The PNC Financial Services Group, Inc. (PNC) Q2 2024 Earnings Call Transcript

The PNC Financial Services Group, Inc. (NYSE:PNC) Earnings Conference Call July 16, 2024 10:00 AM ET

Company Participants

Bryan Gill - Director of IR
William Demchak - Chairman, President & CEO
Robert Reilly - EVP & CFO

Conference Call Participants

Betsy Graseck - Morgan Stanley
John Pancari - Evercore
Erika Najarian - UBS
Scott Siefers - Piper Sandler
Ebrahim Poonawala - Bank of America
Bill Carcache - Wolfe Research
Ken Usdin - Jefferies
Mike Mayo - Wells Fargo
Matt O'Connor - Deutsche Bank
Gerard Cassidy - RBC

Operator

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. [Operator Instructions] 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

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

Today's presentation contains forward-looking information, cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com under invest relations. These statements speak only as of April 16, 2024, and PNC undertakes no obligation to update them.

Now, I'd like to turn the call over to Bill.

William Demchak

Thank you, Bryan, and good morning, everyone. As you've seen, we had a strong second quarter, and we generated $1.5 billion in net income, or $3.39 diluted earnings per share. Our results included a gain on a portion of our Visa Class B shares, which was substantially offset by other items in the quarter, including a securities repositioning. Rob is going to provide more details on that Visa gain financial results and outlook in a second, but I'll highlight a few items.

First off, net interest income has moved past its trough, and both NII and NIM grew in the quarter. And by the way, this would have occurred independent of the $10 million impact that we got from the securities repositioning. Importantly, we are on a growth trajectory towards expected record NII in 2025. We continue to add new customers and see strong business momentum across our franchise, particularly in the new and expansion markets. [DDA] (ph) 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 is going to touch on this in a minute, but we have increased our continuous improvement program target for 2024 as expense discipline remains a top priority.

The credit environment continues to play out as we have expected, including an increase in charge-offs within the CRE office portfolio, where we remain adequately reserved. Outside of CRE office, credit quality remains relatively stable. Finally, we further strengthen our capital levels during the quarter. Our strong balance sheet allows us to continue supporting our customers and communities, investing in our business and people, and delivering returns for shareholders. Our financial strength and stability are also reflected in the latest results from the Fed stress test in which we maintained our stress capital buffer at the regulatory minimum of 2.5% and importantly for the second year in a row, PNC has had the lowest start to trough capital depletion in our peer group, further demonstrating our best-in-class resiliency. With this in mind, our board recently approved an increase in our quarterly stock dividend by $0.05.

In summary, we delivered strong results in the second quarter and are well positioned to drive further growth and expansion into 2025 and beyond. Before I turn it over to Rob, as always, I just want to thank our employees for everything they do for our company and our customers.

And with that, I'll turn it over to Rob to take you through the quarter. Rob?

Robert Reilly

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average linked quarter basis. Loans of $320 billion were stable. Investment securities increased $6 billion or 4%. And our cash balances at the Federal Reserve were $41 billion, a decrease of $7 billion or 15%, primarily reflecting the deployment of cash into higher-yielding securities.

Deposit balances averaged $417 billion, a decline of $3 billion or less than 1% due to a seasonal decline in corporate balances. Borrowed funds increased $2 billion or 2% and were 15% of total liabilities. At quarter end, AOCI was negative $7.4 billion and improved $600 million compared with March 31st. Our tangible book value increased $89.12 per common share, a 4% increased linked quarter, and a 15% increase compared to the same period a year ago.

We remain well capitalized and our estimated CET1 ratio increased to 10.2% as of June 30th. Regarding the Basel III end-game, we expect the inclusion of AOCI in the final rule and our CET1 ratio with the impact of AOCI would be 8.7%. And while we recognize the likelihood of changes to certain other aspects of the Basel III end-game NPR, under the currently proposed capital rules, our estimated fully phased-in expanded risk-based CET1 ratio would be approximately 8.4%. We continue to be well positioned with capital flexibility. We returned roughly $700 million of capital to shareholders during the quarter, which included $600 million in common dividends and $100 million of share repurchases.

And as Bill just mentioned, our board recently approved a $0.05 increase to our quarterly cash dividend on common stock, raising the dividend to $1.60 per share. Our recent CCAR results underscores the strength of our balance sheet and as previously announced our current stress capital buffer remains at the regulatory minimum of 2.5% for the four quarter period beginning in October 2024.

Slide 5 shows our loans in more detail. Compared to the first quarter, average loan balances were stable. Commercial loans were essentially flat as utilization remains well below both the pre-pandemic historical average of roughly 55% and the second quarter 2023 level of 52.5%. Importantly, we continue to grow customer relationships and CNIB loan commitments increase during the second quarter. Although the direction of the near-term economy remains uncertain, CapEx to sales levels and inventory growth rates remain below historical averages, both of which are typically leading indicators of eventual commercial loan growth. Average consumer loans declined approximately $600 million or less than 1%, driven by lower residential real estate and home equity loan balances. And the yield on total loans increased 4 basis points to 6.05% in the second quarter.

Slide 6 details our investment security and swap portfolios. Average investment securities of $141 billion increased $6 billion, or 4%, reflecting the deployment of excess liquidity into higher-yielding securities, primarily U.S. treasuries. The securities portfolio yield increased 22 basis points to 2.84%, driven by higher rates on new purchases. As of June 30th, the securities portfolio duration was 3.5 years. During the second quarter, our forward starting swaps increased to $18 billion. With the addition of these swaps, we've locked in a portion of our fixed rate asset repricing through 2025 at a level that is approximately 300 basis points higher than maturity. The total weighted average received fixed rate of our swap portfolio, including the forward starters, increased 83 basis points to 3.13% and the duration of the portfolio is 2.2 years.

Slide 7 highlights the securities repositioning we executed during the second quarter. We sold securities with a book value of $4.3 billion and a market value of $3.8 billion. We recognized a $497 million loss on the sale and reinvested the $3.8 billion of proceeds into securities, with yields approximately 400 basis points higher than the securities sold. The reposition is expected to benefit our net interest income by $80 million in 2024, with roughly $10 million of that being realized in the second quarter. And the estimated earn-back period for this transaction is less than four years.

Turning to Slide 8, we expect considerable runoff of low-yielding securities and swaps through the end of 2026, which will allow us to continue to reinvest into higher-yielding assets, providing a meaningful benefit to net interest income. Accumulated other comprehensive income improved to negative $7.4 billion on June 30th, compared to negative $8 billion on March 31st. The improvement was primarily due to the securities repositioning. AOCI will continue to accrete back as our securities and swaps mature, resulting in further growth to tangible book value.

Slide 9 covers our deposits in more detail. Average deposits declined $3 billion or 1% reflecting seasonally lower corporate balances. Regarding mix, consolidated non-interest bearing deposits were 23% of total deposits in the second quarter, down less than 1 percentage point from the first quarter. Additionally, average non-interest bearing deposits had the smallest dollar decline in the second quarter of 2024 since the Fed began raising rates in 2022, which gives us confidence that the non-interest bearing portion of our deposits has largely stabilized. And our rate paid on interest bearing deposits increased by only 1 basis point during the second quarter to 2.61%. We believe our rate paid on deposits is approaching its peak level, but we do expect some potential to [drift] (ph) higher as interest rates remain elevated.

Turning to the income statement, and as Bill mentioned, there were several significant items in the quarter, and I want to provide a bit more detail. Taken together, these significant items have a minimal impact to our earnings per share, totaling to a net EPS benefit of $0.09. As we previously disclosed, we participated in the Visa exchange program, allowing us to monetize 50% of our Visa Class B-1 shares and convert our remaining holdings to 1.8 million Visa Class B-2 shares. Through the exchange we recognized a $754 million pre-tax gain.

In addition, we had significant items that occurred in the second quarter that largely offset the gain, and they are as follows: First, as I mentioned earlier, we repositioned a portion of our securities portfolio and through the sale of certain low-yielding securities recognized a $497 million loss. Second, we recorded a negative $116 million Visa derivative fair value adjustment associated with Visa Class B-2 shares, primarily related to the extension of anticipated litigation resolution. And lastly, we recognize the $120 million PNC Foundation contribution expense. The foundation supports our communities and early childhood education.

Turning to Slide 11, we highlight our income statement trends. Second quarter net income was $1.5 billion or $3.39 per share. Total revenue of $5.4 billion increased $266 million or 5% compared to the first quarter of 2024. Net interest income grew by $38 million, or 1% in the second quarter. Notably, this is the first time NII has increased in six quarters, marking the beginning of an expected upward trajectory. And our net interest margin was 2.6% an increase of 3 basis points. Non-interest income increased $228 million, or 12%, and included $141 million of the significant items I previously detailed. Noninterest expense of $3.4 billion increased $23 million, or 1%, and included the $120 million foundation contribution expense. Notably, we generated positive operating leverage in both the linked quarter and year-over-year comparisons. Provision was $235 million in the second quarter, reflecting portfolio activity, and our effective tax rate was 18.8%.

Turning to Slide 12, we highlight our revenue trends. Second quarter revenue was up $266 million or 5%, driven by higher non-interest income and net interest income. Net interest income of $3.3 billion increased $38 million or 1%, driven by higher yields on interest earning assets. Fee income was $1.8 billion and increased $31 million or 2% linked quarter. Looking at the detail, asset management and brokerage and non-interest income was stable late quarter, as the benefit of higher average equity markets was offset by lower annuity sales due to elevated first quarter activity. Capital markets and advisory fees increased $13 million or 5%, driven by higher M&A advisory activity and loan syndications, partially offset by lower underwriting fees. Card and cash management increased $35 million, or 5%, reflecting seasonally higher consumer transaction volumes and higher treasury management fees. Mortgage revenue declined $16 million or 11%, primarily due to lower residential mortgage activity. Other noninterest income of $332 million increased 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 $130 million FDIC special assessment. Importantly, non-interest expense excluding the foundation contribution declined $135 million or 4% compared with the second quarter of 2023. Notably, personnel declined as a result of the workforce reduction actions we took last year.

As Bill mentioned, we remain diligent in our continuous improvement efforts. At the beginning of the year, we set a continuous improvement program goal of $425 million. Recently, we have identified initiatives that support increasing our CIP by an additional $25 million, raising our full-year target to $450 million. As you know, this program funds a significant portion of our ongoing business and technology investments.

Our credit metrics are presented on Slide 14. Non-performing loans increased $123 million or 5% linked quarter, primarily driven by an individual secured loan within our asset-based lending business. Total delinquencies of $1.3 billion were stable with March 31. Net loan charge-offs were $262 million in the second quarter and included $106 million of net charge-offs related to our CRE office portfolio. And our annualized net charge-off to average loans ratio was 33 basis points. Our allowance for credit losses total $5.4 billion, or 1.7% of total loans on June 30th, stable with March 31st.

Slide 15 provides more detail on our CRE office credit metrics. CRE office NPLs were stable in the second quarter, as charged off and paydowns offset inflows to non-performing loans. And the migration of criticized loans to non-performing status is an expected outcome as we work to resolve the challenges inherent to this portfolio. As expected, net loan charge-offs within the CRE office portfolio increased and totaled $106 million in the second quarter. Ultimately, we expect additional charge-offs on this portfolio, the size of which will vary quarter-to-quarter given the nature of the loans. As of June 30, our reserves on the office portfolio were 10.3% of total office loans, and inside of that, 15.5% on the multi-tenant portfolio. Accordingly, we believe we are adequately reserved. Importantly, we continue to manage our exposure down, and as a result, our balance has declined 4% or approximately $300 million linked quarter.

In summary, PNC posted a solid second quarter 2024 and we're well positioned for the second half of the year. Regarding our view of the overall economy, we're expecting continued economic growth in the second half of the year, resulting in real GDP growth of approximately 2% in 2024, and unemployment to increase modestly to slightly above 4% by year-end. We expect the Fed to cut rates 2 times in 2024, with a 25 basis point decrease in September and another in December.

Looking at the third quarter of 2024 compared to the second quarter of 2024, we expect average loans to be stable, net interest income to be up 1% to 2%, fee income to be up 1% to 2%, other non-interest income to be in the range of $150 million and $200 million, excluding Visa and securities activity. We expect core non-interest expense to be up 3% to 4%. We expect third quarter net charge-offs to be between $250 million and $300 million.

Regarding our full-year guidance, for ease of comparability to prior guidance, we exclude the first quarter FDIC special assessment, as well as the second quarter Visa gain and other significant items. Considering our reported first half operating results, third quarter expectations, and current economic forecasts, our full year 2024 guidance is as follows: For the full year 2024 compared to full year 2023, we expect average loans to be down less than 1%, which equates to nominal loan growth in the second half of 2024. We recognize the potential for greater loan growth, and should that occur, it will be accreted to our full year average. Despite lower expected loan volumes, we expect full year NII to be at the better end of our previous expectations, or down approximately 4%. We expect our securities repositioning and better than expected deposit dynamics to offset the impact of a lower than expected loan volume. We expect non-interest income to be up 3% to 5%, slightly lower than our previous guidance due to continued softness and mortgage activity and to a lesser extent, loan-related capital market fees. As a result, total revenue is expected to be down 1% to 2% and inside the range of our previous guidance. We now expect core non-interest expense to be down approximately 1% versus our previous guidance of stable, in part due to our increased CIP target. And we expect our effective tax rate to be approximately 18.5%.

With that, Bill and I are ready to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

Betsy Graseck

Hi, good morning.

William Demchak

Hey, good morning, Betsy.

Betsy Graseck

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 -- using the Visa gains? And I ask just from the context of trying to think through NIM trajectory from here. Thanks.

William Demchak

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

Robert Reilly

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

Betsy Graseck

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

William Demchak

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

Betsy Graseck

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

William Demchak

Sure.

Operator

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

John Pancari

Good morning.

William Demchak

Hi, John.

John Pancari

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

William Demchak

Well, I could [Multiple Speakers]

Robert Reilly

It wasn't -- If you backed out the restructuring, the guide would still be higher. And we did that while 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 will benefit like everybody else.

William Demchak

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

John Pancari

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

Robert Reilly

Yes. I mean, right now we're on pace and we continue to -- 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 finalization there. And then beyond that, I think, 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. But that'll be a factor in terms of deciding on buybacks. But the important part is that we are buying back shares.

William Demchak

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

John Pancari

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

Operator

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

Erika Najarian

Hi. Good morning.

William Demchak

Good morning.

Erika Najarian

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

Robert Reilly

Yes, sure. Our plan -- so Slide 9 is a good slide and that clearly shows a decline in the increase of the rate paid. The short answer to one of your questions there is, we do expect the rates [indiscernible] drift up a little bit, but in contrast it's 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 -- we'll be able to move pretty quickly on the high rates paid on commercial and [indiscernible]. But we still do have these interest-bearing consumer deposits that are below market that will grind higher. So that's something that we've talked about before and just something that we'll need to keep our eye on.

Erika Najarian

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

William Demchak

That's a good question.

Robert Reilly

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

William Demchak

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

Erika Najarian

Got it. And Bill, I think that's such a good point, because I think when people are taking a fixed asset repricing, sometimes they misthink about the $525 million as opposed to whatever. It could be at four, right, by the end of next year. And to that -- to your point, you've locked in a certainty. Okay. Thank you.

Operator

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

Scott Siefers

Good 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 software expectation. I mean, it sounds like it's just a -- or mostly a function of mortgage, which sort of is what it is. But just curious to hear sort of what do you think is going well? What will need a heavy lift? That kind of thing.

Robert Reilly

Yes, it's mostly a refinement, Scott. So, for the full year guide around the fees, we lowered our expectations of increase, as you know, from up 4% to 6% to up 3% to 5%. So still up and a small shift. Most of that coming from continued softness in mortgage, which we expect to be on the -- continue in the balance 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. And again, we could see loan growth, and if that's the case, then those fees would come back. But that's the general thinking, everything else on schedule, so to speak.

Scott Siefers

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

William Demchak

Yes, I mean, basically we want to have our fair share of consumer lending products with the clients we serve in our traditional DDA and other products. And we don't today. We're there on home equity. We're probably close in mortgage. We're under-prevented 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 -- we need to improve and it's an opportunity for us.

Scott Siefers

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

Operator

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

Ebrahim Poonawala

Good morning.

William Demchak

Good morning.

Ebrahim Poonawala

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

Robert Reilly

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

Ebrahim Poonawala

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

William Demchak

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

Ebrahim Poonawala

Got it. An outlook for reserves is stable from [indiscernible]

William Demchak

Reserves are stable, yes.

Ebrahim Poonawala

Got it. Thank you.

William Demchak

Sure.

Operator

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

Bill Carcache

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

William Demchak

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

Bill Carcache

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

William Demchak

I mean, just quickly, the movement from -- particularly in office CRE, right, from criticized to nonperforming-related reserving and charge-offs is all going 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. Credit quality of corporate America as it relates to at what point do the people who have locked in fixed rates and loan rates start to have to pay more. Ultimately, at the margin is going to impact the way we rate somebody. I think about multifamily is an example where higher rates have hurt coverage ratios. It's not going to cause losses, but it's caused us to downgrade that asset class simply because the excess isn't there. I think it will flow through to corporate America over a period of time as well. But I'm not particularly worried about it.

Robert Reilly

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

William Demchak

Yes, not in the U.S.

Robert Reilly

So it doesn't have a lot of loss context.

Bill Carcache

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

William Demchak

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

Bill Carcache

Thank you for taking my questions.

Operator

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

Ken Usdin

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

Robert Reilly

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

Ken Usdin

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

Robert Reilly

Sure. Yes. Sure.

Ken Usdin

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 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 Reilly

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

Ken Usdin

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 Reilly

Yes. That's right.

Ken Usdin

Got it. Thank you.

Robert Reilly

Sure.

Operator

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

Mike Mayo

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

Robert Reilly

Well, sure. So now the question...

Mike Mayo

And why should -- yes. Go ahead.

Robert Reilly

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

Mike Mayo

Okay. That's helpful. So -- yeah, so what's -- 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, I think people would rather take that than not. But we're hearing all the -- the biggest capital market players are just gushing with their expectations that this is a big capital markets recovery, the world's back, everything else. H8 data actually showed a little bit better. I think you might have underperformed the H8 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 is not executing quite as well as you'd like them to do?

William Demchak

I think you're trying to read into this too hard. Look, we're basically on H8, 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 DHE. They're just not drawing and we're winning clients. All we did, Mike, was this whole notion of if we're giving guidance on the expectation and 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 put -- we got tired of talking about it. When they do it, we'll benefit, and it will add to all of those numbers that you're looking at.

Mike Mayo

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

William Demchak

Yes, I don't -- Rob, do you know DHE number?

Robert Reilly

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

William Demchak

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 Reilly

Yes. No, that's all good. And just to add to that, Mike, CapEx sales, as we said in our opening comments, CapEx sales ratios are low, inventory levels are low. So there's just -- there's a lot of pointing to loan growth. It's just we don't control it.

Mike Mayo

And 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 lower. It just seems CEO confidence is up, people 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 Demchak

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% -- if we hit 2% -- sorry, if they hit 2%, then we'll hit 2%.

Robert Reilly

Or maybe a little better.

William Demchak

Yes. It's I just -- I don't see anything suggesting that's going to happen. So maybe -- I mean, what would you rather have us do here put in our forecast a -- we hope this happens number or just give you numbers that we know are going to happen.

Mike Mayo

No, I understand. Underpromise, never deliver, it's what 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 this cycle might be -- it might be a little bit different, it might not be.

William Demchak

Yes. I think I've spent a lot of time pondering this, Mike. I don't -- look, at the margin, it's going to be that the cost of holding inventory, right? Just the cost of that drawn revolver is big time on the radar of corporates who are managing their own profitability. If you can run the lower inventory, your interest rates go way down when Fed funds is 5.25%. So I think that's part of it.

And I think this whole uncertainty as we come up into the election on what's it going to look like from a regulatory basis, what am I allowed to invest in, am I going to get it approved? All of that, there's a lot of pent-up energy behind that, and we'll see. But I don't know. And it literally was this thing of rather than keep guessing and wishing, if it happens, it's a great outcome. But we don't need to rely on it.

Mike Mayo

Got it. Okay.

Operator

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

Matt O'Connor

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

William Demchak

Yes, we're not going to 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 prioritized tech investments inside of our core retail space. So think online, mobile, real time. And we just haven't put the same energy, although about a year ago we started to, into what we do in credit 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 going to change our credit box, but we're missing a lot of clients who are in that credit box, because we make it too hard for them.

Robert Reilly

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

Matt O'Connor

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

William Demchak

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

Matt O'Connor

Oh, just the remaining Visa [Multiple Speakers]

William Demchak

What happens with the back half? So the 50% that we did not have the ability to monetize. Well, Visa controls that schedule. Some of 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 multi-year exchange. So we'll just continue to monitor it.

Matt O'Connor

Okay. Thank you.

Operator

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

Gerard Cassidy

Hi, Bill. Hi, Rob.

William Demchak

Hey, Gerard.

Gerard Cassidy

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

Robert Reilly

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

William Demchak

Yeah. I went through forecasts on sort of expectations on maturity bubbles and property types. We don't expect that balance -- it's not going to grow at the pace that intuitively you might have thought of.

Robert Reilly

Yes, and that we thought a year ago.

William Demchak

Yeah, because things are getting cured, they're getting sold off pretty quickly. There's -- 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

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

William Demchak

It's mostly office.

Gerard Cassidy

Got it. Okay.

William Demchak

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

Gerard Cassidy

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

William Demchak

I mean, we are –

Robert Reilly

Oh, we've analyzed.

William Demchak

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

Gerard Cassidy

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 saying geographically?

William Demchak

It's not -- it's property by property, right? You could be in a lousy city, but be in the right place and do fine. So, I just don't know that it matters.

Gerard Cassidy

Got it. Okay.

Robert Reilly

That relates to our portfolio for sure.

Gerard Cassidy

Yes. Got it. Okay. Thank you, guys.

Operator

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Bryan Gill for closing comments.

Bryan Gill

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 Demchak

Thanks everybody.

Robert Reilly

Thank you.

Operator

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.