PNC Financial Services Group Inc (PNC) — Q2 2022 Transcript

Thanks, Bryan, and good morning, everybody. As you've seen, we had a strong second quarter, highlighted by 9% revenue growth and solid positive operating leverage resulting in PPNR growth of 23%. We maintained strong credit quality and fees rebounded from the first quarter, driven primarily by capital markets activity, including Harris Williams, and continued growth in card and cash management. The strong loan growth and rising rates helped us to increase both net interest income and net interest margin meaningfully. Loan growth was driven by C&I, where new production increased significantly and utilization returned to near pre-pandemic levels. Consumer loans also grew, driven by mortgage and home equity. Higher rates continued to adversely impact the unrealized value of our securities book. In response, we've continued to reposition the portfolio during the quarter, resulting in 60% of our securities portfolio now being held and held to maturity. We returned $1.4 billion of capital to shareholders during the quarter through share repurchases and dividends. Looking forward, there is uncertainty in the environment we're operating in, including the impact of higher rates, supply chain disruptions, and inflation. But regardless of the path ahead macroeconomically, we believe having a strong balance sheet, a solid mix of fee-based businesses, and continued focus on expense management will continue to provide the foundation for our success. Our focus is on executing the things we can control and not getting distracted by what is beyond our control. Along those lines, we delivered well on our strategic priorities in the quarter, including the build-out of our new BBVA and expansion markets, modernizing our retail banking technology platform, bolstering our asset management offering and building differentiated and responsible capabilities for our retail and commercial customers in the payment space. As I've talked about recently at conferences, our performance in the BBVA markets has exceeded our own expectations. In corporate banking, we've seen sales increase 40% quarter-over-quarter and maintained a 50% non-credit mix of sales since conversion. We've seen similar growth within commercial banking, where sales in the BBVA USA markets are up 32% quarter-over-quarter and non-credit sales to total sales have been approximately 55% since conversion. In retail banking, we've experienced a notable increase in sales for both small businesses and consumers of 16% and 22%, respectively. We have built good momentum in our recruiting efforts over the past few quarters, hiring advisers across all areas of the business to help deliver for our clients. I'll close by thanking our employees for their hard work and dedication to our customers and communities. Moving forward, we believe that we're well positioned to continue to grow shareholder value. And with that, I'll turn it over to Rob for a closer look at our results, and then we'll take your questions.

Well, thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4, and is presented on an average basis. During the quarter, loan balances averaged $305 billion, an increase of $14 billion or 5%. Investment securities grew approximately $1 billion or 1%. And our average cash balances at the Federal Reserve declined $23 billion. Deposit balances averaged $447 billion, a decline of $7 billion or 2%. Our tangible book value was $74.39 per common share as of June 30, a 7% decline linked quarter, entirely AOCI driven as a function of higher rates. And as of June 30, 2022, our CET1 ratio was estimated to be 9.6%. Given our strong capital ratios, we continue to be well positioned with significant capital flexibility. During the quarter, we returned $1.4 billion of capital to shareholders through $627 million of common dividends and $737 million of share repurchases for 4.3 million shares. Our recent CCAR results underscore the strength of our balance sheet and support our commitment to returning capital to our shareholders. As you know, our stress capital buffer for the fourth quarter period beginning in October 2022, is now 2.9%, and our applicable ratios are comfortably in excess of the regulatory minimums. Earlier this year, our Board of Directors authorized a new repurchase framework allowing for up to 100 million common shares, of which approximately 59% were still available for repurchase as of June 30. This allows for the continuation of our recent average share repurchase levels in dollars as well as the flexibility to increase those levels should conditions warrant. Slide 5 shows our loans in more detail. During the second quarter, we delivered solid loan growth across our expanded franchise, particularly when compared to 2021 growth rates. Loan balances averaged $305 billion, an increase of $14 billion or 5% compared to the first quarter, reflecting growth in both commercial and consumer loans. Commercial loans, excluding PPP, grew $13 billion, driven by higher new production as well as utilization. Included in this growth was approximately $5 billion related to high-quality short-term loans that are expected to mature during the second half of the year. Notably, in our C&IB segment, the utilization rate increased more than 120 basis points, and our overall commitments were 5% higher compared to the first quarter. PPP loan balances declined $1.2 billion and at the end of the quarter were less than $1 billion. Consumer loans increased $2 billion as higher mortgage and home equity balances were partially offset by lower auto loans. And loan yields increased 10 basis points compared to the first quarter, driven by higher interest rates. Slide 6 highlights the composition of our deposit portfolio as well as the average balance changes linked quarter. We have a strong core deposit base, which is 2/3 interest-bearing and 1/3 noninterest-bearing. Within interest-bearing, 70% are consumer, and within noninterest-bearing, 50% are commercial compensating balances and represent stable operating deposits. At the end of the second quarter, our loan-to-deposit ratio was 71%, which remains well below our pre-pandemic historic average. On the right, you can see linked quarter change in deposits in more detail. Deposits averaged $447 billion in the second quarter, a decline of nearly $7 billion or 2% linked quarter. Commercial deposits declined $8 billion or 4%, primarily in noninterest-bearing deposits due to movement to higher yielding investments and seasonality. Average consumer deposits increased seasonally by $2 billion or 1%. Overall, our rate paid on interest-bearing deposits increased 8 basis points linked quarter to 12 basis points. Deposit betas have lagged early in the rate rising cycle, but we expect our deposit betas to accelerate in the third quarter and throughout the remainder of the year given our increased rate forecast. And as a result, we now expect our betas to approach 30% by year-end, compared to our previous expectation of 22%. Slide 7 details our securities portfolio. On an average basis, our securities grew $800 million or 1% during the quarter, representing a slower pace of reinvestment in light of the rapidly rising interest rate environment. The yield on our securities portfolio increased 25 basis points to 1.89%, driven by higher reinvestment yields as well as lower premium amortization. On a spot basis, our securities remained relatively stable during the second quarter as net purchases were largely offset by net unrealized losses on the portfolio. As Bill mentioned, in total, we now have 60% of our securities in held to maturity as of June 30, which will help mitigate future AOCI impacts from rising interest rates. Net pretax unrealized losses on the securities portfolio totaled $8.3 billion at the end of the second quarter. This includes $5.4 billion related to securities transferred to held to maturity, which will accrete back over the remaining lives of those securities. Turning to the income statement on Slide 8. As you can see, second quarter 2022 reported net income was $1.5 billion, or $3.39 per share, which included pretax integration costs of $14 million. Excluding integration costs, adjusted EPS was $3.42. Revenue was up $424 million or 9% compared with the first quarter. Expenses increased $72 million or 2%, resulting in 7% positive operating leverage linked quarter. Provision was $36 million and our effective tax rate was 18.5%. Now let's discuss the key drivers of this performance in more detail. Slide 9 details our revenue trends. Total revenue for the second quarter of $5.1 billion increased 9% or $424 million linked quarter. Net interest income of $3.1 billion was up $247 million or 9%. The benefit of higher yields on interest-earning assets and increased loan balances was partially offset by higher funding costs. And as a result, net interest margin increased 22 basis points to 2.5%. Second quarter fee income was $1.9 billion, an increase of $211 million or 13% linked quarter. Looking at the detail of each category. Asset management and brokerage fees decreased $12 million or 3%, reflecting lower average equity markets. Capital market-related fees rebounded as expected and increased $157 million or 62%, driven by higher M&A advisory seats. Card and cash management revenue grew $51 million or 8%, driven by higher consumer spending activity and increased treasury management product revenue. Lending and deposit services increased $13 million or 5%, reflecting seasonally higher activity and included lower integration-related fee waivers. Residential and commercial mortgage noninterest income was essentially stable linked quarter, with higher revenue from commercial mortgage banking activities offset lower residential mortgage loan sales revenue. Finally, other noninterest income declined $34 million and included a $16 million Visa negative fair value adjustment related to litigation escrow funding and derivative valuation changes. Turning to Slide 10. Our second quarter expenses were up by $72 million or 2% linked quarter, driven by increased business activity, merit increases, and higher marketing spend. These increases were partially offset by seasonally lower occupancy expense and lower other expense. We remain deliberate around our expense management. And as we've previously stated, we have a goal to reduce costs by $300 million in 2022 through our continuous improvement program, and we're confident we'll achieve our full-year target. As you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 11. Overall, we saw broad improvements across all categories. Nonperforming loans of $2 billion decreased $252 million or 11% compared to March 31 and continue to represent less than 1% of total loans. Total delinquencies were $1.5 billion on June 30, a $188 million decline linked quarter, reflecting lower consumer and commercial loan delinquencies, which included the resolution of acquisition-related administrative and operational delays. Net charge-offs for loans and leases were $83 million, a decrease of $54 million linked quarter, driven by lower consumer net charge-offs, primarily within the auto portfolio. Our annualized net charge-offs to average loans continues to be historically low at 11 basis points. And during the second quarter, our allowance for credit losses remained essentially stable, and our reserves now total $5.1 billion or 1.7% of total loans. In summary, PNC reported a solid second quarter, and we're well positioned for the second half of 2022 as we continue to realize the potential of our coast-to-coast franchise.

In regard to our view of the overall economy, we expect the pace of economic growth to slow over the remainder of 2022, resulting in 2% average annual real GDP growth. We also expect the Fed to raise rates by an additional cumulative 175 basis points through the remainder of this year to a range of 3.25% to 3.5% by year-end. Looking at the third quarter of 2022, compared to the second quarter of 2022, we expect average loan balances to be up 1% to 2%. We expect net interest income to be up 10% to 12%. We expect noninterest income to be down 3% to 5%, which results in total revenue increasing 4% to 6%. We expect total noninterest expense to be stable to up 1%. And we expect third quarter net charge-offs to be between $125 million and $175 million. Considering our reported operating results for the first half of 2022, third quarter expectations, and current economic forecast for the full year 2022 compared to the full year 2021, we expect average loan growth of approximately 13% by an 8% loan growth on a spot basis. We expect total revenue growth to be 9% to 11%. Our revenue outlook for the full year is unchanged from the guidance we provided in April. However, relative to our expectations at that time, we now expect more net interest income from higher rates, offset by somewhat lower fees. We expect expenses, excluding integration expense to be up 4% to 6%. And we now expect our effective tax rate to be approximately 19%. And with that, Rob and I are ready to take your questions.

Rob, can you elaborate a little further on the deposit beta change? Is it purely just the rate of Or is there a deposit mix that's also influencing your new outlook for the beta?

Yes, probably both, but a little bit more of the former. We're just at that point now where we're seeing rates rising to the point where the betas are becoming active. They were not that active on the consumer side, a little bit on the commercial side in the first quarter, and that's picked up a bit. More on the commercial side, as we expected, and in our case, it's our non-operating deposits that explains the decline there in the second quarter. So betas are beginning to move. We expected that, and we're ready for it.

Credit quality remains strong, similar to the previous quarter. Bill, I know there is significant uncertainty in the world, but it seems your company is well positioned in terms of credit quality. Are we facing a major recession at the end of the year that might impact credit quality for banks? Could you provide your outlook on credit and the economy?

Yes, I don't believe there is any impending crisis. I think the challenges we face will emerge in the middle of next year, rather than in the next six months. It's important to note that as we move through this period, we are still managing a higher risk portfolio from BBVA, while our loan growth is primarily focused on higher quality borrowers. Consequently, the overall quality of our portfolio is actually improving each quarter. However, this trend cannot continue indefinitely. Eventually, I expect the Federal Reserve will need to slow down the economy to control inflation, which I believe will be more difficult and take longer than the market predicts. When that occurs, we will likely see credit costs rise, returning to what we consider normalized levels. However, I do not see any significant bubbles within the banking sector concerning credit. Instead, I anticipate a gradual increase in credit losses as we enter the slowdown.

And some normalization.

I'm sorry, what was that Rob, I'm sorry.

Gerard, Bill mentioned that some normalization is inevitable.

There was a time when you discussed increasing your securities mix due to the liquidity in the system. However, with the Fed implementing quantitative tightening and the strong loan growth you're experiencing, are you considering the opposite approach? Could you potentially redeploy some of your securities portfolio paydowns to support further growth, thereby increasing the proportion of your earning assets in loans?

I think, over time, that is probably likely if we continue to see loan growth we do. But you shouldn't mix security balances with the way we think about fixed-rate exposure hedging our deposits, right? Securities are one way we do that, swaps are another way, and then, of course, our fixed-rate assets themselves. Long story short, the balance is probably decline, but we're sitting in a period of time right now where we're very asset sensitive. You'll notice our balances basically stayed flat through the course of the quarter as we kind of purposely watch and let things roll off here given our view on what we think longer-term rates are going to ultimately do. So balances could go down just as a matter of sort of algebra in the balance sheet, but our ability to invest in rising rates is still there in a large way.

Yes, that's right. The context of your question is that historically, before the rapid increase in liquidity over the last couple of years, we allocated about 20% of our securities to our earning assets. We increased that due to the abundant liquidity in the system. While we're still high by historical standards, that is not likely to change anytime soon.

That's very helpful. And separately, as the Fed proceeds through the hiking cycle at some point, I think as you've both alluded to in your comments, that's going to presumably slow the pace of growth. But taking your loan growth guidance higher for the year, maybe could you speak to how much of that improved outlook is idiosyncratic because it certainly does sound like that you're expecting a deceleration at some point at the macro level?

A lot of it just comes from our ability to win new business. Utilization rates have largely approached where we were, I think, Rob, pre-pandemic at this point.

Yes.

There is some room for growth. Our success in new markets and acquiring new business, especially where 50% of it is fee-based, is quite strong. We are confident that we can maintain this momentum regardless of economic conditions.

Yes. And I would just add to that. In terms of the loan growth outlook for the 12 months, we're up a bit, mostly because of the outperformance in the first half relative to our expectations. So that's sort of truing up, so to speak.

Got it. And if I could squeeze in one last one. I think it's interesting, Bill, to think about your commentary around the normalization of credit as the Fed proceeds through its hiking cycle. And sort of we think about the long and variable lags that between monetary policy and when that ultimately starts to show up in credit, and then when you sort of juxtapose that with what's happening with reserve rates, which it's notable that for most of your peers, they've drifted below their day 1 levels.

That's a difficult question to answer considering the dynamics of CECL. However, we expect that credit quality will decline at a steady rate over the next two years. I don't anticipate that this decline will be particularly severe, and it seems to be a valid expectation based on the charge-off levels we have been observing.

I would add that our reserve levels are above our day 1 fee, so even when accounting for the BBVA acquisition, we are appropriately reserved. I feel good about it.

Just wanted to just ask to dissect a little bit. Rob, you mentioned that your outlook for NII is a little bit better. Your outlook for fees are a little softer. The NII one, I think we get, just wondering if you can help us understand now what kind of curve you're building in? And is it more just that uptick of rates that offsets that new 30% beta outcome?

Yes, that's correct, Ken. That's precisely the case. In a higher interest rate environment, the net interest income and the balances we've generated contribute to the improved net interest income outlook. You also mentioned the fees; we are generally expecting them to be softer this year compared to our initial forecasts at the beginning of the year and last quarter, particularly for AMG and mortgage, as anticipated, due to the performance of the equity markets for AMG and mortgage interest rates. So it's essentially a trade-off with the higher rates.

Got it. I apologize for missing your earlier comment about 3.25% and 3.50%. Thank you for that. Regarding the fees, there was a strong recovery as anticipated, particularly in the capital markets. What changes are you seeing in the outlook for fees?

So on the fee side, again, for the full year, most of the change relative to our full year expectations is within AMG and mortgage. On capital markets, you'll recall, we had a soft first quarter relative to our expectations. We did see the bounce back in the second quarter. So we're back in position with our full year expectations in the second half, obviously remains to be seen.

Okay. If I could ask one more question. Bill, you talked about the various ways to gain exposure to variable rates. I’m curious about your approach to the swaps portfolio. You’ve made some adjustments to protect and manage the potential near-term upside versus what might happen in the future based on Fed funds, Futures curve expectations, and your overall perspective on the economy.

We consider the swaps book as part of our overall investing and fixed rate exposure. In relation to our securities and swaps, we believe that the current year-end rates are mostly accurate, but we find the idea that the Fed will start easing in the spring of next year to be unreasonable. Therefore, we're holding off for now because we believe there is still value to capture at the longer end of the curve as people realize that controlling inflation is more challenging than they think. Additionally, the Fed is unlikely to cut rates immediately just because the economy is slowing if inflation remains high. So, we'll maintain our current position; we don’t view swaps and bonds as separate entities. Our focus is on our interest rate exposure, and we are very asset sensitive. While we have opportunities to invest in various areas, we are currently choosing not to do so and have allowed our positions to run down this year.

I'm sure if this is the question I can ask, but I just wanted to clarify the loan growth expectation rose, the performance has been spectacular, the revenues didn't move even though we had the higher loan growth and the higher rate outlook, and that's because of the higher beta assumed and also lower fees, Rob?

Well, in part. I think the earlier question you might have missed it, Erika, was the improved outlook for the full year loan growth. The answer was most of that was a true-up to our outperformance in the first half. So we grew loans faster than we thought we would in the first 6 months, which is great. So we true-up that full year expectation. So all of that is built in to the full year guidance.

Part of the impact we're seeing in net interest income and net interest margin is related to our loan yields, where the quality of our book has improved significantly. We've added a substantial amount of high-grade assets, and spreads have actually narrowed quarter-over-quarter. When we assess our forecast for net interest income, along with healthy loan growth, we incorporate the understanding that spreads are tighter than before as we enhance the quality of our book.

That's another component. That's right.

Got it. And just as a follow-up question. How should we think about deposit growth from here? Bill, I think you've been the one that has been vocal about the notion that if loan growth is positive, deposit growth should be positive. How should we weigh that relative to probably your willful desire to work out the non-operating deposits out of your balance sheet and QT.

Yes. Well, it's a good question, and the answer remains to be seen a little bit. We've clearly seen the larger corporates move liquidity out of the banking system into money markets, government money markets. And I think, as we go forward, the combination of QT from the Fed and what they do with their repo facility is going to drive some of the yield available in those funds, which in turn is going to drive how much of that sits on banks' balance sheets or not. Outside of those deposits, it's more about a rate paid game. And I think deposits kind of inside of the retail space and the smaller mid-market commercial space, I think deposits actually grow simply because of the loan volume. But the mix shift that we've seen in commercial from a little bit less noninterest-bearing into interest-bearing, that game is going to play out. So thus far, I mean, if you look at total liquidity in the system, it really hasn't moved. And of course, the Fed hasn't really started their QT program yet. What we've seen is a movement of liquidity from banks into money funds as money fund yields started to grow. So this is going to take a while to play out.

Yes. And our expectations, Erika, are generally stable, but Bill pointed the mix could be different. And then an open question on the nonoperational deposits, which we'll either do or not do.

Yes. A significant portion of what we have observed so far consists of deposits that aren't particularly important to us. We refer to them as surge deposits internally, as they are from non-core clients parking liquidity, which has now moved into funds.

And importantly, are, by definition low margin.

Got it. And my last question, Bill, you said earlier you don't really see any bubbles within the banking system. I think a lot of investors are more concerned about what's outside of the banking system. And interestingly, I'm sure you know this statistic very well. Corporate lending in terms of the bank share of it has declined to 16%. I guess my question to you is, do you see an opportunity as rates rise and the economy slows down, is some of that market share available back to banks in terms of what's happened in the private market? Or was that never credit that you wanted to do anyway? And don't you have a unit within P&C that does third-party recoveries in terms of if you have corporate defaults, you could be a third-party recoverer if that's the term.

Yes, I want to highlight the audit showing that only 16% of corporate credit is within banks, but I believe there’s a way to address that. Credit outside the banking system diminishes. We engage with this in two ways: first, through our special servicing arm in Midland for real estate-related credits, and second, we excel in handling corporate credits, including the acquisition of troubled asset portfolios. Additionally, as part of our asset-based lending group, we serve as senior lender on a secured basis and act as the agent for the entire capital structure. When lower-rated pieces experience difficulties, the potential fees for us to manage those loans on behalf of B lenders increase significantly. We have been approached by several B lenders to manage their portfolios as they prepare for upcoming challenges, but we have not yet committed to that. Should we choose to pursue it, I believe it could be very profitable.

And we've done that in the past.

Can you hear me?

Yes.

Okay. Great. I guess all these questions get down to NIM. So are you forecasting deposits to run off for the year because you've mentioned betas are starting to move? And I missed the updated guidance because you're guiding for good NII growth. So how much deposit runoff are you assuming in your deposit growth?

I can jump on that, and we covered some of that, Mike. Generally speaking, and we recognize the fluidity. For the second half, we're calling for stable deposits, some mix change between noninterest-bearing and interest-bearing also an open question in terms of nonoperational deposits and what betas are required for that and whether we choose to keep those or not. So that all remains to be seen. But the outlook is stable. And NIM, we do expect to expand.

And you talked about tighter loan yield spreads just because you're going up in quality. Are you getting rewarded for this more uncertain outlook? I mean, capital markets, some assets are pricing at near recession levels, but I feel like the lending markets are not doing the same. And are you getting more spread for the added chance of a recession?

It depends on the lending sector. For example, in asset-based lending, straight spreads on high-rated assets have stabilized. Much of what we're observing is a shift in the quality of our portfolio rather than a market change in spreads. However, we believe the consumer side is where the market appears irrational. Auto lending, in our opinion, seems to be somewhat of a bubble, and we're still seeing questionable practices on the consumer side. On the corporate and real estate fronts, the trend is shifting back toward banks, allowing us to negotiate better spreads, covenants, and structures. However, this shift is not as dramatic as some of the recent headlines suggest regarding capital markets.

So you're getting some of that. Bill, can you put this in context, this looks like the fastest commercial loan growth in 14 years. And we haven't had a cycle like this in quite some time. And I guess, I'm repeating, I think what you've said in the past. It's inventory, it's credit utilization, it's capital expenditures, it's working capital, some business from capital markets back to the banks. Did I miss anything there?

No. I mean, thank you for reminding. I mean that's what happened, right? We've had inventory build and CapEx and a little volume back to the banks and boom, you get big loan growth.

Yes, in particular, and it overlaps, Mike, particularly on the utilization, which has grown.

Yes. But that's coming off of their inventory, Bill, which overlaps.

The one I didn't mention that some other banks have mentioned, you did not. So I don't want to leave the witness here, but in terms of gaining share from nonbanks, because you're seeing some nonbank entities not on a solid footing as they were in the past. Are you gaining share from them? Do you expect to gain share from them? Are there opportunities to do so? Are you shifting resources because I get it, you're the national main street bank, you're in 30 MSAs. You have a lot on your plate to try to gain share in all those markets. Meanwhile, you have some verticals where you might be able to gain share. What are you doing to try to capitalize on that?

Yes. Mike, most of those players play in a risk bucket that we don't like to play in, right? So the exception to that is, in our asset-based lending book, where borrowers who might have been able to do a cash flow loan with a BDC at one point are now going to come back to the banks and do it asset-based. But on the consumer side, the guys who are out there playing subprime consumer or even in the leverage lending side, cash flow unsecured, we just don't have a big book of business there, nor do we want one.

Regarding commercial loan growth, I apologize if I overlooked any details, but I recall you mentioning the $5 billion in high-quality, short-term loans that you anticipate will mature in the latter half of the year. Could you provide more insight into those balances and what influenced them? Additionally, do you foresee any further increases in this type of lending?

We'd like to see additional flows in that type of lending.

Sure.

We had a few clients with specific timing needs that we were able to address, and their significant balances are expected to run off.

And we'd like to do that.

Yes. That happens again, that's great. But these were specific ones we called out both because of their size and also because there are lower spreads in the rest of the book and that had some impact on the loan yield this quarter.

Okay. And then also related to that, in what areas do you expect that you could see some moderation in commercial loan demand as we do get some slowing in economic activity if the Fed succeeds here with the tightening?

Eventually, what you're going to see, we've seen utilizations go up as people have built inventories. Now that will reverse itself as we get into a slowdown and people struggle to move inventories. It will peak, and then they'll grind it to a halt. But I think that's going to end up being the driver. We'll continue to go work and gain share. And ultimately, against the money we put out, we look at what happens to utilization and utilization will start to drop through a slowdown, peak early into it and then slow down as they try to free up working capital.

Okay. I understand. Regarding your reserves, have the economic scenarios you analyze to support CECL worsened compared to last quarter? How have they changed? Additionally, were there any significant reallocations within the reserve, such as from commercial to consumer? Can you elaborate on that? I'm trying to gauge your level of confidence.

Without going into the specifics of CECL, I can tell you that we increased our overall provision by adding two reserves based on the scenarios we analyzed.

Yes. I mean, it's pretty stable, John. So no big mix changes, no big dollar changes. The percentage came down a little bit just because of largely the high credit quality, large underwritings we just spoke about improving the mix. So pretty much unchanged.

Well, no, so to clarify that. In terms of the dollar amounts and the stable. But inside of that, obviously, our scenarios built in some worsening concepts. But there's QFR as part of that process that offset that. So end of the day, stable.

I guess just 1 follow-up, Rob. In terms of as we think about the outlook for deposit betas and margins, if the Fed stops at the end of the year, you talked about the deposit beta and deposit growth expectation in the back half. But give us a sense of the asset sensitivity profile of the balance sheet in a world where the Fed stops hiking, the 2.10 remains inverted for 6 to 12 months. And as Bill alluded to, we may not get cuts as quickly. In that backdrop, do you still expect the margin to drift higher? Or do we start seeing some liability sensitivity where deposits are repricing higher, but you're not seeing the benefit on the asset side?

Yes, yes. We don't give explicit NIM outlook. But I would say your question is when does NIM peak. We see NIMs continuing to expand and peaking in '23. So with everything that you described, we still see upside in them.

Got it. So safe to assume that even in a backdrop where the Fed stops hiking, the NIM should still at least drift higher a bit for a few more quarters. So point noted.

Yes, possibly. And again, we're in sort of that context, we're talking about '23 then. 2023.

Yes, you have to. The number of pieces that are moving inside of that, even if let's assume they get out there and they just freeze and you have a small inversion in the curve and you sit there, in that instance, betas probably don't move from wherever they were post the last hike. And instead, what you're going to see is a increase in fixed-rate asset yields that basically roll off from very low yields into higher yields. And then the upside to the extent we want to deploy at that point. So you see a gain in yields inside of the security book in a static environment simply because everything that was purchased with 1.5% handles rolls off.

Yes, that's correct. That's why we are still some distance from the peak.

Yes, that's a good point. Just to remind you, while we are making progress, we are not in a hurry. There is no rush to address this in terms of our current exposure. The inventory question is all over the place because you have a bunch of customers who have more inventory than they want. And you have others who are still struggling to build inventory to keep up with supply because of continued supply chain disruption. So I don't know that there's a simple answer on inventories. Real estate, aside from the ongoing concern with office spaces, is holding up fairly well. We remain cautious about the slow deterioration we observe in that sector, but we feel adequately reserved. Excluding that specific issue, the rest of the real estate market continues to perform reasonably well. While the slowdown is on my mind, I do not anticipate a significant spike into a severe recession. We are monitoring the real estate situation closely and have positioned ourselves against the risks in the office market, which is unfolding as we had anticipated. Overall, we are not particularly concerned about the broader real estate outlook.

Yes. And, to your point, we're well reserved. And multifamily, which is the biggest component of that, is very strong. I did in my opening comments. We're going to continue buying back shares roughly at the average rate of what we've been doing the last couple of quarters.

As we think about loan loss reserves in, call it, a moderate recession, how high or how much add do you think you have to do? I think, for COVID, it was around $2.5 billion X the day 1 CECL impact. But obviously, there's been a mix shift, the BBVA deal and a lot of factors. But as you guys run your stress tests, what would cumulative reserve bill be for a moderate recession?

No way to answer that.

I was going to say that, Bill said there was an earlier impossible question. Yes, that one might be number two.

It’s important to recall the reserve buildup during COVID. The scenarios we are considering don't specifically relate to whether employment reaches 15% or if GDP increases. We're anticipating a slowdown, which is likely to lead to an increase in reserves, but that won’t be linked to the circumstances we faced when the economy collapsed during COVID.

Right.

Yes, just in terms of size. So you almost have to take that whole example set and remove it from the framework of how you think about provisions going forward.

Right. So it seems like you're implying, and we've heard from some others that it should be a lot less. But I guess we'll see.

Matt, I believe you're highlighting an issue that many investors misunderstand about the current banking system. If we examine the market capitalization that has exited the banking sector and consider the worst-case scenarios for reserve increases and charge-offs during a market cycle, it's quite exaggerated. While we will see some increased losses, they will not reach that level. More importantly, I see a growth opportunity for us during a mild downturn, based on how we operate our business and the influx of business back into the banking system from the capital markets. Therefore, I am genuinely puzzled by the widespread concerns regarding banking reserves, the impending recession, and how these factors will affect bank profitability. While there will be some impact, it won't be as severe.

To your point, if it's being extrapolated from the COVID scenario.

It's just a data point that needs to be removed.

And then just the flip side got a little over $8 billion of losses in OCI. Obviously, a lot of that comes back over time, the part that's related to the bond book. Just give us a rule of thumb like how much of that accretes back each year if rates stay here on the kind of the medium, longer-term part of the curve?

The held-to-maturity accretes back independent of this point. I don't know you all.

We disclosed that, Bryan. It's a couple of hundred million.

Internally, we believe that given our movements, we should have addressed the held-to-maturity book in a way that enhances our capital base while effectively mitigating further declines in AOCI and the available-for-sale book, depending on rate fluctuations. Overall, we are confident in our current mix. Additionally, this situation is not affecting our capital flexibility concerning AOCI in relation to regulatory capital.

Yes. And I guess what I was asking is like if we just think over the next few years, right, like all that OCI eventually gets reversed back as the bonds mature, you are saddled with $8 billion of losses like a lot of banks, having a drag. I'm just wondering what's a good rule of thumb? Does that $8 billion come back, kind of maybe $1.5 billion, $2 billion a year or something like that?

I mean, let's say we've got a 7 years or something.

Well, the short answer is approximately $200 million a quarter, $1 billion a year. So that's the number you're looking for. But that's the right neighborhood.

Sorry, that's out of the held to maturity.

Held to the maturity. Yes, the held to maturity.

Just 1 follow-up on that, on the AFS book. I guess the underlying question is, is the duration roughly the same as the HTM book. I get that rates will move that mark around, but let's say, rates never change. Is it the same duration as HTM?

Yes, roughly. Yes, roughly.

Yes, I have some questions regarding deposits. Your loan-to-deposit ratio today is about 70%, possibly 71%, compared to 83% in the fourth quarter of 2019. There is considerable room for improvement in the loan-to-deposit ratio. Are you aiming to return to 83% soon, or do you have a specific path or pace you feel comfortable with?

Look, if it's high quality, we'd love to go back to 83%. If it's in our risk box and coupled with client relationships where we have really strong cross-sell, that would be a great outcome.

Well, that also relates to the deposit pricing and what we choose to do. So yes, you're right. We have room and flexibility there as we go through these increased betas and a growing loan environment.

Right. So part of the question is just trying to get a sense as to the pace of LDR increase you kind of control with the deposit pricing?

Right.

So you could let a lot more run off before you start.

No. I don't think. I mean, look, our intention here is to keep deposits and grow deposits if we can without having to be aggressive on rate. It's very simple. And inside of that, we'd like to grow loans. And if we manage to do the 2 things there and grow loan to deposits to 83%, we'll be making a load of money given the fee mix we get when we grow loans.

That's a good idea.

That would be a great thing to be able to do, and we’re going to work on it.

Yes. Well, I mean, I guess part of the question is you don't have to be more competitive on deposit rate right now, you could wait a few more quarters and then move.

Yes. That's what I said.

Yes.

I wanted to follow up because, Bill, you seem very certain that the market cap that has been lost from your stock is much greater than the credit loss impacts you anticipate. So, let me ask personally. You have held a significant amount of stock for a long time, indicating you have a vested interest. At what point would you decide to invest further and purchase additional shares? We haven't seen that from any other bank CEO. If you believe this situation is a dislocation and consider it unlikely that we will face a severe recession, global financial crisis, or pandemic, have you thought about this? Would you be willing to make that move?

I think about it constantly. While I don't usually discuss my personal financial situation, I find a lot of value here. It's notable that several senior executives have joined our employee stock purchase plan, which might allow me to acquire a few shares over time. Overall, I truly believe there's significant value present. However, I don't anticipate making a large purchase since, as you mentioned, I already own a substantial amount of stock, which constitutes most of my net worth.

I just want to emphasize something that you previously mentioned on the call. There seems to be a disconnect between how the capital markets are priced and your expectations in other areas. You pointed out that the power has shifted back to the banks from the borrowers regarding terms and structure, although the pricing may not reflect that to the same extent. The challenge lies in determining how to price these loans, especially with the potential for a recession on the horizon. How do you approach that pricing decision?

Pricing is ultimately determined by the market. For a given credit quality, I expect to see small increases. Additionally, pricing is influenced by a grid. As we enter a slower economy and people increase their leverage based on performance, we will see fluctuations in spreads that are already factored into existing contracts because spreads depend on performance for many of the loans we handle. We will reach that point. More importantly for us, Mike, is the cross-selling we achieve. In the end, while loan prices matter, what’s essential is that we maintain good structure. Pricing is significant, but when combined with a strong relationship in the TM sector and capital markets, it really enhances the returns from that client relationship.

And there's a structure component. There's a lot of good companies out there that don't have structures that we would lend into that they could change that.

And then I guess one more. Just in terms of your 30 MSAs or your newer markets, your BBVA markets, do you have any metrics on what market share you have there versus your legacy franchise? Because that would size the opportunity.

It's small. Big opportunity. Opportunity is big.

Big opportunity. We don't need to worry about that right now. We just need to do more.

Thanks, everybody.

Thank you.