The PNC Financial Services Group - Q2 2024
July 16, 2024
Transcript
Operator (participant)
Greetings, and welcome to the PNC Financial Services Group second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question during this time, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bryan Gill. Thank you, Bryan. You may begin.
Bryan Gill (Head of Investor Relations)
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 July sixteenth, two thousand and twenty-four, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.
William S. Demchak (Chairman and CEO)
Thank you, Bryan, and good morning, everyone. As you've seen, we had a strong second quarter, and we generated $1.5 billion in net income or $3.39 diluted earnings per share. Our results included a gain on a portion of our Visa Class B shares, which was substantially offset by other items in the quarter, including a securities repositioning. Rob's going to provide more details on that Visa gain, financial results and outlook, in a second, but I'll highlight a few items. First off, net interest income has moved past its trough, and both NII and NIM grew in the quarter. By the way, this would have occurred independent of the $10 million impact that we got from the securities repositioning. Importantly, we are on a growth trajectory towards expected record NII in 2025.
We continue to add new customers and see strong business momentum across our franchise, particularly in the new and expansion markets. DDA growth accelerated in our branches, and we continue to add new corporate and commercial banking clients above historical rates. In our retail business, we launched our first new credit card in several years, PNC Cash Unlimited, a highly competitive card that offers 2% back on all purchases. We plan to launch several new cards in the months and year ahead. Average deposits held relatively flat to the first quarter levels, a little bit ahead of our expectations. And our expenses remained well controlled, and we generated positive operating leverage during the second quarter. Rob's going to touch on this, in a minute, but we have increased our Continuous Improvement Program target for 2024 as expense discipline remains a top priority.
The credit environment continues to play out as we've expected, including an increase in charge-offs within the CRE office portfolio, where we remain adequately reserved. Outside of CRE office, credit quality remains relatively stable. Finally, we further strengthened our capital levels during the quarter. Our strong balance sheet allows us to continue supporting our customers and communities, investing in our business and people, and delivering returns for shareholders. Our financial strength and stability are also reflected in the latest results from the Fed's stress test, in which we maintained our stress capital buffer at the regulatory minimum of 2.5%. Importantly, for the second year in a row, PNC has had the lowest start to trough capital depletion in our peer group, further demonstrating our best-in-class resiliency.
With this in mind, our board recently approved an increase in our quarterly stock dividend by $0.05. In summary, we delivered strong results in the second quarter and are well positioned to drive further growth and expansion into 2025 and beyond. Before I turn it over to Rob, as always, I just want to thank our employees for everything they do for our company and our customers. And with that, I'll turn it over to Rob to take you through the quarter. Rob?
Robert Q. Reilly (CFO and EVP)
Thanks, Bill, and good morning, everyone. Our balance sheet is on slide 4 and is presented on an average linked quarter basis. Loans of $320 billion were stable, investment securities increased $6 billion or 4%, and our cash balances at the Federal Reserve were $41 billion, a decrease of $7 billion or 15%, primarily reflecting the deployment of cash into higher-yielding securities. Deposit balances averaged $417 billion, a decline of $3 billion or less than 1% due to a seasonal decline in corporate balances. Borrowed funds increased $2 billion or 2% and were 15% of total liabilities. At quarter end, AOCI was negative $7.4 billion and improved $600 million compared with March 31.
Our tangible book value increased $89.12 per common share, a 4% increase linked quarter and a 15% increase compared to the same period a year ago. We remain well capitalized, and our estimated CET1 ratio increased to 10.2% as of June thirtieth. Regarding the Basel III Endgame, we expect the inclusion of AOCI in the final rule and our CET1 ratio with the impact of AOCI would be 8.7%. And while we recognize the likelihood of changes to certain other aspects of the Basel III Endgame NPR, under the currently proposed capital rules, our estimated fully phased-in expanded risk-based CET1 ratio would be approximately 8.4%. We continue to be well-positioned with capital flexibility.
We returned roughly $700 million of capital to shareholders during the quarter, which included $600 million in common dividends and $100 million of share repurchases. As Bill just mentioned, our board recently approved a $0.05 increase to our quarterly cash dividend on common stock, raising the dividend to $1.60 per share. Our recent CCAR results underscore the strength of our balance sheet, and as previously announced, our current stress capital buffer remains at the regulatory minimum of 2.5% for the four-quarter period beginning in October 2024. Slide 5 shows our loans in more detail. Compared to the first quarter, average loan balances were stable. Commercial loans were essentially flat, as utilization remains well below both the pre-pandemic historical average of roughly 55% and the second quarter 2023 level of 52.5%.
Importantly, we continue to grow customer relationships, and C&IB loan commitments increased during the second quarter. Although the direction of the near-term economy remains uncertain, CapEx to sales levels and inventory growth rates remain below historical averages, both of which are typically leading indicators of eventual commercial loan growth. Average consumer loans declined approximately $600 million, or less than 1%, driven by lower residential real estate and home equity loan balances. The yield on total loans increased four basis points to 6.05% in the second quarter. Slide 6 details our investment security and swap portfolios. Average investment securities of $141 billion increased $6 billion, or 4%, reflecting the deployment of excess liquidity into higher-yielding securities, primarily U.S. Treasuries.
The securities portfolio yield increased 22 basis points to 2.84%, driven by higher rates on new purchases. As of June thirtieth, the securities portfolio duration was 3.5 years. During the second quarter, our forward-starting swaps increased to $18 billion. With the addition of these swaps, we've locked in a portion of our fixed rate asset repricing through 2025 at a level that is approximately 300 basis points higher than maturities. The total weighted average received fixed rate of our swap portfolio, including the forward starters, increased 83 basis points to 3.13%, and the duration of the portfolio is 2.2 years. Slide 7 highlights the securities repositioning we executed during the second quarter.
We sold securities with a book value of $4.3 billion and a market value of $3.8 billion. We recognized a $497 million loss on the sale and reinvested the $3.8 billion of proceeds into securities, with yields approximately 400 basis points higher than the securities sold. The repositioning is expected to benefit our net interest income by $80 million in 2024, with roughly $10 million of that being realized in the second quarter. The estimated earn back period for this transaction is less than 4 years. Turning to slide 8, we expect considerable runoff of low-yielding securities and swaps through the end of 2026, which will allow us to continue to reinvest into higher-yielding assets, providing a meaningful benefit to net interest income.
Accumulated Other Comprehensive Income improved to negative $7.4 billion on June thirtieth, compared to negative $8 billion on March thirty-first. The improvement was primarily due to the securities repositioning. AOCI will continue to accrete back as our securities and swaps mature, resulting in further growth to tangible book value. Slide 9 covers our deposits in more detail. Average deposits declined $3 billion, or 1%, reflecting seasonally lower corporate balances. Regarding mix, consolidated non-interest bearing deposits were 23% of total deposits in the second quarter, down less than 1 percentage point from the first quarter. Additionally, average non-interest bearing deposits had the smallest dollar decline in the second quarter of 2024 since the Fed began raising rates in 2022, which gives us confidence that the non-interest bearing portion of our deposits has largely stabilized.
And our rate paid on interest bearing deposits increased by only 1 basis point during the second quarter to 2.61%. We believe our rate paid on deposits is approaching its peak level, but we do expect some potential drift higher as interest rates remain elevated. Turning to the income statement, and as Bill mentioned, there were several significant items in the quarter, and I want to provide a bit more detail. Taken together, these significant items have a minimal impact to our earnings per share, totaling to a net EPS benefit of $0.09. As we previously disclosed, we participated in the Visa exchange program, allowing us to monetize 50% of our Visa Class B1 shares and convert our remaining holdings to 1.8 million Visa Class B2 shares. Through the exchange, we recognized a $754 million pre-tax gain.
In addition, we had significant items that occurred in the second quarter that largely offset the gain, and they are as follows: First, as I mentioned earlier, we repositioned a portion of our securities portfolio, and through the sale of certain low-yielding securities, recognized a $497 million loss. Second, we recorded a negative $116 million Visa derivative fair value adjustment associated with Visa Class B shares, primarily related to the extension of anticipated litigation resolution. And lastly, we recognized a $120 million PNC Foundation contribution expense. The foundation supports our communities and early childhood education. Turning to slide 11, we highlight our income statement trends. Second quarter net income was $1.5 billion, or $3.39 per share.
Total revenue of $5.4 billion increased $266 million, or 5%, compared to the first quarter of 2024. Net interest income grew by $38 million or 1% in the second quarter. Notably, this is the first time NII has increased in 6 quarters, marking the beginning of an expected upward trajectory. And our net interest margin was 2.6%, an increase of 3 basis points. Non-interest income increased $228 million or 12%, and included $141 million of the significant items I previously detailed. Non-interest expense of $3.4 billion increased $23 million or 1%, and included the $120 million foundation contribution expense. Notably, we generated positive operating leverage in both the linked quarter and year-over-year comparisons.
Provision was $235 million in the second quarter, reflecting portfolio activity, and our effective tax rate was 18.8%. Turning to Slide 12, we highlight our revenue trends. Second quarter revenue was up $266 million or 5%, driven by higher non-interest income and net interest income. Net interest income of $3.3 billion increased $38 million or 1%, driven by higher yields on interest earning assets. Fee income was $1.8 billion and increased $31 million or 2% linked quarter. Looking at the detail, asset management and brokerage, non-interest income was stable linked quarter, and as the benefit of higher average equity markets was offset by lower annuity sales due to elevated first quarter activity.
Capital markets and advisory fees increased $13 million or 5%, driven by higher M&A advisory activity and loan syndications, partially offset by lower underwriting fees. Card and cash management increased $35 million or 5%, reflecting seasonally higher consumer transaction volumes and higher treasury management fees. Mortgage revenue declined $16 million or 11%, primarily due to lower residential mortgage activity. Other non-interest income of $332 million increased to $197 million, and included $141 million related to this quarter's significant items. Turning to Slide 13. Our non-interest expense of $3.4 billion was well controlled, increasing by only $23 million or 1%.
Expenses for the second quarter included the $120 million contribution to the PNC Foundation, while the first quarter of 2024 included a $130 million FDIC special assessment. Importantly, non-interest expense, excluding the foundation contribution, declined $135 million or 4% compared with the second quarter of 2023. Notably, personnel declined as a result of the workforce reduction actions we took last year. As Bill mentioned, we remain diligent in our continuous improvement efforts. At the beginning of the year, we set a continuous improvement program goal of $425 million. Recently, we've identified initiatives that support increasing our CIP by an additional $25 million, raising our full year target to $450 million. As you know, this program funds a significant portion of our ongoing business and technology investments.
Our credit metrics are presented on Slide 14. Non-performing loans increased $123 million or 5% linked quarter, primarily driven by an individual secured loan within our asset-based lending business. Total delinquencies of $1.3 billion were stable with March 31. Net loan charge-offs were $262 million in the second quarter and included $106 million of net charge-offs related to our CRE office portfolio. Our annualized net charge-offs to average loans ratio was 33 basis points. Our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on June 30, stable with March 31. Slide 15 provides more detail on our CRE office credit metrics. CRE office NPLs were stable in the second quarter, as charge-offs and pay downs offset inflows to non-performing loans.
The migration of criticized loans to non-performing status is an expected outcome as we work to resolve the challenges inherent to this portfolio. As expected, net loan charge-offs within the CRE office portfolio increased and totaled $106 million in the second quarter. Ultimately, we expect additional charge-offs on this portfolio, the size of which will vary quarter to quarter, given the nature of the loans. As of June 30th, our reserves on the office portfolio were 10.3% of total office loans, and inside of that, 15.5% on the multi-tenant portfolio. Accordingly, we believe we're adequately reserved. Importantly, we continue to manage our exposure down, and as a result, our balances declined 4% or approximately $300 million linked-quarter.
In summary, PNC posted a solid second quarter 2024, and we're well positioned for the second half of the year. Regarding our view of the overall economy, we're expecting continued economic growth in the second half of the year, resulting in real GDP growth of approximately 2% in 2024, and unemployment to increase modestly to slightly above 4% by year-end. We expect the Fed to cut rates two times in 2024, with a 25 basis point decrease in September and another in December. Looking at the third quarter of 2024 compared to the second quarter of 2024, we expect average loans to be stable, net interest income to be up 1%-2%, fee income to be up 1%-2%....
other non-interest income to be in the range of $150 million-$200 million, excluding Visa and securities activity. We expect core non-interest expense to be up 3%-4%. We expect third quarter net charge-offs to be between $250 million and $300 million. Regarding our full year guidance, for ease of comparability to prior guidance, we exclude the first quarter FDIC special assessment, as well as the second quarter Visa gain and other significant items. Considering our reported first half operating results, third quarter expectations, and current economic forecasts, our full year 2024 guidance is as follows: For the full year 2024 compared to full year 2023, we expect average loans to be down less than 1%, which equates phenomenal loan growth in the second half of 2024.
We recognize the potential for greater loan growth, and should that occur, it'll be accreted to our full year average. Despite lower expected loan volumes, we expect full year NII to be at the better end of our previous expectations, or down approximately 4%. We expect our securities repositioning and better-than-expected deposit dynamics to offset the impact of the lower-than-expected loan volume. We expect non-interest income to be up 3%-5%, slightly lower than our previous guidance due to continued softness in mortgage activity, and to a lesser extent, loan-related capital markets fees. As a result, total revenue is expected to be down 1%-2% and inside the range of our previous guidance. We now expect core non-interest expense to be down approximately 1% versus our previous guidance of stable, in part due to our increased CIP target.
We expect our effective tax rate to be approximately 18.5%. With that, Bill and I are ready to take your questions.
Operator (participant)
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. You may press star two if you would like 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 poll for your questions. Our first questions come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.
Betsy Graseck (Analyst)
Hi, good morning.
Robert Q. Reilly (CFO and EVP)
Hey, good morning, Betsy.
Betsy Graseck (Analyst)
So on NII, I know you guided to the upper end of the range, even though you've got slower loan growth, clearly due to your NIM improving. At least that's one driver. There's others as well. I just wanted to understand how you're thinking about the securities restructuring from here. Is this something that you would consider continuing, or is it we should look at it as a one-off, from, you know, using the Visa gains? And I ask just from the context of trying to think through NIM trajectory from here. Thanks.
William S. Demchak (Chairman and CEO)
You should think of it as a one-off. I mean, you, you never say never, and, you know, I don't know what the future holds, but practically, at this point, we don't have to do any restructuring on anything to hit that stated goal of the, you know, the 25 record on NII.
Robert Q. Reilly (CFO and EVP)
We don't have any plans to do that.
William S. Demchak (Chairman and CEO)
Yeah.
Betsy Graseck (Analyst)
Okay, great. And then could you speak to how you're thinking about deposit pricing and levels? I mean, clearly there was, you know, tax-related outflows and things like that this quarter. You know, and with loan growth being muted, you know, should we be anticipating deposits stable to down, or are you going to be out there trying to get deposit growth? Just again, asking from the context of how we should think about deposit pricing as we work through our models. Thanks so much.
Robert Q. Reilly (CFO and EVP)
Yeah, sure. Sure, Betsy. I would say the short answer to that is, you know, stable to down is our expectation, with an emphasis on stable. And things have really stabilized, yeah, year over year, as you know. So our expectation is, you know, some downward drift, but not anywhere near the, you know, the level that we've seen in the last couple of years.
Betsy Graseck (Analyst)
Got it. All right. Thanks so much. Appreciate it.
Robert Q. Reilly (CFO and EVP)
Sure.
Operator (participant)
Thank you. Our next questions come from the line of John Pancari with Evercore ISI. Please proceed with your questions.
John Pancari (Senior Managing Director and Equity Research Analyst)
Good morning.
Robert Q. Reilly (CFO and EVP)
Hey, John.
John Pancari (Senior Managing Director and Equity Research Analyst)
On your NII outlook, it's good to hear the NII inflection and the confidence there. Excluding the $70 million benefit from the securities repositioning in the back half of this year, I mean, it appears that the underlying NII run rate for the back half was, was guided a bit lower. Can you—is that mainly loan growth, that's the driver? I mean, if you could just talk through that a little bit in terms of the factors impacting that run rate.
Robert Q. Reilly (CFO and EVP)
Well, I could-
William S. Demchak (Chairman and CEO)
Rob and I are staring at each other.
Robert Q. Reilly (CFO and EVP)
Yeah.
William S. Demchak (Chairman and CEO)
It wasn't... If you backed out the restructuring, the guide would still be higher. And we did that while you know muting our loan growth assumption. And we did that because we kind of just got tired of saying that, "Hey, loan growth is going to come at some point." So we took it out of the forecast. If it shows up, we'll benefit like everybody else.
Robert Q. Reilly (CFO and EVP)
You know, I think that's an important point. That's a big difference in this quarter. We changed our guidance for average loans to be up 1% or approximately 1% for the year, John. So as you can see, now down less than 1%. We don't control that. You know, there's a basis for some loan growth in the second half of the year, but the important point is we've taken it out of our guidance, and our NII improves to the better end of the previous guidance, not just due to the securities restructuring, but also the deposit dynamics and so forth.
John Pancari (Senior Managing Director and Equity Research Analyst)
... Okay. All right, now thanks for the clarification. That helps.
Robert Q. Reilly (CFO and EVP)
Sure.
John Pancari (Senior Managing Director and Equity Research Analyst)
Then just separately on the capital front, clearly, the AOCI benefit from the securities repositioning is certainly noted. How do you feel now in terms of the pace of buybacks as you look out, just given where you stand now on CET1 and from a fully phased in, how does that make you feel about the pace of buybacks here? Could it remain at the $100 million pace per quarter or possibly accelerate?
Robert Q. Reilly (CFO and EVP)
Yeah, I mean, right now, we're on pace, and we continue to—or we expect to continue the pace that we've been on for the first couple of quarters. And as you know, the new rules are still in flux, so there's not, you know, finalization there. And then beyond that, I think, you know, a driver will be what happens with loan growth, which would be a factor in terms of that being our highest and best use of our capital.
William S. Demchak (Chairman and CEO)
Yeah.
Robert Q. Reilly (CFO and EVP)
But that'll be a factor in terms of, you know, deciding on buybacks. But the important part is that we are buying back shares.
William S. Demchak (Chairman and CEO)
Yeah, I think, John, just on buybacks, I mean, at some point, I got to believe loan growth comes back. But to the extent it doesn't, we're generating a lot of capital, obviously in excess of our dividend, and we'll face that question. If we're not using that capital for loan growth, you know, should we accelerate deployment and buybacks? We're not there yet, but that happens down the road if loan growth doesn't materialize, because we're generating a lot of capital.
John Pancari (Senior Managing Director and Equity Research Analyst)
Got it. Okay, that's helpful. Thanks, Bill.
Operator (participant)
Thank you. Our next question has come from the line of Erika Najarian with UBS. Please proceed with your questions.
Erika Najarian (Analyst)
Hi, good morning.
Robert Q. Reilly (CFO and EVP)
Good morning.
Erika Najarian (Analyst)
Just going back to slide nine, I presume that the stabilization and deposit rate paid, which is quite notable as part of the, you know, upgrade of the core NII guide, even without the restructuring. And you answered, Rob, Betsy's question, I gather on a balances standpoint.
Robert Q. Reilly (CFO and EVP)
Yeah.
Erika Najarian (Analyst)
Perhaps give us a sense on how you think deposit rate paid will trend from here, and maybe, you know, under the scenario of, you know, rates staying where we are, versus the scenario of what the forward curve is pricing and how quickly you may be able to reprice.
Robert Q. Reilly (CFO and EVP)
Yeah, sure. Our plan—so slide 9 is a good slide, and it, you know, clearly shows a, you know, decline in the increase of the rate paid. The short answer to one of your questions there is, you know, we do expect, the rates made, rate paid to drift up a little bit. But, you know, in contrast, more like a handful of basis points versus, the contrast to the previous quarters, where you see 60 or 50 and even 30 in recent quarters. So it's slowed down considerably. That's our expectation in the short term, Erika. When we get into rate cuts, we'll see. You know, we'll be able to move pretty quickly on the high, rates paid on commercial and wealth.
But we still do have these interest-bearing consumer deposits that are below market that will grind higher. So, you know, that's something that we've talked about before and just something that we'll need to keep our eye on.
Erika Najarian (Analyst)
Got it. My second question refers back to slide 6 in terms of the forward starters. When I look back at your 10-Q disclosure, it seems like you're largely neutral to interest rates. I know that you and Bill have talked a lot about the different factors that drive the, you know, inflection point in the NII swoosh. I'm wondering if the addition of the $18 billion in forward starters with the received fixed of 4.31, does that impact the magnitude of the swoosh for the, you know, for 2025?
William S. Demchak (Chairman and CEO)
That's a good question.
Robert Q. Reilly (CFO and EVP)
Well, my answer to that would not necessarily be the magnitude, but the certainty.
William S. Demchak (Chairman and CEO)
Yeah.
Robert Q. Reilly (CFO and EVP)
So essentially, what we've done is locked in some of the swoosh.
William S. Demchak (Chairman and CEO)
Yeah, well, you know, probably 50 basis points ago. You know, one of the issues, of course, when everybody talks about fixed rate asset repricing is, you know, what does it reprice to? And of course, therefore, we are exposed to whatever that, you know, five-year rate is, you know, a year and two out. And those forward-starting swaps simply, at a very opportunistic point, locked in, materially higher rates than where we are today. So just to Rob's point, that just locks in the certainty of what we'll be able to produce on a go-forward basis.
Erika Najarian (Analyst)
No, got it. And Bill, I think that's such a good point because I think when people are thinking of fixed asset repricing, sometimes they misthink about the 5.25 as opposed to whatever. It could be at 4, right? By the end of next year, and to that, to your point, you know, you've locked in the certainty. Okay. Thank you.
Operator (participant)
Thank you. Our next questions come from the line of Scott Siefers with Piper Sandler. Please proceed with your questions.
Scott Siefers (Analyst)
Morning, everyone. Thanks for taking the question. Rob, I was hoping you could maybe touch on sort of major fee components in light of the softer expectations. I mean, it sounds like it's just a, or mostly a function of, mortgage, which, you know, sort of is what it is.
Robert Q. Reilly (CFO and EVP)
Yeah.
Scott Siefers (Analyst)
Just curious to hear sort of what you think is going well, what'll need a heavier lift, that kind of thing?
Robert Q. Reilly (CFO and EVP)
Yeah, it's mostly a refinement, Scott. So, you know, for the full year guide around the fees, we lowered our expectations of increase, as you know, from up 4%-6% to up 3%-5%. So still up, and a smaller shift. Most of that coming from continued softness in mortgage, which we expect to continue in the latter half or second half of the year, a little bit less than what we were expecting. To a lesser extent, tied to the reduced loan guidance. We do have loan-related fees within our capital market segment, think loan syndication. So generally speaking, if there's fewer loans, there'll be fewer loan syndication fees. So that's just a direct correlation there to that guide.
Then again, you know, we could see, we could see loan growth, and if that's the case, then those, those fees would come back. But that's the general thinking. Everything else, you know, on, on schedule, so to speak.
Scott Siefers (Analyst)
Okay, perfect. Thank you, Rob. Then I wanted to ask a little bit of a kind of fine-pointed one on loan growth. I think, Bill, in your sort of prepared remarks, you know, you noted the introduction of your first new credit card in a while as well as plans to introduce more. Can you sort of contextualize your aspirations for that business and the sort of the path to get there over time?
William S. Demchak (Chairman and CEO)
Yeah. I mean, basically, we want to have our fair share of consumer lending products with the clients we serve, you know, in our traditional DDA and other products, and we don't today. You know, we're there on home equity. We're probably close in mortgage. We're under-penetrated in auto and in card. And in card, in particular, we just haven't had good offerings. We've had stale technology. We've had slow... Yeah, we weren't, you know, we need to improve, and it's an opportunity for us.
Scott Siefers (Analyst)
Okay. All right. Perfect. All right. Thank you, guys, very much.
William S. Demchak (Chairman and CEO)
Okay.
Operator (participant)
Thank you. Our next question has come from the line of Ebrahim Poonawala with the Bank of America. Please proceed with your questions.
Ebrahim Poonawala (Analyst)
Good morning.
William S. Demchak (Chairman and CEO)
Good morning.
Ebrahim Poonawala (Analyst)
I guess, maybe, Rob, just it looks like you've locked in a lot of asset repricing. As we think about where the NIM should normalize from relative to the 2.6, give us a sense, I mean, you probably have this number, do we hit 3% at some point next year? Give in terms of what the normalized rate would be, and can we get to a 3%+ NIM next year, even with maybe 4 or 5 rate cuts?
Robert Q. Reilly (CFO and EVP)
Sure. So, you know, we don't, we don't necessarily provide NIM outlook or NIM guidance because it's more an outcome than anything. But, to answer your question, you know, we've operated in, you know, call it a normal environment at a 3% NIM margin. So, if we definitely expect to go up into 25. If we approach those levels, it won't be like we haven't been there before, so it's reasonable.
Ebrahim Poonawala (Analyst)
Got it. Just one quick one on credit quality. I think I heard Bill say not a whole lot ex-CRE office, but give us a sense if you're seeing any cracks within the C&I customer base from the prolonged period of, like, just higher for longer rates. Just, how do you handicap the risk of a downturn or a recession over the coming months or the next year?
Robert Q. Reilly (CFO and EVP)
Yeah. So, you know, when we take a look at our total reserves and our total portfolio, CRE office aside, you know, things are pretty stable. Maybe on a quarter-to-quarter basis, consumer is a little bit better, commercial non-CRE is a little bit worse, but not bad. So, you know, definitely some more movements, some downgrades reflecting the higher rates, you know, slower economic activity in our commercial book, but no patterns or any themes to point out.
Ebrahim Poonawala (Analyst)
Got it. Outlook for reserves are stable from 2Q?
Robert Q. Reilly (CFO and EVP)
Reserves are stable, yeah.
Ebrahim Poonawala (Analyst)
Got it. Thank you.
Robert Q. Reilly (CFO and EVP)
Sure.
Operator (participant)
Thank you. Our next question has come from the line of Bill Carcache with Wolfe Research. Please proceed with your questions.
Bill Carcache (Analyst)
Thanks. Good morning, Bill and Rob. Following up on, following up on your NIM and NII commentary, is there a point as we start to get cuts where you would start to worry that those rate cuts would potentially begin to, to negate some of the repricing benefit? And then separately, amid the debate over whether the curve's going to steepen or flatten, depending on the outcome of the election, maybe could you just give us a little bit of a, you know, perspective on how PNC is positioned for either a flatter or, or a steeper yield curve environment?
William S. Demchak (Chairman and CEO)
Sure. We're largely indifferent. I mean, at the very, very margin, we benefit if, you know, when the Fed cuts rates, from a floating rate standpoint. Of course, we're exposed to the steepness of the curve because that plays into, you know, how we reprice maturing fixed-rate assets. And that's a variable. It's a variable for us. It's a variable for everybody. It's one of the reasons we lock some of it in. My own belief, and our positioning is such that even though, you know, we would expect the Fed to cut here, I think in the end, somewhat sticky inflation, the fact that deficits matter, you know, is going to cause the curve to steepen out. So we locked some of it in.
I don't feel terribly worried about the need to lock the rest of it in. I just think we're in a good place. We're going to do fine.
Bill Carcache (Analyst)
Okay. That's helpful. And then on the asset quality side, slide 14 shows that steady upward trajectory in NPLs, but the reserve rate is, you know, relatively stable to down slightly, as you mentioned. And, you know, so it looks like the loss content that you see in the portfolio is, is stable. It's certainly not rising, despite the rising NPLs. You know, maybe could you speak a little bit to that and... You know, are there any implications of loan repricing that you are concerned about? For example, would you expect any impact on the credit performance of your customers as their loans begin to reset, you know, to higher rates?
William S. Demchak (Chairman and CEO)
I mean, just quickly, the movement from, you know, particularly in office CRE, right? From criticized to non-performing related reserving and charge-offs is ongoing as we've expected. That's the natural progression of that cycle. Nothing's changed. We're not surprised by anything. We're reserved for it. You know, credit quality of corporate America as it relates to, you know, at what point do the people who have locked in fixed rates and low rates start to have to pay more? You know, ultimately, at the margin, is gonna impact, you know, the way we rate somebody. I think about multifamily as an example, where higher rates, you know, have hurt coverage ratios. It's not gonna cause losses, but it's caused us to downgrade that asset class simply because the excess isn't there.
I think that'll flow through to corporate America over a period of time as well. But I, I'm not particularly worried about it.
Robert Q. Reilly (CFO and EVP)
And I just add that our, you know, our reserves are adequate. The increase in the non-CRE NPLs in commercial really was one single large credit that is in our business credit, fully secured loan. So-
William S. Demchak (Chairman and CEO)
Not in the U.S.
Robert Q. Reilly (CFO and EVP)
So it doesn't have a lot of loss context.
William S. Demchak (Chairman and CEO)
Yeah.
Bill Carcache (Analyst)
Okay. Understood. Thanks, Bill and Rob. Bill, if I could squeeze in one last one for you. I wanted to get your thoughts on the the FedNow instant payment services, which has been getting some attention. Is there a fee opportunity there? I guess, you know, what level of engagement are you seeing from PNC customers? Do you see potential for lower cost, instant, you know, digital payments, disintermediating debit? It'd just be helpful to hear your thoughts on the overall risks versus potential benefits of that to PNC.
William S. Demchak (Chairman and CEO)
I don't think FedNow has any impact on PNC, to be honest with you. We've been active with real-time payments in the Clearing House and the use cases. All the ones you can think about, you know, from insurers who want to pay, you know, real-time claims in a disaster, through to certain payroll capabilities, through to, you know, Zelle, for example. And FedNow doesn't add or subtract anything to that opportunity. The challenge you have with real-time payments, both at the Clearing House and FedNow at the Fed, is they are not networks. They are a rail to move money, and the distinction between that is a network has very clear rules on who's responsible for items that don't transmit the right way, who's responsible for fraud, who's responsible for returns, on and on and on.
Neither of those two payment rails purposefully were built to payment networks, which is they're not for an IT purpose. They're for moving money, which is very different. So I don't find long term has much of an impact, to be honest with you.
Bill Carcache (Analyst)
Thank you for taking my questions.
Operator (participant)
Thank you. Our next questions come from the line of Ken Usdin with Jefferies. Please proceed with your questions.
Ken Usdin (Analyst)
Hey, thanks a lot. Good morning. You guys gave us that great, great table last December with the repricing of fixed assets through 2025. I'm just wondering, you know, how much carry forward would there, will there also be through 2026? Should we think about that kind of ratably? Obviously, it's been six months since you gave us that slide, but, just wondering just how that rolls as we look further ahead. Thanks.
Robert Q. Reilly (CFO and EVP)
Well, Ken, we're gonna refrain from 2026 guidance on the call here today, but it'll continue to increase. But you know, the real change in the dynamic occurs, obviously, in the first and second quarter of 2025, and then grows from there.
Ken Usdin (Analyst)
Okay. Yeah, that's why I'm asking the building blocks question as opposed to-
Robert Q. Reilly (CFO and EVP)
Sure. Yeah.
Ken Usdin (Analyst)
-the question.
Robert Q. Reilly (CFO and EVP)
Sure. Sure.
Ken Usdin (Analyst)
Okay. Understood. And then on the expenses, so you guys have been doing a great job holding the line, and I just wanted to ask, like, it looks like there's a pretty decent ramp baked into the second half on expenses. And I'm just wondering, like, what influences that? Because it seems like expenses will be growing faster than revenues in the second half, so, or certainly faster than fees. So, you know, can you just walk through, is that conservatism? Is there some catch up on investments that you're making? Any context on that? Thanks, Rob.
Robert Q. Reilly (CFO and EVP)
Yeah, sure, sure. Now we, we've outperformed on the first half, no doubt about it, and we feel great about that, and that's one of the reasons why we increased our CIP goal and also increased our guidance for the full year expenses. In the third quarter, it doesn't all happen uniformly. In the third quarter, we do have some investments coming online, technology investments coming online that bring some depreciation expense. We've got an additional day, those sorts of things. So it's, you know, it's all part of the plan. It's just, expenses don't fall uniformly through, throughout the year.
Ken Usdin (Analyst)
Okay, got it. And then obviously, as that plays forward, and if NII is better next year, you can also afford more cost growth, but we'll hear about that later.
Robert Q. Reilly (CFO and EVP)
Yeah, that's right.
Ken Usdin (Analyst)
Got it. Thank you.
Robert Q. Reilly (CFO and EVP)
Sure.
Operator (participant)
Thank you. Our next questions come from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.
Mike Mayo (Analyst)
... Hi. Similar to some of the others, maybe this is like the game of Jeopardy! I think the answer is, you have continuous improvement program with expense savings going from $425 million up to $450 million. You have securities repositioning that's giving you a boost to NII for the rest of this year. And you have fixed asset repricing that helps your securities yield go up by 400 basis points. Your forward payment swaps go up 180 basis points and a little bit some other things. So the answer is, you know, all those things are going in the right direction, yet you still have a guide for negative operating leverage for this year. So I guess what is the question? Or why is that?
Or you can't eke it out, or-
Robert Q. Reilly (CFO and EVP)
Well, sure. So the—no, no, the question-
Mike Mayo (Analyst)
What's going on and why, and why should... Yeah. Yeah, go ahead.
Robert Q. Reilly (CFO and EVP)
Yeah. So just to keep with your Jeopardy! approach here, the question would be: What's loan growth going to be in the second half? So we did come down.
Mike Mayo (Analyst)
Okay, that's helpful. So what's going on, Bill? You were very adamant three quarters ago about loan growth. And look, if you get NII in your range, even without getting loan growth, you know, I think people would rather take that than not. But we're hearing the biggest capital market players are, you know, just gushing with their expectations that this is a big capital markets recovery, the world's back, everything else. H.8 data actually showed a little bit better. I think you might have underperformed the H.8 data this quarter on loan growth. So is it, A, that you're just being more prudent and conservative, and you're not seeing the pricing that you want?
Or B, your mix is just a little bit differently, or C, maybe your team's not executing quite as well as you'd like them to do?
William S. Demchak (Chairman and CEO)
I think you're trying to read into this too hard. Look, we're basically on page 8, maybe a little soft on consumer because our card book didn't grow. When C&I comes back, traditionally, we'll do better. We've been actually adding C&I. They're just not drawing it. We're winning clients. All we did, Mike, was this whole notion of, you know, if we're giving guidance on the expectation in some crystal ball that says there's going to be loan growth, when thus far, we don't see evidence of it, we just took it out. If it shows up, then it's additive to everything we do. And we certainly aren't underperforming. We're winning clients at a pace that we never have. So it's literally this notion of when do they draw on lines?
And we just got tired of talking about it. When they do it, we'll benefit, and it'll add to all of those numbers that you're looking at.
Mike Mayo (Analyst)
Any meat on those bones about customer acquisition? You did mention 51% loan utilization. That seems like pretty low level versus 53% a year ago and 55%-
William S. Demchak (Chairman and CEO)
Yeah
Mike Mayo (Analyst)
... historical.
William S. Demchak (Chairman and CEO)
Yeah.
Mike Mayo (Analyst)
So I guess that would back up what you're saying, but so how much are you growing loans? You expanded to so many MSAs and implemented teams and did all that stuff that helps sometimes, but other times doesn't help as much.
William S. Demchak (Chairman and CEO)
Yeah, I don't, Rob, do you know C&I numbers?
Robert Q. Reilly (CFO and EVP)
No, I don't know. I don't know off the top of my head, but,
William S. Demchak (Chairman and CEO)
Yeah. No, we've grown exposures, and we've won clients at a pace well beyond, particularly in the new markets, but overall, well beyond what we've managed to do historically. We ought to, and we will, produce some of those metrics for you.
Robert Q. Reilly (CFO and EVP)
Yeah, no, that's all good. Just to add to that, Mike, you know, CapEx sales, as we said in our opening comments, CapEx sales ratios are low, inventory levels are low, so there's just a lot pointing to loan growth. It's just, we don't control it.
Mike Mayo (Analyst)
Just last follow-up on that, because, Bill, you've been around for a while, and Rob, the disconnect between what we're hearing and seeing in the capital markets and that activity picking up versus the still subdued loan growth, as you say, CapEx and inventory are low. It just seems CEO confidence is up, people are ready to do all sorts of things, yet when the rubber meets the road with you guys, you're just not seeing it that much.
William S. Demchak (Chairman and CEO)
You're, you're trying to isolate us, and we're not isolated. I would happily tell you loan growth is going to be 2%, which is what all our peers are going to say. And if they hit 2%-
Robert Q. Reilly (CFO and EVP)
We don't have that.
William S. Demchak (Chairman and CEO)
If we hit 2%... Or sorry, if they hit 2%, then we'll hit 2%.
Robert Q. Reilly (CFO and EVP)
Or maybe a little better.
William S. Demchak (Chairman and CEO)
Yeah. It's just we-
Robert Q. Reilly (CFO and EVP)
I-
William S. Demchak (Chairman and CEO)
... I don't see anything suggesting that's going to happen. So maybe, I mean, what would you rather have us do here? You know, put in our forecast you know, we hope this happens number, or just give you numbers that we know are going to happen.
Mike Mayo (Analyst)
No, I understand. Underpromise and overdeliver is what, you know, you try to do. It's just in the past, you said at this stage of the cycle, and historically, you've seen loan growth come back, so it sounds like-
William S. Demchak (Chairman and CEO)
Yeah
Mike Mayo (Analyst)
... this cycle might be a little bit different, might not be.
William S. Demchak (Chairman and CEO)
Yeah, I think, you know, I've spent a lot of time pondering this, Mike. I don't... You know, look, at the margin, it's got to be that the cost of holding inventory, right? Just the cost of that drawn revolver is, you know, big time on the radar of corporates who are managing their own profitability. If you can run lower inventory, your interest rates, you know, go way down when Fed funds is, you know, 5.25%. So I think that's part of it. I think this whole uncertainty as we come up into the election you know, what's it gonna look like from a regulatory basis? What am I allowed to invest in? Am I gonna get it approved? All of that, there's a lot of pent-up energy behind that, and we'll see.
But, you know, I don't know, and it literally was this thing of, you know, rather than keep guessing and wishing, if it happens, it's a great outcome, but we don't need to rely on it.
Robert Q. Reilly (CFO and EVP)
Got it. Okay. Thank you.
William S. Demchak (Chairman and CEO)
Yep.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question has come from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.
Matt O'Connor (Analyst)
Good morning. Bill, haven't heard you guys talk too much about credit card. And you mentioned a new product and some more coming and, you know, just thoughts on kind of the strategy for card going forward and, you know, the targeted customer, and then, any interest in acquiring portfolios, which is, you know, not really been on the radar in the past. Thanks.
William S. Demchak (Chairman and CEO)
Yeah. No, we're not gonna acquire portfolios. The product that we have historically offered our existing clients and the service levels, websites, processing that went along with it were less than what we aspire to. We have an ability to get higher penetration with our existing clients, offer them better products, have better technology. Historically, we prioritize tech investments inside of our core retail space, so think online, mobile, real time. And we just haven't put the same energy, although about a year ago, we started to into what we do in credit card. Some of that is service technology, ease for customers, application, all of that stuff. Some of it is just getting better at approvals.
And we're not gonna change our credit box, but we're missing a lot of clients who are in that credit box because we make it too hard for them.
Robert Q. Reilly (CFO and EVP)
Yeah, or in simple terms, we're just under-penetrated relative to industry averages. Nothing hugely aspirational other than just to have our fair share.
William S. Demchak (Chairman and CEO)
Yeah.
Matt O'Connor (Analyst)
Yeah, that makes sense. Then, just separately, I think you still have half of, you know, your original Visa stake. You know, what's kind of the plan on that? I assume that's you know, in the $750 range, you know, mark to market for Visa, net of hedges and stuff like that. Just, just frame what's left and the timing of it. Thanks.
Robert Q. Reilly (CFO and EVP)
I'm sorry, I missed the front part of that question.
William S. Demchak (Chairman and CEO)
Visa, Visa.
Matt O'Connor (Analyst)
Oh, just the remaining Visa stake and-
Robert Q. Reilly (CFO and EVP)
What happens with the back half, so the 50% that we did not have the ability to monetize. Well, Visa controls that schedule. You know, some of it's reliant on the litigation resolution, and some of it's reliant on the schedule they've laid out, which is sort of a multiyear exchange. So, we'll just continue to monitor it.
Matt O'Connor (Analyst)
Okay. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your questions.
Gerard Cassidy (Analyst)
Hi, Bill. Hi, Rob.
William S. Demchak (Chairman and CEO)
Hey, Gerard.
Robert Q. Reilly (CFO and EVP)
Hello.
Gerard Cassidy (Analyst)
You guys had the good fortune of having insights into the commercial real estate business through Midland, your CMBS servicer. Can you give us some insights and color on what Midland is seeing in terms of their pipeline of increased, you know, special servicing, which, of course, I know has higher revenue, but more importantly, maybe directionally, shows us where credit is heading?
Robert Q. Reilly (CFO and EVP)
Yeah, that's a good question, Gerard. You know, ironically, their special servicing balances actually went down in the quarter, which is a little bit of a head scratcher. We don't think that's necessarily indicative of a trend. We do expect it to continue to go up. But from the start, and I think you've asked this question before, it's been much, much slower, in terms of those increases to those balances than you would have expected.
William S. Demchak (Chairman and CEO)
Yeah. And there, you know, I went through forecasts on sort of expectations on maturity bubbles and property types, and we don't expect that balance... you know, it's not gonna grow at the pace that intuitively you might have thought of.
Robert Q. Reilly (CFO and EVP)
Yeah, and that we thought a year ago.
William S. Demchak (Chairman and CEO)
Yeah. Yeah, because things are getting cured, they're getting sold off pretty quickly. There's, you know, for things that are really bad, there's still a lot of capital in the market, so they're turning it faster than, perhaps we would have thought.
Gerard Cassidy (Analyst)
Are they seeing any change in the product? Is it still primarily commercial office, or is it moving into any of the product areas?
Robert Q. Reilly (CFO and EVP)
It's mostly office.
Gerard Cassidy (Analyst)
Got it. Okay. Yeah.
William S. Demchak (Chairman and CEO)
Yeah, it's interesting. It's all of the above for all of the historical reasons.
Robert Q. Reilly (CFO and EVP)
Yeah.
William S. Demchak (Chairman and CEO)
You know, so there's still a little retail. There's hotels that'll show up in there. There's, you know, multifamily that is in the multifamily that went to Freddie and Fannie, and then, you know, increasingly it's office, and the bubble down the road looks more like office.
Robert Q. Reilly (CFO and EVP)
Yeah.
William S. Demchak (Chairman and CEO)
Yeah.
Gerard Cassidy (Analyst)
Got it. And then just on your commercial real estate, in the slide 15, you give us obviously good detail, and you've always, you know, told us about this multi-tenant office is the issue. It looks like, obviously, with 52% criticized, how far are you along in analyzing or reviewing that portfolio? Are you completely through it, and now it's going a second time, or any color there?
William S. Demchak (Chairman and CEO)
I mean, we're-
Robert Q. Reilly (CFO and EVP)
Oh, we've analyzed it.
William S. Demchak (Chairman and CEO)
I mean, we're completely through it every quarter.
Gerard Cassidy (Analyst)
Yeah. Yeah.
William S. Demchak (Chairman and CEO)
I mean, a couple things. I don't know if we put this out there, but there's actually not that many loans, so we don't have thousands of small loans. These are typically larger loans, and so we've gone asset by asset. And as anything gets close to being troubled, we look at three different appraisals, one of which is our own self-generated, using more extreme negative assumptions than what you might get from a commercial appraiser. We use higher vacancy rates, higher interest rates, longer time to lease up, higher cost to rehab, all that other stuff in our evaluation. So we go through this. We know all the properties. We keep looking at them. We know what's gonna happen to them. We know the timelines.
Look, it's not a great outcome, but there's nothing in there that, you know, I think is gonna surprise us.
Very good. And just one last one on this, Bill. Geographically, are you guys finding certain parts of the country weaker than others? I know there's a lot of talk about the big urban markets, Class B and C buildings. How about from your vantage point, what are you guys seeing geographically?
It's not... You know, it's property by property, right?
Gerard Cassidy (Analyst)
Got it.
William S. Demchak (Chairman and CEO)
You could be in a lousy city but be in the right place and do fine.
Gerard Cassidy (Analyst)
Yeah.
William S. Demchak (Chairman and CEO)
So I just don't know that it matters.
Gerard Cassidy (Analyst)
Got it. Okay.
Robert Q. Reilly (CFO and EVP)
It relates to our portfolio, for sure.
William S. Demchak (Chairman and CEO)
Yeah.
Gerard Cassidy (Analyst)
Yeah. Got it. Okay. Thank you, guys.
Robert Q. Reilly (CFO and EVP)
Sure.
Operator (participant)
Thank you. There are no further questions at this time. I would now like to turn the floor back over to Brian Gill for closing comments.
Bryan Gill (Head of Investor Relations)
Well, thank you all for joining our call this morning, and if you have any follow-up calls, feel free to reach out to the IR team, and we'd be happy to jump on a call with you.
William S. Demchak (Chairman and CEO)
Thanks, everybody.
Robert Q. Reilly (CFO and EVP)
Thank you.
Operator (participant)
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.