionally, just a quick follow-up to Rob as we're in the liabilities side of the balance sheet, you know, is there, you know, what drove the strength in deposits and, you know, was that mostly corporate and is that permanent balances or is that sort of some corporate balances just parked for now given the uncertainty in the market. Okay, I can't give an answer to where we might end up if rates, you know, front rates kind of hold in pretty in change, which I expect they will. You know, practically, you can do it most of that yourself, right.

William Demchak: So the zero cost deposits are obviously worth a lot more if there's any steepness to the curve. You know, we get that benefit with our fixed rate assets. So maybe inside of your question is all a sequel if we end up in an environment where front rates are 3 in change, in back rates are somewhat higher than that. That's the really attractive environment for banks, ourselves included.

Speaker Change: You know, we get that benefit with our fixed-rate assets. So maybe inside of your question is, all else equal if we end up in an environment where front rates are three in change and back rates are somewhat higher than that. That's the really attractive environment for banks, ourselves included.

William Demchak: Yeah, and then the second part of that era kind of was the outperformance in order to find the balances came on the commercial interest-bearing side. As commercial clients continue to build cash on their balance sheet, our expectation is that it'll hold for the most part through the end of the year. Got it.

Speaker Change: Yeah, and then the second part of that era kind of was, yeah, that the outperforming center to plot the balances came on the commercial interest bearing side as commercial client continued to build cash on their balance sheet. Her expectation is that a whole, for the most part, through the end of the year.

Erika Najarian: Thank you.

John Pancari: Our next questions come from the line of John Pancari with Everkorn.

Speaker Change: Got it, thank you.

John Pancari: Please proceed with your questions. Good morning.

Speaker Change: Thank you, our next questions come from the line of John Pancari with Evercore. Please proceed with your questions.

John Pancari: John. On the loan side still, you know, balances are clearly still pressured, and you flagged binulations down a bit to 50.7 and below your historical. Didn't maybe talk about the demand, the underlying demand trends that you are seeing.

Speaker Change: Boring!

John Pancari: on the on the loan side still you know balances are clearly still pressured and you flagged line utilization down a bit to 50.7 and below your historical didn't maybe talk about the demand the underlying demand trends that you are seeing and what do you think is going to be the biggest catalyst to get borrowers off the sidelines and borrowing is it continued rate cuts confidence in that front is that the election if you give us some thoughts there and what do you think that growth rate is reasonable as you enter 2025. Thanks.

John Pancari: And what do you think is going to be the biggest catalyst to get borrowers off the sidelines and borrowing? Is it continued rate cuts, confidence in that front? Is it the election that you could just maybe give us some thought there? And what do you think that growth rate is reasonable as you enter 2025?

Rob Reilly: Thanks.

Rob Reilly: Hey, John, it's Rob. So, yeah, you know, all year we've yet delivered the loan growth that we thought was coming at. At some future point, and for all the obvious reasons that you say, utilization is low. And there is a bit of a pause feeling, obviously, with the election coming up and the rate environment. Well, we point to in terms of constructive front is we do continue to add customers. We do continue to add loan commits.

Rob Reilly: Hey, John, it's Rob. So, yeah, you know, all year we've, we've yet delivered the long road that we thought was coming at some future point and for all the obvious reasons that you've seen in utilization as low.

Rob Reilly: and there is a bit of a pause feeling, obviously, with the election coming out and the rate environment. Well, we point to, in terms of the constructive front, is we do continue to add customers, we do continue to add loan commitments.

Rob Reilly: Court of Recorder. So, our commercial clients are putting those lines in place with the anticipation of borrowing. So, that's a constructive sign. And then you've seen the low inventory levels, the low cap ex to sales levels. So, it does feel as though we're at the point of the cycle to where, you know, loan growth is not too far off. Okay, got it.

Rob Reilly: A quarter of a quarter, so our commercial clients are putting those lines in place with the anticipation of borrowing. So that's a constructive sign, and then you've seen the well inventory levels, the low cap X to sales levels. So the does feel is that we're at the point of the cycle to where, you know, loan growth is not too far off.

Rob Reilly: Thanks, Rob, for that. And then separately, capital markets clearly has been a point of strength.

Speaker Change: Okay, I got it, thanks for all of that and then separately Capital Market's clearly it's been a point of strength. Can you maybe just provide us a little bit of color on the pipeline there and do you expect a pull back and the fourth quarter off these high levels? Just how should we figure out that?

Rob Reilly: Can you maybe just provide a little bit of color on the pipeline there? And do you expect a pullback in the fourth quarter of these high levels? Just how should we figure out that? Yeah, yeah, we do.

Rob Reilly: Oh, I'll expand that a little bit in terms of our fee guidance for the fourth quarter. So, we're pointing it down five to seven percent. And all of that decline is being driven by the elevated MSR levels and the elevated capital markets levels that we actually achieved in the third quarter. So, for the fourth quarter, you know, the MSR is pretty straightforward. We don't expect to have those levels in the fourth quarter. And then on the capital market side, you know, the short answer is we probably pulled a little bit of the fourth quarter activity into the third quarter.

Speaker Change: Yeah, we do. Oh, I'll expand that a little bit in terms of our fee guidance for the fourth quarter. So we're pointing to down five to seven percent and all of that decline is being driven by the elevated MSR levels and the elevated capital markets levels that we achieve in the third quarter.

Speaker Change: So, for the fourth quarter, you know, the MSR is pretty straightforward, we don't expect to have those levels in the fourth quarter.

Speaker Change: and then on the capital market side, you know, the short answer is we probably pulled a little bit of the fourth quarter activity into the third quarter. A lot of that has been our Harris Williams M&A advisory businesses that are really strong third quarter, as well as some of the other broader capital markets stores. So it's a little bit lumpy.

Rob Reilly: A lot of that is in our Harris Williams M&A advisory businesses that had a really strong third quarter, as well as some of the other broader capital markets stores. So, it's, it's a little bit lumpy. The pipelines, though, are strong. The momentum is strong. Capital markets year over year is up north of 23% of the back half of 24, including our capital markets. Guide into the fourth quarter is up 20% over the first half. So, the momentum there. It's just not necessarily going to fall linearly quarter to quarter. Got it.

Speaker Change: The pipelines that are strong, the momentum is strong, capital markets year over year is up north to 23%.

Speaker Change: The back half of 24 including our capital markets guide into the fourth quarter is up 20% over the first half, so the momentum there, it's just not necessarily going to fall linearly quarter to quarter.

Rob Reilly: All right. Thanks, Ron.

Speaker Change: Got it, no way, thanks for him.

Scott Seifers: Thank you. Our next questions come from the line of Scott Seifers with Piper Sandler.

Speaker Change: Yes.

Scott Seifers: Please proceed with your questions.

Speaker Change: Thank you. Our next questions come from the line of Scott Seepers with the Piper Sampler. Please proceed with your questions.

Scott Seifers: Morning, everyone.

Scott Seifers: Thanks for taking the question. I guess I wanted to follow up just a little bit on sort of the lending and deposit discussion. I guess first just kind of qualitatively do you have a sense for what a lending recovery might look like when it does come back. And I guess the context in that is a recall of the time when the bank loans used to grow at some multiple of GDP, but it's been quite a while since we've seen that. So, maybe just some, some top level thoughts there. And then on the other side of the balance sheet, just maybe your sense for how deposit costs behave if lending does come back better, you know, you all.

Scott Seepers: Morning everyone, thanks for taking the questions.

Scott Seepers: I guess I wanted to follow up just a little bit on sort of the lending and deposit discussion. I guess first just kind of qualitatively give up.

Scott Seepers: stands for what a lending recovery might look like when it does come back and I guess the context and that is a recall of time when the bank looms.

Scott Seepers: and used to grow at some multiple of GDP, but it's been quite a while since we've seen that. So maybe just some top level thoughts there. And then on the other side of the balance sheet, just maybe your sense for how deposit costs behave if lending does come back better. You all, and I think a lot of the industry, are great from a liquidity perspective, so curious how much competition factors into your thinking as well. Thank you very much.

William Demchak: And I think a lot of the industry are great from a liquidity perspective. So, curious how much competition factors into your thinking as well. You know, we can come up with 10 different theories on why loan growth hasn't been there and why it might come back, but all of them are me making up theories. It's been below trend on utilization. You know, there's a bunch of uncertainty, not the least of which is the election and rates and all the other things that may impact it.

William Demchak: But it's, you know, it's one of the reasons why we kind of said, look, we'll, we'll, we'll, you know, produce growth for shareholders without having to rely on some made-up stories to why there might be long growth. If there is, it's terrific. And at some point, it'll come back.

Speaker Change: You know, proves growth for our shareholders without having to rely on some made-up stories to why there might be long growth. If there is, it's terrific and at some point it'll come back, but I've given I'm trying to forecast it personally. On the funding side, we are very liquid. So we have an opportunity, should it arise, we have a lot of capital and cash and that would be a great thing for us. You know, I just want to balance it to fed this.

William Demchak: But I've given up trying to forecast it first. personally. On the funding side, we are very liquid. So we have an opportunity; should it arise, we have a lot of capital and cash, and that would be a great thing for us. You know, I don't know if it's a balance that the Fed is 35, 5, 45 average. So a lot. Yeah. So I don't know that it's going to, it would impact our funding costs whatsoever. Perfect.

Speaker Change: 35 spot, 45, yeah, average, so a lot. Yeah, so I don't know that it's going to impact our funding costs whatsoever.

Scott Seifers: Okay. Good. All right.

Scott Seifers: Thank you very much.

Scott Seifers: Thanks.

Speaker Change: Perfect. Okay, good. All right, thank you very much.

Scott Seifers: Thank you.

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

Speaker Change: and his name is Bryan Gill, and his name is Bryan Gill.

Speaker Change: it

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

Matt O'connor: Good morning. Can any update thoughts on where do you think your net interest margin normalizes. I think I have one point a couple of months ago. You said it could approach 3%. I think it was by the end of next year. But update thoughts on that given the full growth. And your outlook for the next year. Thanks for balance. Thanks. Yeah.

Matt O'connor: Good morning, Hannah, any update thoughts on where you think you're in that interest margin, normalizes? I think I had one point a couple months ago you said it could approach 3% I think it was by the end of next year, but update thoughts on that given the full curve and your outlook for the mix of balance sheet.

Rob Reilly: Hey, Matt Robb. I do recall asking the question before, and the answer is going to be the same, which is, you know, our name is increasing. We don't, we don't manage to name it an outcome. We've operated close to three. My expectation is that we'll approach those levels. I don't remember saying by the end of 25, but maybe that's something that you added. But you know, we're on our way up, and three is reasonable through time.

Speaker Change: Hey, Matt Robb. I do recall asking the question before and the answer is going to be the same, which is, you know, our name is increasing. We don't we don't manage to name it an outcome. We've operated close to three. My expectation is that we'll approach those levels. I don't remember saying by the end of 25, but maybe that's something that you added in, but, you know, we're on our way up and three is reasonable through time. We're on our way up. We're on our way up.

Matt O'connor: Okay. And I said maybe it was by the end of 26. I had my. No trouble read.

Speaker Change: Okay, and actually I made it to the end of the 26th, I had my... no trouble read. And it just separately, you know, you've always been very strong in commercial lending and some of the few businesses that come from that, you know, consumer size has always been a little bit less of a focus, but I think you've been reading in some areas like credit card around the edges and just any update thoughts in terms of what could be growth drivers as we think about consumer lending, consumer fees, next couple years. Thanks.

Matt O'connor: And it just separately, you know, you've always been very strong in commercial lending and some of the few businesses that come from that, you know, consumer size, always been a little bit less of a focus, but I think you've been meeting in comparison like credit card around the edges and just any update thoughts in terms of what could be growth drivers.

William Demchak: As we think about consumer lending, consumer is next couple years. Thanks. Look, we have, you know, historically we have under invested in it and we've under we are under penetrated with our existing clients and consumer and consumer. Yeah. And that's our opportunity set. I don't know that we need to be heroic and be, you know, go beyond that. But we ought to have the same penetration rate that our peers do with respect to our consumer lending. And there's, you know, fairly material upside should, you know, if we can pull it off and we're investing to be able to do so.

Speaker Change: Yeah, look at what we've...

Speaker Change: You know, historically we have under invested in it and we've under we are under penetrated with our existing clients and consumer and consumer. Yeah, and and that's our opportunity set. I don't know that we need to be heroic and be, you know, go beyond that, but we ought to have the same penetration rate that our peers do with respect to our consumer landing. And there's, you know, fairly material outside should, you know, if we can pull it off and we're investing to be able to do so. And we've introduced a new credit card and that plans to continue to do that along those lines.

William Demchak: And we've introduced a new credit card and plan to continue to do that along those lines. Okay.

William Demchak: And when do you think you'll start, we'll start seeing some of those efforts kick in, and we are seeing pretty good credit card volume growth in the industry and at most peers, and obviously as a little bit of a lag, but what do you think some of those efforts will be a little bit more evident.

Speaker Change: Okay, and what do you think you'll start? We'll start seeing some of those efforts to kick in and we are seeing pretty good credit card body and growth in the industry and in at most peers and obviously there's only a lag but what do you think from those efforts will be more evident?

William Demchak: I don't know that I have a timeline on it. I would tell you that we're investing in people, we're investing in our. Credit management capabilities in our marketing and our product delivery, you know, all of the above that will, you know, hopefully true time allows to get the penetration we should have. I don't know what the timeline is about that, but I know it's a journey, and I know we need to start. And we're getting out.

Speaker Change: Credit Management capabilities in our marketing and our product delivery, all of the above that will hopefully through time allow us to get the penetration we should have. I don't know what the timeline is about that, but I know it's a journey and I know we need to start it. [inaudible]

Matt O'connor: Thank you.

Speaker Change: and we're at Robert Getting Now.

Speaker Change: Thank you.

Bill Carcache: Our next questions come from the line of Bill Carcache with Wolf Research.

Bill Carcache: Please proceed with your questions. Thanks.

Speaker Change: Thank you. Our next questions come from the line of Bill Karkachi with Wolf Research. Please proceed with your questions.

Bill Carcache: Good morning, Bill and Rob. Following up on your loan growth commentary, you've had a lot of success over the years in taking share within C&I. If we do get a reacceleration in low growth over, say, the next year or so, how does that influence your ability to continue to take share and perhaps outpace industry growth, recognizing your competitors are obviously not willingly seating share? Well, I think that will show up. We are growing DHE and winning new clients at a record pace, I think. So, you know, when utilization comes back, as we have in the past, my best guess is we would outperform.

Speaker Change: Thanks. Good morning, Bill and Rob. Following up on your loan growth commentary, you've had a lot of success over the years and taking share within CNI. If we do get a re-acceleration in loan growth over say the next year or so, how does that influence your ability to continue to take share and perhaps outpace industry growth, recognizing your competitors are obviously not willingly seeding share? Good morning. Good morning. Good morning. Good morning.

Bill Demchak: Well, I think that will show up. We are growing DHE and winning new clients, you know, at a record pace, I think. So, you know, when utilization comes back, we got this.

Bill Carcache: Well, THE is our loan commitment. They're unfounded at the moment, but they've been put in place. And I think the most of the momentum that we see is in our Southwest markets where we are achieving record levels and would expect to be above average if it all plays out. As we expect.

Bill Demchak: As we have in the past, my best guess is we would outperform.

Bill Demchak: The THH is our loan commitments. They're unfunded at the moment, but they've been put in place. And I think the most of the momentum that we see is in our Southwest markets where we are achieving record levels and would expect to be above average if it all plays out.

Bill Carcache: Thanks. That's helpful.

Bill Carcache: And then separately on non-interest bearing deposits. You expect rates on your interest-bearing deposits to decline starting next quarter.

Bill Demchak: as we expect.

Speaker Change: Thanks for that helpful, and then separately on non-interest varying deposits. You expect the rate on your interest-bearing deposits to decline starting next quarter, but how long before you'd expect to see the effect of lower rates relating to compensating balances?

Bill Carcache: But how long before you'd expect to see the effect of lower rates relating to compensating balances? Yeah, I don't know. That's a tough one to answer. I mean what we're encouraged about is that we've clearly stabilized now. For a couple of quarters at the levels that we are following several quarters of, you know, pretty substantial decline. So we've stabilized.

Speaker Change: Yeah, I don't know. That's a tough one to answer. I mean, what we're encouraged about is we've clearly stabilized now for a couple of quarters at the levels that we are following several quarters of pretty substantial decline. So we've stabilized, there's a lot of theories in terms of what sort of the magic short-term rate is that kicks that up, but no one has a definitive answer.

Bill Carcache: There's a lot of theories in terms of what sort of the magic short-term rate is that kicks that up. But no one has a definitive answer. Right.

Bill Carcache: But is the credit that you give customers on compensating balances a sort of lever that you'd expect to use or be willing to use as you look to grow? Non-interest bearing deposits. Just trying to think through whether that's a potential, you know, something that could spur growth. You should assume that crediting rate is a, you know, blow market versus open deposit rate. And so it's not going to have a moving beta for some period of time relative to rates coming down. It's relatively constant and we're fine with that.

Speaker Change: Right, but is the credit that you give customers on compensating balances, a sort of lever that you'd expect to use, or be willing to use as you look to grow, not in transparent deposits.

Speaker Change: is trying to think through whether that's a potential, you know, something that could spur grow.

Speaker Change: You should assume that crediting rate is a, you know, low market versus open deposit rate and so it's not going to have a moving beta for some period of time relative to rates coming down.

Speaker Change: It's relatively confident and we're fine with that.

Bill Carcache: Okay. Great.

Bill Carcache: If I could squeeze in one last one, if the NII trajectory that you laid out for 2025 plays out, is anticipated. Is there any reason why, you know, the positive operating leverage commentary that you laid out is very helpful. But any reason why the efficiency ratio wouldn't get down into sort of that high 50% range. Seems like the math would suggest that that could get there, but would appreciate your thoughts. We'll have to see.

Speaker Change: Great, if I could squeeze in one last one, if the NII trajectory that you laid out for 2025 plays out is anticipated, is there any reason why the positive operating leverage commentary that you laid out is very helpful, but any reason why the efficiency ratio wouldn't get down into that high 50% range.

Speaker Change: seems like the math would suggest that that could get there but would appreciate your thoughts.

Bill Carcache: But we're in the process of doing our budgeting for next year right now. So we'll have more for you on that in our January. Call.

Speaker Change: We'll have to see it, but we're in the process of doing our budgeting for next year right now. So we'll have more for you on that in our January call.

Mike Mayo: Thanks for taking my questions. Thank you.

Speaker Change: Okay, thanks for taking my questions.

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

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

Mike Mayo: Hi, I think Bill, your prior comment that you expect record NII in 2025. Do you feel more, less, or just as confident as before? What sort of long growth do you kind of assume for next year? We wouldn't have said it if we didn't feel confident to begin with, so I don't know levels of confidence, but we feel pretty good about that. That's confident. That's the third half. And we don't have any growth in there whatsoever to get to that number. So no long growth for next year. We have something, but it's well, we will have something, but the record NII level is not reliant.

Mike Mayo: Hi, I think you're a prior comment that you expect record NII in 2025. Do you feel more or less or just as confident as before and what's sort of long growth do you kind of assume for next year?

Speaker Change: We wouldn't have said it if we didn't feel confident to begin with, so I don't know levels of confidence, but we feel pretty good about that.

Speaker Change: and we don't have any pro-glomberals in there whatsoever to get to that number.

Speaker Change: There's no long row for next year. We have something but it's, well we will have something but that record NII level is not reliant. It's not dependent on long row.

Mike Mayo: It's not dependent on long growth. Okay. And then back, I know I think last quarter you used the word "befuddled" as to why long growth wasn't coming back. I guess number one could be the election. Number two could be private credit. Number three could be disintermediation and capital markets. Number four companies could just be managed differently today. Or number five, you could have a weaker economy, or it could be all the above. Just give us your best stab at why long growth remains just so weak in the economy that's still growing. I think all of your reasons, other than three and four.

Speaker Change: Okay, and then back, I know I think last quarter you used the word befuddled as to why Lone Growth wasn't coming back. I guess number one could be the election, number two could be private credit, number three could be disintermediation of capital markets, number four, companies could just be managed differently today, or number five, you could have a weaker economy or could be all of the above. Just give us your best stab at why Lone Growth remains just so weak. Any economy that's still growing.

Mike Mayo: I don't think private is causing utilization rate on middle market companies to remain low, you know, for the businesses we play in. And I'm not sure. I mean, at the margin, public markets being wide open has caused some of our larger clients to pay down outstanding balances and hit the capital market. So that's probably true at the margin. By this basic notion of people just aren't using working capital the way they used to. And maybe that's the way they run the company post-COVID. Maybe that's the uncertainty. Let's get a play out over time. And we can all guess about it.

Speaker Change: I think all of your reasons other than three and four. I don't think private is causing utilization rate on middle market companies to remain well. You know, for the businesses we play in.

Speaker Change: and I'm not sure, I mean, at the margin public market, it's being wide open, has caused some of our larger clients to pay down outstanding balances and hit the capital market. So that's probably true at the margin. This basic notion of people just aren't.

Speaker Change: using working capital the way they used to. And maybe that's the way they run the company post COVID, maybe that's the uncertainty. It's got to play out over time and we could all guess about it. I just don't know the answer, so I'm still a funnel.

Mike Mayo: I just don't know the answer. So I'm still befuddled. Okay.

William Demchak: And then lastly, your reserves on office CRE were taken even higher, especially multi-tenant. Last quarter, you said the industry is in the first inning. I think a lot of people disagree with that. I'm not saying, yeah, I'm not sure. We're two years into this, at least. And it's still a big question mark. I think a lot of people's minds. So when you said the industries in the first inning, clearly your reserves are higher than others. Why do you say it's only the first inning? What's your reasoning? I think we're just now starting to clear buildings in sales, right?

Speaker Change: Okay, and then lastly, your reserves on office theory were taken even higher, especially multi-tenant. Last quarter you said, the industry is in the first inning. I think a lot of people disagree with that, I'm not saying.

Speaker Change: Yeah, I'm not sure. I've worked two years into this at least and...

Speaker Change: It's still a big question mark. I think a lot of people's mind. So when you said the industry is in the first inning, clearly your reserves are higher than others, why do you say it's only the first inning? What's your reasoning?

Speaker Change: I think...

William Demchak: We've had some extensions. We've had, you know, maturity's hitting. We have a whole slow of turn loans in the CNBS market and with small banks that will be out there 3, 4, 5, 6 years. I just think this plays out through over a long period of time. Office vacancies pick your market are quite high and we're just now realizing the market value of that is we resolve properties. That's why we're reserved where we are, and that's why I'm not worried about it per se from PNC standpoint, but now this is going to be noisy for a while.

Speaker Change: You know, maturity setting, we have a whole slew of term loans in the CNBS market and with small banks that will be out there 3, 4, 5, 6 years. I just think this place out through over a long period of time.

Speaker Change: I did it.

Speaker Change: Office vacancies pick your market are quite high, and we're just now realizing the market market value that is we resolve our profits.

Speaker Change: Yeah, that's why we're reserved for where we are and that's why...

Speaker Change: I'm not

Speaker Change: We're e to buy to per se from PNC standpoint, but now this is going to be noisy for a while.

William Demchak: I might find that a little early innings early in early any to we're not in early innings with respect to how we're reserved. I mean, you know, to the best of our ability, we've taken all that up front.

Speaker Change: I'm a finalist and I feel like it's a great first.

Speaker Change: [inaudible]

Speaker Change: But we're not having to call it anymore. We're not in early innings with respect to how we're reserved.

Speaker Change: I mean, you have to love our haste, but to the best of our ability, we've taken all that up front.

Mike Mayo: And it's thinking one more last one.

Mike Mayo: As far as acquisitions, I know you'd like to buy them on the cheap. I mean, National City, you know, you go down the list. It's getting tougher for you to buy things on the cheat.

Speaker Change: and it's taking one more last one. As far as acquisitions, I know you'd like to buy them on the cheat. I mean, National City, you know, you go down the list, it's getting tougher for you to buy things on the cheat. Maybe if you, a bank does have an office or a CRE problem that you swoop in there, but am I right in thinking it's a lot less likely you do an acquisition now that some of these stocks have come back or what you're thinking.

William Demchak: Maybe if you a bank does have an office or Siri problem that you swoop in there, but am I right in thinking it's a lot less likely you do an acquisition now that some of these stocks have come back or what you're thinking. And you're right. We don't see value in an acquisition at the moment. Okay. Thank you.

Speaker Change: and I, you're right, we don't see value.

Speaker Change: in an acquisition at the moment.

Operator: As a reminder, if you would like to ask a question, please press star one on your telephone keypad.

Speaker Change: Okay, thank you.

Speaker Change: Thank you, as a reminder if you would like to ask a question, please press star one on your telephone keypad. Our next question is come from the line of Ibrahim Punawala with the Bank of America. Please proceed with your questions.

Ebrahim Poonawala: Our next question has come from the line of Ibrahim Punewala with the Bank of America. Please proceed with your questions.

Ebrahim Poonawala: Good morning. I guess maybe just one rob for you as a follow-up on deposit pricing. I think a fair amount of uncertainty around how much banks will be able to flex deposit costs lower because the September card reminds us one around your beta expectations. And any early proof points on how customers and especially commercial customers have received the lower rates over the last few weeks. Sure. So, you know, we're early on, just a couple of weeks out from the rate. But now we're in a down beta cycle. You know, we said that we think that our terminal beta will be approximately 50%.

Speaker Change: Good morning.

Speaker Change: I guess this is one rock for you as a follow-up on deported pricing.

Speaker Change: Fair amount of uncertainty around how much banks will be able to flex the deposit cost lower because the September card. Remind us one around your beta expectations and any early proof points on how customers, especially commercial customers, have received the lower rates over the last few weeks.

Speaker Change: Well, sure, so we're early on just a couple of weeks out from the rake, but we're now in a down beta cycle. We said that we think that our terminal beta will be approximately 50 percent, and we will reduce rates paid for the balance of this year, and maybe we get a little bit less than half of the way there by the end of 24.

Rob Reilly: And we will reduce rates paid through the balance of this year, and maybe we get a little bit less than half of the way there by the end of 24. But that's going to play out. It's early, but that's sort of our thinking. So, you know, rate paid will be coming down, particularly in the higher interest-bearing commercial deposits, some wealth deposits. And that's underway. And we'd expect that to continue.

Speaker Change: But that's going to play out it's early but that's sort of our thinking so you know rate paid will be coming down, particularly in the higher interest bearing commercial deposits, some wealth deposits and that's underway and we'd expect that to continue.

Ebrahim Poonawala: But in on commercial clients, so how do you around loan growth and all the reasons why loan growth may or may not pick up. If you don't mind the speaking to the health of the commercial customer base. And whether like some of the macro data on jobs could be a bit misleading, like when you talk to your CNI customers. Are they like are the balance sheet healthy? Like do the if the Fed were to pause rate cuts after a quarter to that increase the risk for these customers and how they might approach investing, hiring, etc.

Speaker Change: But on commotion clients, so how do you around loan growth and all the reasons why loan growth may only take up. If you don't mind the speaking to the health of the commotion customer base.

Speaker Change: and very like some of the macro data on jobs could be a bit misleading. Like when you talk to your CNI customers, are they like, are the balance sheet healthy? Like do they, if the Fed were to pause, rate cuts after a quarter to that increase the risk for these customers and how they might approach investing, hiring, etc. Would love any color you can share.

William Demchak: Would love any color you can share. I guess it may be a varies by industry, but a simple notion is companies at the margin are losing margin, right? They have an end of; they can't pass on prices. They once could; they're not making it up in volume. So the discussion of, you know, how do I cost has at least entered the dialogue, but we haven't seen that show up in layoffs, right? The data remains strong, and as long as the data is strong, consumers are spending, and the economy is strong. So everybody's staring and watching and looking, and there's margin pressure on corporates, but you know, there's no, we don't see in conversations, you know, some, some pending, big, you know, layoff spike hitting the US economy. You know, there's specific industries that are in slumps, whether it's transportation, you know, healthcare struggling, like consumers, right there, you know, at the margin, but that's, you know, it's just at the margin, and nothing else.

Speaker Change: I guess it may be a very spying industry but a simple notion is companies that the margin are losing margin.

Speaker Change: Right, they have an end, they can't pass on prices, where they was because they're not making it up in volume. So the discussion of, you know, how do I cut cost as at least entered the dialogue? But we haven't seen that show up in layoffs.

Speaker Change: Alright, the data remains strong that as long as the data is strong, consumers are spending in the economy strong. So everybody's staring and watching and looking and there's margin pressure on corporates.

Speaker Change: But you know, there's no, we don't see in conversations, you know, some, some pennied big, you know, lay off spike hitting the U.S. economy. You know, there's specific industries that are in some, whether it's transportation, you know, healthcare, struggling, so we're staying there.

Speaker Change: You know, the margin, but that's...

Ebrahim Poonawala: Yeah. Got it.

Speaker Change: You know, it's just at the margin.

William Demchak: And if one last one just following up on Mike's question on M&A bank transactions usually stop for stock. Now what? I mean, your stock's done well. Why would a deal, given your history and track record on deal integration? Like, is it just completely ruled out at this point? Is there the willing seller acquiring a good franchise? Does it no longer make sense? Just because of pricing? Yeah, it's, I mean, the fact that we have a multiple advantage, you know, our stock is worth the money it trades at. I'm not sure our other stock are. So, you know, straight up financial math saying it works doesn't mean it's a good deal.

Speaker Change: and nothing new.

Speaker Change: And if one last for just following up on my question on M&A, bank transactions usually stop for stock. Now, what I mean your stock is done well, why would a deal given your history and track record on deal integration like is it completely ruled out at this point if there's a willing seller acquiring a good franchise, there's no longer make sense just because of pricing?

Speaker Change: Yeah, it's...

Speaker Change: I mean, the fact that we have a multiple advantage in our stock is...

Speaker Change: Worth the money it trades at. I'm not sure other stuff is on her. So straight up financial math saying it works doesn't mean it's a good deal.

William Demchak: And, you know, when we look at potential targets, it would be interesting, you know, from certain geographies and so forth. They just don't pencil out when you look at their balance sheet and the amount of investment we have to put in the franchise and just the time sync it takes to do it. So, you know, and by the way, we look at everything, and just I don't think the markets anywhere close where we'd find something attractive. Or pay a premium on top of what you think is already a premium priced in. That's fair.

Speaker Change: and when we look at potential targets, it would be interesting, you know, from certain geographies and so forth, they just don't cancel out when you look at their balance sheet. The amount of investment we'd have to put in the franchise and just the time sink it takes to do it.

Speaker Change: So I would, you know, and by the way we look at everything, I just don't think the markets anywhere close where we'd find something attractive.

Speaker Change: or pay a premium on top of what you think. It's already a premium price didn't.

Speaker Change: Let's wear. Thank you.

Betsy Graseck: Our next questions come from the line of Betsy Grayseck with Morgan Stanley. Please proceed with your questions.

Speaker Change: Thank you, our next questions come from the line of Betsy Grasik with Morgan Stanley. Please proceed with your questions.

Betsy Graseck: Oh, hi, thanks so much. Okay, great.

Betsy Graseck: Just to follow up on the last question. So, right, doesn't make sense. MNA right now in this environment given. Well, whatever. Yeah, I won't go there.

Betsy Grasik: Oh, hi, thanks so much. Okay, great, just to follow up on the last question. So, right doesn't make sense. M&A right now in this environment given, well, whatever. I won't go there. But just the underlying question is organic growth. How do you see your organic growth progressing?

William Demchak: But just the underlying question is organic growth. How do you see your organic growth progressing over the medium term? Are there, are there legs to acceleration, or are we what we're seeing today a good run rate? No, there's there's there's legs on acceleration certainly in CNI as we continue to build out these new markets. What you're going to see us do is more aggressively invest into our retail distribution franchise. You know, very targeted in high volume branch builds and particular markets. You know, at the moment, go back to some of these questions of, hey, what of rates are three and a quarter at the front end?

Betsy Grasik: over the medium term.

Betsy Grasik: Are there legs to acceleration or are what we're seeing today is a good run rate?

Speaker Change: There's lives on acceleration certainly in CNI as we continue to build out these new markets, what you're going to see us do is more aggressively invest into our retail.

Speaker Change: Distribution franchise, you know, very targeted in high-volume branch-buildings of particular markets. You know, at the moment, go back to some of these questions of, hey, what have rates are three and a quarter at the front end and what he earned on deposits? The break even on a branch has become a lot easier to achieve. And, you know, my historical comments on the need for scale are still true.

William Demchak: And what are not deposits? The break even on a branch has has become a lot easier to achieve. And you know, my historical comments on the need for scale are still true. It just looks like the way we're going to have to get there, at least in the near term, is through, you know, investment and organic growth, and we're good at it. We've been executing on it, and we'll just continue on. Particularly in the Southwest markets where the momentum is very strong across all our businesses, CNID retail and the private bank.

Speaker Change: It just looks like the way we're going to have to get there, at least in the near term, is through investment and organic growth that we're good at it. We've been executing on it, and we'll just continue on. Particularly in the southwest markets, we're the momentum's very strong across all our businesses. See you in I.D. Retail, and the private bank.

Betsy Graseck: Okay, thanks so much.

Betsy Graseck: Yeah. Thank you.

Speaker Change: Okay, thanks so much, you know.

Gerard Cassidy: Our next questions come from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your questions.

Speaker Change: Thank you. Our next questions come from the line of drawer casting with RBC Capital Markets. Please proceed with your questions.

Gerard Cassidy: Hi Rob, I'm Bill. You guys have done a very good job in managing credit over the years and shows up again in this quarter. Can we take a look at in the CNID portfolio? What are the trends that you guys might be seeing in your the SNIC portfolio or the asset back portfolio or the leverage portfolio? The trends are pretty benign. What do you guys see in there? Not much. You know, at the margin, we still have more downgrades and upgrades. You know, very simple rates go across that whole book. Much of that is driven by margin compression as opposed to anything fundamental with the underlying company.

Speaker Change: I'm Rob, I'm Bill

Speaker Change: Hey there, me

Speaker Change: You guys have done a very good job in managing credit over the years and it shows up again this quarter Can we take a look at in the C9 portfolio? What are the trends that you guys might be seeing in your this Nick portfolio or the asset back portfolio or the leverage portfolio? The trends pretty benign. What are you guys seeing there?

Speaker Change: Not much. You know, at the margin we still have more downgrades and upgrades, you know, a very simple ratio across that whole book. Much of that is driven by margin compression and supposed to anything fundamental with the underlying company.

Gerard Cassidy: But now the economy is healthy and company, you know, in our portfolio is healthy. You know, we'll have lumpy one off. There's always some story that happens, and we have one of those is quarter actually. But overall, the portfolio feels, feels pretty strong. Yeah, they're still very acceptable, bookable credits. They're just not as strong as the ultra strong. They were the last time I raised them.

Speaker Change: But now the economy is healthy and company in our portfolio is healthy. We'll have lumpy one-offs, there's always some story that happens and we have one of those is quarter-asherly. But overall the portfolio feels pretty strong.

Speaker Change: and just clarify it with them. Go ahead, Robert.

Speaker Change: Yeah, they're still very acceptable, bookable credits, they're just not as strong as the ultra strong they were.

William Demchak: Got it. And I know you touched on this on commercial loan growth about, you know, companies might be stronger. Have you seen any evidence that, you know, because of the pandemic, because of what companies went through, you know, your long time customers that you've talked to for years, do you actually see them better managed or stronger because of what happened during the pandemic? I think that almost has to be true. And certainly, you know, part of the answer to the utilization question, by the way, has to be the notion that, you know, basically working capital was free for a bunch of years.

Speaker Change: Now for the last time I raised him.

Speaker Change: Got it. And I know you touched on this commercial loan growth about companies might be stronger. Have you seen any evidence that, you know, because of the pandemic, because of what companies went through, you know, your long time customers that you've talked to for years, do you actually see them better managed or stronger? Because of what happened during the pandemic?

Speaker Change: I think that almost has to be true, and certainly, you know...

Speaker Change: You know, part of the answer to the utilization question by the way, has to be the notion that, you know, basically working capital was free for a bunch of years when all of a sudden got expensive. So you're looking at places where you can improve margin and you're trying to cut your borrowings and be more efficient at what you're running in inventory and investment. So.

William Demchak: And all of a sudden, it got expensive, so you're looking in places where you can improve margin, and you're trying to cut your borrowings and be more efficient at what you're running in inventory and investment. So, you know, companies, companies did without a lot of stuff during the pandemic, and you learn from that and you try to keep to it site. You know, we'll see. But the other broader messages, the economy's fine. Companies are fine. Labor still feels strong. You know, a lot of things in the geopolitical horizons that could disrupt that, but those are exogenous variables to the basic economy.

Speaker Change: But...

Speaker Change: You know, companies did without a lot of stuff during the pandemic and you learn from that and you try to keep to it.

Speaker Change: Yeah, we'll see.

Speaker Change: But, you know, on our broader messages, the Economies find companies are fine, labor still feels strong, you know, a lot of things that you have political horizons that could disrupt that, but those are exogenous variables to the basic economy we operate in.

William Demchak: And we are.

Gerard Cassidy: Great.

William Demchak: And then just the final follow-up, you gave us some good data, of course, on the commercial real estate office portfolio.

Speaker Change: Great, and we're just the final follow-up, you gave us some good data, of course, on the commercial real estate office portfolio.

William Demchak: What kind of impact, I guess, if the cap rates start to come down, when do you start to see that be beneficial for the commercial? I mean, where it could really help you help the values of those properties. I know each property is different; vacant-to-rates are critical, but is there any kind of point that you guys look at the cap rates that sell 100 basis points or 150 that would help the valuation process? Look, lower cap rate at the margins to help. I think what you're running into, though, is you'll have office buildings that, you know, if they're 50% vacant, they'll hit the market and the question will be, can they ever get to normal occupancy through historical absorption rates?

Speaker Change: What kind of impact, I guess if the cap rates start to come down, when do you start to see that be beneficial for the commercial? I mean, where it could really help you help the values of those properties. I know each property is different, they can see rates are critical, but is there any kind of point that you guys look at that if the cap rates fell 100 basis points or 150, that would help the valuation process? Thank you very much.

Speaker Change: is a lower cap rate at the margin to help. I think what you're running into, though, is you'll have office buildings.

Speaker Change: That, you know, if they're 50% vacant, they'll hit the market and the question will be, can they ever get to normal occupancy through historical absorption rates? And if the answer to that is no.

William Demchak: And if the answer to that is no, then the value of that building we just saw in New York is next to zero. If there's a tail on absorption, or yes, I think I can rehab it and get this thing back to my normal, you know, 90, 95%, then it has values that go in concern and it's worth something. The cap rate almost is irrelevant in those two scenarios. If the thing is never going to be occupied, it doesn't matter what the cap rates worth; it's worth land.

Speaker Change: and the value of that building we just saw in New York is next to zero.

Speaker Change: If there's a tale on absorption where yes, I think I can rehab it and get this thing back to my normal, you know, 90-95 percent, then it has value as it going concerned and it's worth something. The cap rate almost is irrelevant in those two scenarios. If the thing is never going to be occupied, it doesn't matter what the cap rate's worth, it's worth land. That's what I'm going to do.

William Demchak: Very good. Good insights.

Operator: Thank you.

Speaker Change: Very good insight. Thank you.

Bryan Gill: We have reached the end of our question and answer session.

Bryan Gill: I would now like to hand the call back over to Brian Gill for any closing comments. Okay. Well, thank you all for participating in the call this quarter, and feel free to reach out to the IR team if you want to solve questions. Thanks a lot, everybody. Thank you.

Speaker Change: Thank you. We have reached the end of our question and answer session. I would now like to hand the call back over to Bryan Gill for any closing comments.

Bryan Gill: Okay, well, thank you all for participating on the Call this Quarter and feel free to reach out to the Ira team and feet in the small questions. Thanks a lot everybody. Thank you.

Operator: This does conclude today's teleconference. We appreciate your participation. May disconnect your lines at this time. Enjoy the rest of your day.