PNC Financial Services Group Inc (PNC) — Q4 2024 Transcript

Well, good morning and welcome to today's conference call for the PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC, and participating on this call are PNC's Chairman and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials, as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of January 16, 2025, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Thank you, Bryan, and good morning, everyone. As you've seen, we had a solid fourth quarter and a very strong year. For the full year 2024, we earned $6 billion, or $13.74 per share. We executed well against our priorities and continued to gain momentum across our franchise. While loan demand remained soft throughout the year, our net interest income benefited meaningfully from fixed asset repricing, and we expect to see further tailwinds from repricing over the next couple of years. We grew fee income by 6%, and we achieved record revenue. At the same time, we maintained our expense discipline, allowing us to deliver positive operating leverage, which is an aside and you will recall that looked pretty much out of reach at the start of 2024. Finally, we grew capital and increased our tangible book value per share by 12% compared to last year, while returning $3 billion of capital to shareholders through dividends and share buybacks. Now, Rob's going to walk through the financial results in more detail, but I wanted to take just a moment to reflect on the strength of PNC's positioning, as we head into 2025. Our businesses are performing exceptionally well, and we continue to see positive momentum, particularly in our expansion markets. CNIB had record revenue and non-interest income in 2024, as new client growth continued at an accelerated rate. Our sales and our expansion markets grew 26% with over 60% of those sales being non-credit. In retail banking, consumer DDA growth in 2024 was the highest it's been in eight years and we produced record brokerage revenue at PNC Investments and the asset management group delivered its strongest level of positive net flows in years. Going forward, we're investing in new products and an expanded footprint to further accelerate our momentum. We will soon be rolling out our new online banking platform. We are doubling our new branch builds to gain scale on some of the fastest growing regions in the country. And on the corporate side, we recently announced our entry into the Salt Lake City market. As Rob will highlight, our forward guidance solidly points to record NII in 2025, as well as strong fee income growth across our franchise. This combined with our ongoing expense discipline positions us to deliver meaningful positive operating leverage this year. There are a lot of uncertainties regarding the outlook for the economy, interest rates, the regulatory environment. We believe that PNC's balance sheet is well-positioned. We are adequately reserved for our credit risk and our strong capital levels provide substantial flexibility, as we enter 2025. Before wrapping up, I'd like to spend just a moment to express our sympathies to those who have been impacted by the wildfires. PNC is, of course, committed to supporting our customers, our communities, and importantly, the more than 200 employees we have in the affected areas. I also want to thank our employees for everything they do for our company and our customers. We accomplished a significant amount in 2024, and we're entering 2025 with a lot of momentum. I've never been more excited about the opportunities in front of us to continue to grow our franchise and to deliver for our stakeholders. And with that, I'll turn it over to Rob to take you through the numbers.

Thanks, Bill, and good morning everyone. Our balance sheet is on Slide 4 and is presented on an average basis. For the linked quarter loans of $319 billion were stable, investment securities increased by $2 billion, and our cash balance is at the Federal Reserve for $38 billion, a decrease of $7 billion or 16%. Deposit balances grew $3 billion and averaged $425 billion. Borrowed funds decreased $9 billion or 12%, primarily due to the maturity of FHLB advances. At quarter end, AOCI was negative $6.6 billion compared to negative $5.1 billion as of September 30, reflecting the impact of higher rates. Our tangible book value was $95.33 per common share, which was a slight decline linked quarter due to the decrease in AOCI, but a 12% increase compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 10.5% as of December 31st. And 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. We returned approximately $900 million of capital to shareholders during the quarter through both common dividends and share repurchases. Slide 5 shows our loans in more detail. Average loan balances of $319 billion were stable compared to the third quarter, and the yield on total loans decreased 26 basis points to 5.87% in the fourth quarter, primarily driven by lower short-term rates. Consumer loans averaged $100 billion and were essentially flat-linked quarter, as growth in auto was offset by a decline in residential real estate. Commercial loans of $219 billion were stable as growth in CNIB and leasing balances was offset by a $1 billion decline in commercial real estate loans. On a period-end basis, commercial loans declined roughly $5 billion, reflecting both lower CRE balances and utilization rates. Slide 6 details our investment security and swap portfolios. Overall, we continue to be relatively neutral to changes in interest rates in 2025, and we continue to manage our fixed and floating rate assets to reduce interest rate sensitivity in future years. Average investment securities of $144 billion increased $2 billion as purchases more than offset runoff and maturities. During the quarter, we continue to add floating rate securities, and our total portfolio is now 20% floating, compared to 6% a year ago. The majority of our floating rate securities are designated as available for sale, and as a result, comprise approximately 40% of our AFS portfolio. Also, floating rate securities are a higher yielding alternative to excess cash at the Federal Reserve. The yield on our securities portfolio increased 9 basis points to 3.17%, driven by higher rates on new purchases and the runoff of lower yielding securities. And as of December 31st, the duration of our securities portfolio was approximately 3.4 years. Our received fixed rate swaps pointed to the commercial loan book totaled $50 billion on December 31, comprised of $37 billion of active swaps and $13 billion of forward starting swaps. The weighted average received rate on the active swaps increased 14 basis points linked quarter to 3.22%. Looking forward, we expect considerable runoff in our short-term duration securities and swap portfolios, which will allow us to continue to reinvest into higher-yielding assets. Accordingly, AOCI will accrete back with maturities, resulting in continued growth to tangible book value. A full update on the expected maturities and AOCI burn down is provided in the appendix. Slide 7 covers our deposit balances in more detail. Average deposits increased $3 billion, or 1%, reflecting continued growth in interest-bearing commercial balances, partially offset by lower consumer brokered CD balances. 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 declined 29 basis points during the fourth quarter to 2.43%, reflecting pricing actions commensurate with the Fed rate cuts. Our cumulative deposit beta through December was 47%, and going forward, we expect our beta to be in the high 40% range during the anticipated rate-cutting cycle. Turning to Slide 8, we highlight our income statement trends and a few notable items this quarter. Fourth quarter net income was $1.6 billion or $3.77 per share. Comparing the fourth quarter to the third quarter, total revenue of $5.6 billion increased $135 million or 2%. Net interest income grew by $113 million or 3%. And our net interest margin was 2.75%, an increase of 11 basis points. Non-interest income of $2 billion increased 1%. Non-interest expense of $3.5 billion increased $179 million or 5%. The increase included non-core items netting to $79 million pre-tax, or $62 million after tax, which I'll provide more detail on in a few moments. Provision was $156 million, reflecting improved macroeconomic factors and portfolio activity. And our effective tax rate was 14.6%, which included $60 million of income tax benefits related to the resolution of certain tax matters. Turning to slide 9, we highlight our revenue trends. On a full-year basis, we generated record revenue of $21.6 billion, as lower net interest income was more than offset by 6% growth in non-interest income. Looking at the linked quarter comparison, revenue increased $135 million, driven by higher net interest income. Net interest income of $3.5 billion increased $113 million, or 3%, driven by lower funding costs and the continued benefit of fixed rate asset repricing. Fee income was $1.9 billion and decreased $84 million, or 4% linked quarter. Looking at the detail, asset management and brokerage income declined $9 million, or 2%, reflecting lower annuity sales, partially offset by the benefit of higher average equity markets. Capital markets and advisory fees decreased $23 million or 6% reflecting elevated third quarter activity. Card and cash management fees were stable as higher Treasury management revenue was offset by credit card origination incentives. Lending and deposit services revenue grew $10 million, or 3%, due to increased customer activity. Mortgage revenue declined $59 million linked quarter, primarily due to elevated hedge gains in the third quarter. And our other non-interest income increased $106 million, reflecting a less negative impact from Visa derivative activity. Turning to Slide 10. Full year non-interest expense decreased by $488 million or 3%. Core non-interest expense was down $152 million or 1% compared to 2023. As a result, we generated positive operating leverage on a reported basis, as well as adjusted for non-core expenses. Fourth quarter non-interest expense of $3.5 billion increased $179 million or 5%. As I mentioned, the quarter included $79 million of non-core expenses, which reflected $97 million of asset impairments, partially offset by an $18 million reduction to the FDIC special assessment. The asset impairments included a number of items and were primarily related to various technology investments. Core non-interest expense increased $100 million or 3% linked quarter, largely due to seasonality and higher marketing spend. As you know, we had a 2024 goal of $450 million in cost savings through our continuous improvement program, which we exceeded. Looking forward to 2025, our annual CIP target is $350 million. And this program will continue to fund a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 11. Non-performing loans decreased $252 million or 10% linked quarter, driven by lower C&I and CRE NPLs. Total delinquencies of $1.4 billion were up $107 million or 8% compared with September 30. The increase was primarily driven by commercial loan delinquencies, the majority of which have already been or are in the process of being resolved. Net loan charge-offs were $250 million. The $36 million linked quarter decrease was driven by lower office CRE charge-offs and higher commercial recoveries. And our annualized net charge-offs to average loans ratio was 31 basis points. Our allowance for credit losses totaled $5.2 billion or 1.64% of total loans on December 31, down 1 basis point from September 30. Slide 12 provides more detail on our CRE office portfolio. Our office CRE balances declined 7% or approximately $500 million linked quarter as we continue to manage our exposure down. Criticized loans and non-performing balances also declined as paydowns and charge-offs outpaced new inflows during the quarter. Net loan charge-offs within the CRE office portfolio were $62 million, down from $95 million in the third quarter. Despite this decline, we continue to see stress in the office portfolio, given the challenges inherent in this book and the lack of demand for office properties. As a result, we expect additional charge-offs, the size of which will vary quarter-to-quarter, given the nature of the loans. Our reserves on the office portfolio increased to 13% as of December 31 up from 11% the prior quarter. The increases in reserves reflects the continued valuation adjustments across the portfolio. Accordingly, we believe we are adequately reserved. In summary, PNC reported a solid fourth quarter, which contributed to an overall successful 2024, and we are well-positioned for 2025. Regarding our view of the overall economy, we're expecting continued economic growth over the course of 2025, resulting in approximately 2% real GDP growth and unemployment to remain slightly above 4% through year-end. We expect the Fed to cut rates 2 times in 2025 with a 25 basis point decrease in March and another in June. Looking ahead, our outlook for full year 2025 compared to 2024 results, is as follows. In regard to loan growth, while a lot of indications point to accelerated growth, we've not built that into our guidance. As a result, our guidance reflects spot loan growth of 2% to 3%, which equates to stable average full year loans. We expect total revenue to be up approximately 6%. Inside of that, our expectation is for net interest income to be up 6% to 7% and non-interest income to be up approximately 5%. Non-interest expense to be up approximately 1%, and we expect our effective tax rate to be approximately 19%. Based on this guidance, we expect we will generate substantial positive operating leverage in 2025. Our outlook for the first quarter of 2025 compared to the fourth quarter of 2024 is as follows: we expect average loans to be down approximately 1%; net interest income to be down 2% to 3% which includes the impact of 2 fewer days in the quarter; fee income to be stable; other non-interest income to be in the range of $150 million to $200 million, excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be down 1% to 2%. We expect total non-interest expense to be down 2% to 3%, and we expect first quarter net charge-offs to be approximately $300 million. And with that, Bill and I are ready to take your questions.

Hi, good morning. I wanted to start off with a take on industry deposit growth and trends in '25. What are you guys seeing for the industry this year? And then maybe some comments on PNC's ability to gain some share in retail deposits, particularly as you start densifying some of the expansion markets.

Hi John, good morning. It's Rob. Yes, so on deposits, in terms of our outlook for '25, we do see growing deposits slightly 1% to 2% over the course of the year. We do expect some seasonality, though on commercial deposits where they'll go down a little bit in the first quarter and then grow from there. As far as our organic efforts in the expansion markets, things are going really well, and things continue along those lines. I'm sorry, Bill, the DDA growth that Bill talked about at the beginning bodes well for us.

Okay. Thanks Rob. And then in terms of the NII guidance, maybe just some thoughts on the cadence and the drivers? Obviously down in the first quarter. And then how do the drivers align to pick up sequentially and kind of get to that 6%, 7% for the year?

Yes, so a couple of things on that, and I'll just repeat what I said in the opening comments. Our guide for the full year and for the first quarter is very conservative in terms of loan growth. Average loans for the full year stable, spot up 2% to 3%. So we want to emphasize that in terms of how we calculate our full year NII and for the first quarter. Inside of that, obviously, it is a continuation of the fixed rate asset repricing that we talked about a lot and the continued dynamics around the floating rates and the deposits. In the first quarter, we do call for NII to be down 2% to 3%. 75% of that decline is fewer days. And then the balance is just some lower seasonal commercial deposits that I talked about, both interest-bearing and noninterest-bearing which is typical. And then again, I emphasize no loan growth in our first quarter NII guidance.

Okay. And does the fixed asset reprice kind of pick up as you go through the year or is there any kind of weighting to that throughout the year?

It is fairly balanced. It will continue on the current trajectory through 2025 and beyond.

Okay. Thank you.

Thank you. Good morning guys. Thanks for taking the question. Let's see. Rob, so you've emphasized a couple of times not a lot of loan growth baked into the guide, which I appreciate. Just curious now that the dust has kind of settled on the election, maybe just updated thoughts on how you might see demand developing. It is pretty clear that's not going to be a requisite to hit your numbers. But just what are your clients thinking saying, could we evolve something into the second half of the year? How are you thinking about kind of the major touch points you'll be looking for?

We've been asked this question for four quarters. There are many signs suggesting that utilization should increase. I should mention that we are growing our client base and expanding our products. However, despite this growth, utilization has decreased, leading to lower balances. If the new administration clearly outlines their plans regarding tariffs and other policies from the start, it may encourage investment and a rise in utilization. However, as we have mentioned before, we have become somewhat weary of trying to pinpoint when things will improve and prefer to take a more cautious approach.

Got you. Perfect. All right. Thanks Bill. And then Rob, in the past, you've mentioned that the company can achieve a 3% normalized margin. I'm curious if that's too ambitious for this year, given that much of the increase in net interest income seems to be planned throughout the year. Do you think it's possible to reach that 3%, or will it take longer to develop?

Yes, so we've talked about that. We don't provide NIM guidance because it is an outcome. We do expect NIM to continue to increase through the course of 2025. We've approached that 3% level in the past, and I think it is logical to assume that we’d get close to that.

All right. Perfect. Thank you very much. Appreciate it.

Thank you, Rob. Just to clarify, this is an important discussion with your investors today. Regarding your response to Scott's question, can we consider that 3% as an annual exit rate? I understand that you don't provide net interest margin guidance, but from a mechanical perspective, I wanted to confirm if that's what you're indicating. Also, concerning the two rate cuts you have in your guidance, some people may only expect one cut. Does it really make a difference whether it’s one or two cuts for your outlook on net interest income?

So the second question first. No, it doesn't. We're very neutral to rates, we've said that. So '25 is sort of locked in from a rate perspective. And then on your first question, yes confirmed, approaching 3% by the end of '25.

Great. And my follow-up question here is how Bill, maybe you think about the demand construct for lines of credit in the rate environment that the forward curve is pricing in. So with a higher neutral rate than we expected and maybe some flatness, we don't have that now but maybe some flatness from SOFR to the other benchmarks, how do you expect that in terms of impacting whether or not companies seek out to finance their projects through lines of credit versus going to the capital markets? And how much of that dynamic is embedded into your more conservative guide?

The conservative guidance is mainly due to our lack of visibility regarding the factors that might lead to changes. The choice between using a capital market or a line of credit depends on pricing. For instance, a line of credit could be converted into fixed, and capital markets can also offer fixed options. Therefore, I'm not certain that’s a key driver. Generally, higher rates would affect, and likely have affected, the overall amount of credit lines being utilized, as holding inventory and working capital becomes pricier. I'm sure this is at least partly why utilization rates are lower now compared to pre-COVID levels.

Got it. Thank you.

Good morning. Just on the fee income side, I want to see if you can unpack the 5% growth outlook a bit for 2025, maybe just look at the most noteworthy drivers. I know you've talked about the capital markets opportunity quite a bit in the past as well as treasury and cash management and other areas. So if you could just help us and think about what are the largest drivers of that 5% outlook. Thanks.

Yes. Sure, John. Just in the order of how we report our fees by categories for 2025, asset management, we would expect to be up mid-single digits, capital markets and advisories up mid-to-high single digits, card and treasury management up mid-to-high single digits, lending and deposit services up maybe low single digits. And then lastly mortgage, we expect to be off approximately 10% or even more. That's a small component but that's our best thinking at the moment.

Got it, Rob. Thanks for that information. It's helpful. Regarding capital on the buyback front, you're at the 10.5% CET1 level and have repurchased $200 million in the fourth quarter. How should we consider a reasonable pace as we look towards 2025? If the $200 million level seems reasonable, could that be maintained if you experience an increase in loan growth from your conservative expectations?

Yes. I think yes, the answer to that second part is yes, we can sustain that. And the current plan is to continue at the levels that we've been doing. You saw $200 million in the fourth quarter, so between $100 million and $200 million is where we've been averaging, and that's what I would expect going forward.

Okay. Great. Thanks Rob.

Hi Bill, I guess I've been asking this question for the last three or four calls, so I break the streak. Loan growth, so you're giving your NII guide assuming not much loan growth, just average, 0. And I know you're getting out of the forecasting business and so you just say it's basically 0 and here's your NII guide. And you're guiding for 400 basis points of operating leverage and that's that. Having said that, with all the caveats and the answers you gave before, what do you think is really happening? Is all the loan growth just going to debt capital markets or are the corporations just sluggish or what's going on?

It is not going to capital markets. I mean, there's a part of our book in the large corporate space where utilization has probably dropped more than most because of their ability to hit capital markets. But it's across all the subsegments from smaller commercial to middle market through to even our specialty businesses and asset-based finance, for whatever reason Mike, utilization is lower. And part of that's got to just be total cost. Part of it is got to be, we've been running into a lot of uncertainty, right? We've been calling for this landing for the better part of two years and people would like to have landed and got on with it, I think, before they invest a lot of capital. I think three quarters ago, if not four, we kind of said we're going to quit forecasting this. We don't need it. We showed you numbers to beat those numbers. And loan growth kind of ended up where we thought three or four quarters ago, which was not great. I don't know that it's going to be not great in '25. I just don't know what it's going to be. So you plug in any number that you want.

Or importantly, when it's going to be.

Yes. The important thing to remember, Mike, is that we are not going to behave differently than any other bank. We're not changing our approach. We're not exiting or entering any markets. We have a significant amount of revolving credit that will adjust with the market. I just don't want to commit to a figure that has a lot of uncertainty.

Got it. And then just as a follow-up, Bill, you've never been shy whether you've testified to Congress or with your views on your CEO letters. There is a new administration. I think they're listening. So if you were talking to them and you do indirectly through the different industry groups, what would you hope to see changed, as it relates to the regulation at PNC?

A couple of different things. One is, I think the government has to get off of the assumption that somehow the banking industry is the piggy bank to cure the ills in the world. All of the silliness around canceling fees and rebating and all the other stuff, I think they got to get back to following the law and I think that will be a good thing. And of course, the industry is sued on a number of those proposals, and I’d expect that we'll have some success with that. I think they need to focus, and we repeatedly emphasized, this notion of focus on the core risks. We spend too much energy on things that do not affect the safety and soundness of the banking institution and not enough, as we saw a year ago, on things that do. And I would hope to see that we'll see some changes inside of that. There at some point, they'll renew Basel III. My best guess is that will be a neutral outcome. I don't think it is going to cause things to go lower. I don't think it is going to cause them to go up. There's going to be some changes to the stress test that maybe reduces volatility. But personally, I don't expect big changes in the outcome. And that's kind of it. Let us do our job. The banking industry does a lot of good for this country. And I think, by and large, the industry is in a really good place over the next couple of years.

Okay, great. Thank you.

Hi, thank you. Good morning. I have a question about loan growth. I'm curious how much of the C&I weakness is due to paydowns, as companies can refinance and pay down their C&I loans. With the SOFR curve being relatively flat for the two-year, three-year, four-year, and five-year terms, are there any changes occurring that you could discuss? How is that affecting the overall figures?

I don't think at all. The shape of the curve is largely irrelevant. The company figures out how long they want to borrow for and whether they want to do it fixed or floating. And they can achieve that either through a bond in the capital market swap or a loan that's reset the other way or whichever way they want to do it. So I think this is raw demand for capital. I think, as I said, for large corporates, the spread component in the capital markets is really attractive. So that's driven by spread and demand in public markets as opposed to some notion of expense.

All right, so originations are quite low.

But that's not right either.

It's just going to.

Originations are high. Utilization is low.

Yes. So Betsy, our unfunded commitment growth has been strong all year, including in the fourth quarter. So those are lines that our commercial customers are establishing that they're paying for, which is probably the strongest indication of borrowing intent.

Okay. I have a separate question about liquidity. Rob, you mentioned the liquidity number you have at the Fed and with rate cuts expected soon. I know your liquidity coverage ratio is very high, indicating strong liquidity. You are clearly a leader in liquidity. I'm just curious, are we potentially missing out on some earnings by keeping all that liquidity? In your outlook for net interest income this year, do you plan to maintain all that liquidity at the Fed, or is there an expectation for redeployment at some point?

That is actually a fair question. If we knew with certainty that there really wasn't going to be any loan growth, then we would probably deploy the cash in a different form that would have a slightly higher yield. So there is an interplay there that probably isn't in our guidance and is fair.

Okay, thank you.

And reflects our optimism even though if it's not in our guidance.

Right.

Hi Bill, hi Rob. Can you share your thoughts on the competition from the capital markets? You've been navigating this for 40 years. The private credit sector seems to have received significant attention recently. I'm curious whether the introduction of Basel III in July '23 prompted banks to reevaluate their risk-weighted assets. There has been talk about risk-weighted asset reductions. Did private credit firms take advantage of that change? Do you encounter them often, particularly in the large corporate space, or do you see them more in the middle markets, or is it mainly the larger deals where they operate?

You're addressing two distinct issues. The trend of reducing risk-weighted assets involved selling structured credit, utilizing credit derivatives to protect lower tranches on auto loans or similar assets. This approach focused on divesting the highest-risk tranches from existing credit portfolios to achieve regulatory capital benefits. The shift of private capital towards credit represents the next investment opportunity. We discussed this with several bank CEOs at a recent conference, and none of us noted a deal we regretted losing. However, we have observed that we have not opted to compete at pricing levels we found unacceptable. This is crucial. At PNC, we've established a partnership with TCW to ensure that in certain cases, rather than losing clients, we retain them through alternative options that allow us to maintain total relationship management and related fees.

On the operating aspects, yes.

Yes, today. But the current situation in private credit, despite all the headlines, is not related to the reasons our loan growth is lower than it has been historically.

And you guys have been very strong in the asset-backed lending area. Do you see other competitors in that arena or no, it's just the traditional asset-backed lenders that you've competed against for years?

We are primarily dealing with traditional players. When discussing asset-backed lending and the asset base, it is a significant operational business that requires hundreds of field auditors nationwide. It is challenging for a fund to decide to enter that market because of the extensive operations involved.

Can you provide an update on the rollout of the new branches? Which regions are you targeting first, such as the Southwest or the West Coast, and what can we expect in terms of your expansion plans over the next few years?

Hi, Gerard, it's Rob. Yes, I would say it's in all the places that you would expect. The recent sort of step up has a focus on South Florida, the Miami area. But of course, in our expansion markets in Texas, Arizona, Colorado those are the places.

Got it. So nothing here in Portland, Maine, only.

No, we're going to get back to you on that one.

Okay, thank you guys.

Thanks. Good morning Bill and Rob. I wanted to follow up on what you mentioned, Bill, about nearing the launch of your online banking platform. Is this related to your expansion into new markets? I would appreciate it if you could elaborate on how this integrates with your current physical and digital channels.

It's an essential part of our strategy to make everything we do cloud native and based on microservices. This will improve the experience for our customers by making it easier to navigate and increasing self-service options. The most significant advantage is that it enables us to change and launch products quickly. What used to take six months to update in online banking can now be done overnight with the new system. This has been a complex endeavor and a significant investment we've been working on for a couple of years. Ultimately, it will enhance our consumer satisfaction scores online. In customer surveys, we receive excellent feedback regarding our branch experience, but we perform only at an average level with our online and mobile services. We aim to exceed that average, which is why we are actively pursuing this initiative.

That's helpful. Rob, I wanted to ask if you could discuss what drove the valuation adjustments that led to an increase in reserves for the office portfolio. How are you thinking about the risk of similar adjustments leading to incremental reserve building from here, particularly if we don't get any more cuts?

Yes. So as I mentioned, we are adequately reserved in terms of how we look at things. Credit looks good. Commercial non-CRE, in particular, improved during the quarter. Our outlook improved. Consumer is pretty good. Within the CRE office space, we've got some moving parts there. The good news is that the outstandings are coming down. We are managing it. There are some idiosyncratic pieces there where the reserves moved a little bit in percentage but really not a big change there. We just continue to work through it.

I think we have the same discussion every quarter about the reserve because we maintain a high percentage compared to many of our peers in terms of what we reserve. We do this mainly because there isn't a fully established market, like a clearing market where properties trade. Not much has moved recently; instead, there have been extensions and pay downs among other variations. Since there isn't a stabilized market, we remain committed to being well reserved.

The good news for us is that, as you know, it's a small percentage of our overall loans, so there is some variability from quarter to quarter. In fact, our charge-offs on office loans decreased in the fourth quarter compared to the third quarter, which was unexpected. We do anticipate more charge-offs, so we just need to manage through that.

That's helpful. Thanks. If I could squeeze in one more on your hedging strategy. Can you discuss the uptick in forward starting swaps that we saw this quarter and how you are thinking about potentially putting on new forward starters, as we look ahead from here?

Yes. I mean, it is actually pretty straightforward. So our roll-off of fixed rate assets, and we've put that out publicly for securities or loans. When we look at the forward curve available at any given point in time, we can choose to lock in that rate on that replacement yield. So if it's a treasury that's going to mature in 1.5 years with a 2% coupon, I can effectively choose to buy that treasury forward at a 4.5% coupon. And so we've been gradually fighting off. That's why we say we are really comfortable with where we are in '25 because we've used swaps like that to effectively lock in these maturing fixed rate assets. And we continue to look at in MIL start biting off pieces of '26 and '27 because it continues. What we see through '25 ought to continue through the next couple of years if rates follow the forward curve. So there is a big opportunity there, and you'll see us using that tool to lock some of that in over time.

Throughout the balance of '25 as we lock in the future years.

That’s helpful. Thank you for taking my questions.

Good morning. Can you guys remind us, do you have any targeted capital level either on a stated CET1 or adjusted for AOCI?

We don't. Matt, it's Rob. We don't have a stated target. Obviously, we continue to build levels. We're 10.5% on CET1, 9.2% on the revised. Our minimum requirement is 7%. So we've got a lot of flexibility, but we don't have an explicit target and part of that is because the rules are still in flux.

Okay. Yes. I mean, it seems like I know it's been kind of covered, but it was impressive that the adjusted capital was stable despite the move in rates, so you gave a lot of disclosure on the securities book. The duration didn't really extend. So it feels like with sluggish loan growth and your buyback assumptions that the capital ratios will continue to build off already high levels.

Yes.

And then separately on the expenses, I mean, obviously, the operating leverage is strong but the kind of 1% growth includes some of the lumpiest in the base. And I guess the punchline is on a core basis, the expenses are going up 3%. And obviously, you're leaning into some areas on investment. Is that kind of a good medium-term run rate? Or is it just maybe a step-up for a short period of time as you fully load those expansion efforts?

I think you've got a handle on it. We guided up to the 1% off the reported numbers just because it's easier that way, as we talk about it through the balance of '25. But expenses up in that 3% range is typical for us and obviously reflects, on a core basis, obviously reflects a lot of investment.

Yes. Importantly, the investment that we are making is not at all catch-up to something we should have done. This is new branches, it is new technology. It's larger data centers that are more resilient. It is everything positioning us to accelerate our organic growth. So these are all dollars spent to make money.

Got it. Make sense. Okay. Thank you.

Good morning. Bill, could you share your thoughts on the regulatory environment we discussed earlier? Without a significant increase in loan demand, it appears that the revenue landscape for banks may not improve much. How does this perspective affect your view on the potential for transformational mergers and acquisitions in light of the regulatory and political landscape? You’ve mentioned in the past the importance of competing with major banks and achieving a national presence. What do you think the chances are of such opportunities arising, and how would you approach them? I understand you will be cautious and are aware of the financial implications, so I appreciate your insights.

I believe, considering the margin, it's probably become easier to get a deal approved, although we might have received approval with the previous administration as well. The challenge is that, as you will hear on every earnings call, everyone is looking to acquire, and nobody wants to sell. The favorable conditions for bank earnings are driven by the turnover in rates. Credit conditions are satisfactory. Therefore, the prevailing mindset seems to be that companies prefer to hold on, expect to make more money next year, and delay concerns about long-term franchises. This isn’t an immediate issue for us. In this environment, it’s difficult to force a sale when a genuine buyer is looking to grow, and we don’t plan to pursue that aggressively.

Great. Understood. Your response indicates that in the short term, the focus is on maximizing shareholder value.

I believe the structural challenges in the banking industry are very evident, especially when observing the deposit shifts towards the largest banks and the growth in DDA accounts. Notably, we have increased our DDA this year at an unprecedented rate, and we are among a few banks in the industry that have achieved this. When examining the fundamentals, the cost of funding, the rise in brokered deposits, and the decline in fee income and available products for smaller banks suggest that consolidation should occur. However, we are currently in a situation where everyone believes they will be the one consolidating. As such, I am unsure of what will transpire.

Fair point, I agree. And I guess maybe just a quick one, following up on credit quality. If we don't get any Fed rate cuts, employment holds up okay, is it your sense that credit quality is generally okay? There are no real stress points in that backdrop?

Yes, I believe that’s correct. My expectation has been consistent, and it's unfolding as anticipated. Even if there are a few rate cuts, I think we’ll be in this situation for a while, and the back-end will remain under pressure. Over time, many of the low interest rates that corporate America has secured will expire, which may lead to a slight decline in their debt coverage ratios. However, their solvency will not be affected, nor will there be actual losses due to the economy's strength. Overall, I feel confident about our position. The Fed seems to have successfully managed the situation, and we are in a favorable spot.

Helpful. Thank you.

Well, thank you, and thank you all for joining our call today and your interest in PNC. And please feel free to reach out to the IR team if you have any follow-up questions.

Thanks, everybody.

Thank you.