The PNC Financial Services Group Inc (NYSE: PNC) Q1 2023 earnings call dated Apr. 14, 2023
Corporate Participants:
Bill Demchak — Chairman, President and Chief Executive Officer
Robert Q. Reilly — Executive Vice President and Chief Financial Officer
Analysts:
Betsy Graseck — Morgan Stanley — Analyst
Mike Mayo — Wells Fargo Securities — Analyst
Gerard Cassidy — RBC — Analyst
John Pancari — Evercore — Analyst
Bill Carcache — Wolfe Research — Analyst
Scott Siefers — Piper Sandler — Analyst
Ken Usdin — Jefferies — Analyst
Stefan Shed — Point72 — Analyst
Alan Davies — NatWest Markets — Analyst
Presentation:
Operator
Good morning and welcome to today’s conference call for the PNC Financial Services Group. Participating on this call are PNC’s Chairman, President and CEO, Bill Demchaka, 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 April 14, 2023 and PNC undertakes no obligation to update them. Now I’d like to turn the call over to Bill.
Bill Demchak — Chairman, President & Chief Executive Officer
Thank you, Brian, and good morning, everybody. As you can see on this slide, our quarterly results were strong and we reported $1.7 billion in net income or $3.98 per share. Inside of this, we grew deposits and loans, increased our capital and liquidity positions, generated positive operating leverage, and maintain strong credit quality. For the past month, we’ve seen market volatility across the broader industry. And while we take this situation seriously and are closely monitoring the environment, it’s important to note that these events have taken place within a few banks wit hvery unique business models.
Inside of our company, we really haven’t seen any meaningful impacts from the events of the past month. Our balance sheet remained strong and stable. We are operating the company in the same way we were at the beginning of March.
Ultimately, over time, we expect the dynamics playing out the banking system today to contribute to changes in the competitive landscape. While it’s still early innings, we believe that PNC will be a beneficiary from this process. That said, in the near term, we’re not immune to the competitive environment and the deposit dynamics that will ultimately impact our NII in the near term and Rob is going to cover that in more detail in a second. We remain focused on growing relationships across our lines of business and we continue to execute on key priorities, including the expansion of the BBVA legacy markets.
Rob will provide more details on our financial performance in a moment. However, for this particular call, he will review our first quarter earnings in a slightly condensed manner to allow time to also cover key balance sheet focus points that have been top of mind for our investors in the last couple of weeks. And of course, following that, we’ll be able to discuss your specific questions in the Q&A segment.
Finally, I’d like to thank our 61,000 employees for helping deliver a strong quarter and everything they do to support our customers. Now with that, I’ll turn it over to Rob.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Thanks, Bill and good morning everyone. Our balance sheet is on slide 4 and is presented on an average basis. Loans for the first quarter were $326 billion, an increase of $3.6 billion or 1% linked quarter. Investment securities were relatively stable at $143 billion. Cash balances at the Federal Reserve average $34 billion and increased $4 billion during the quarter.
Deposits of $436 billion grew on both a spot and average basis linked quarter. Average borrowed funds increased $4 billion, which reflected fourth quarter 2022 activity, as well as senior note issuances in January of this year. At quarter end, our tangible book-value was $76.90 per common share, an increase of 7% linked quarter. And we remain well capitalized with an estimated CET1 ratio of 9.2% as of March 31, 2023.
During the quarter, we returned $1 billion of capital to shareholders, which included $600 million of common dividend and approximately $370 million of share repurchases or $2.4 million shares. Due to market conditions and increased economic uncertainty, we expect to reduce our share repurchase activity in the second quarter. And of course, we’ll continue to monitor this and may adjust share repurchase activity as appropriate.
Slide 5 shows our loans and deposits in more detail. During the first quarter, loan balances averaged $326 billion, an increase of $4 billion or 1%, largely reflecting the full quarter impact of growth in the fourth quarter of 2022. Deposits averaged $436 billion in the first-quarter, increasing $1.3 billion. We continue to see a mix-shift from non-interest bearing to interest-bearing. And I will cover that in more detail in a few minutes. Our rate paid on interest-bearing deposits increased to 1.66% during the first-quarter from 1.07% in the fourth quarter of 2022. And as of March 31st, our cumulative deposit beta was 35%.
Turning to the income statement on slide 6, as you can see first quarter 2023 reported net income was $1.7 billion or $3.98 per share. Total revenues of $5.6 billion decreased to $160 million compared to the fourth quarter of 2022. Net interest income decreased $99 million or 3%, primarily driven by two fewer days in the quarter and higher funding costs, partially offset by higher yields on interest earning assets. Our net interest margin of 2.84% declined eight basis points, reflecting the increased funding costs I just mentioned. Non-interest income also declined 3% or $61 million as growth in asset management and brokerage was more than offset by a general slowdown in capital markets activity, as well as seasonally lower consumer transaction volumes.
First-quarter expenses declined to $153 million or 4% linked-quarter, even after accounting for the increase to the FDIC deposit assessment rate, which equated to $25 million. Provision was $235 million in the first-quarter and included the impact of updated economic assumptions, as well as changes in portfolio composition and quality. And our effective tax rate was 17.2%.
Turning to Slide 7, we highlight our revenue and expense trends. As a result of our diversified revenue streams and expense management efforts, we generated positive operating leverage of 2% linked quarter and 15% compared to the same period a year ago. And as we previously-stated, we have a goal to reduce costs by $400 million in 2023 through our continuous improvement program. And we’re confident we will achieve our full-year target. And as you know, this program funds a significant portion of our ongoing business and technology investments.
Our credit metrics are presented on slide 8. Nonperforming loans remained stable at $2 billion and continue to represent less than 1% of total loans. Total delinquencies of $1.3 billion declined $164 million or 11% linked quarter. Notably, the delinquency rate of 41 basis-points is our lowest level in over a decade. Net charge-offs were $195 million, a decrease of $29 million linked quarter.
Our annualized net charge-offs to average loans ratio was 24 basis-points in the first quarter. And our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on March 31st, essentially stable with year end 2022. Before I provide an update on our forward guidance, as Bill mentioned, we want to take a deeper dive into some of the key balance sheet items that are top of mind in the current environment related to deposits, securities and swaps, capital and liquidity and the impact of potential regulatory changes and finally office exposure within our commercial real-estate portfolio.
In our view, we believe we are well-positioned across all of these key areas of focus. Turning to slide 10, our $437 billion deposit base is broken down between consumer and commercial categories to give you a view of the composition and granularity of the portfolio. At the end of the first-quarter, our deposits were 53% consumer and 47% commercial. Inside of our $230 billion of consumer deposits, approximately 90% are FDIC insured. The portfolio is very granular, with an average account balance of approximately $11,500 across nearly 20 million accounts throughout our coast-to-coast franchise. Our $207 billion of commercial deposits are 20% insured, but importantly, approximately 95% of the total balances are held in operating and relationship accounts. These include deposits held as compensating balances to pay for treasury management fees, escrow deposits at Midland loan services and broader relationship accounts, all of which tend to provide more stability than deposit only accounts. Importantly, we have approximately 1.4 million commercial deposit accounts, representing a diverse set of industries and geographies.
Turning to slide 11, we highlight our mix of noninterest-bearing and interest-bearing deposits. Our consumer deposits noninterest-bearing mix has been stable, remaining at 10% compared to the same-period a year-ago. The commercial side is where we expected to see a continued shift from non-interest bearing into interest-bearing deposits as rates have risen, and that has played out, albeit at a somewhat faster pace than we had expected. The commercial non-interest bearing portion of total deposits was 45% as of March 31st, down from 58% a year-ago.
Importantly, commercial non-interest bearing deposits include the compensating balances and Midland escrow deposits I mentioned previously, which provide support to this mix through time. On a consolidated basis, our level of non-interest bearing deposits was 27% at the end of the first quarter of 2023, down from 33% a year-ago.
PNC has historically operated with a higher percentage of non-interest bearing deposits relative to the banking industry, due in part to the strength of our treasury management business and granular deposit base. As a result, we expect our non-interest bearing portion of deposits to continue to exceed industry averages and approach the mid 20% range by year end 2023. In addition to our mix-shift, we have seen a faster increase in our deposit costs this year as the Federal Reserve has continued to raise short-term interest rates.
Slide 12 shows a recent trends and our current expectations for deposit betas through the end of 2023. The increase in our current deposit beta expectations are largely driven by recent events that have increased the intensity and focus on rates paid and ultimately have added incremental pricing pressure sooner than we previously expected.
We expect the Federal Reserve to raise the benchmark rate by 25 basis-points in May. This, coupled with heightened competition for deposits, has accelerated our expectations for the level and pace of beta increase. And we now expect to reach a terminal beta of 42% by year end.
Slide 13 details our investment securities and swap portfolios. Our securities balance averaged $143 billion in the first-quarter and were relatively stable linked quarter. The yield on our securities portfolio increased 13 basis-points to 2.49% as we continue to replace run-off at higher reinvestment rates. Yields on new purchases during the quarter exceeded 4.75%. Our portfolio is high-quality and positioned with a short-duration of 4.3 years, meaningfully shorter than many of our peers. Approximately two thirds of our securities are recorded as held to maturity and one third is available for sale.
Average security balances represent approximately 28% of interest-earning assets. Our received fixed swaps pointed to the commercial loan book remain largely stable at $42 billion notional value and 2.25 year duration. At the end of the first-quarter, our accumulated other comprehensive loss improved by $1.1 billion or 10% to $9.1 billion, driven by the impact of lower interest rates during the quarter and normal accretion as the securities and swaps pull to par.
Slide 14 highlights the pace of expected Security and swap maturities, as well as related AOCI runoff. By the end of 2024, we expect about 26% of our securities and swaps to roll-off. This will drive increases in our securities and commercial loan yields, as well as meaningful tangible book-value improvement as we expect approximately 40% AOCI accretion by the end of the year 2024.
Slide 15 highlights our strong liquidity position. Our strong liquidity coverage ratios continue to improve in the first-quarter and exceeded regulatory requirements throughout the quarter. Our cash balances at the Federal Reserve totaled $34 billion and we maintained substantial unused borrowing capacity and flexibility through other funding sources. PNC has a robust liquidity management process, which includes a required statutory daily liquidity coverage ratio assessment, as well as a monthly net stable funding ratio calculation.
In addition, we perform monthly internal liquidity stress-testing that covers a range of time horizons, as well as systemic and idiosyncratic stress scenarios. Our mix of borrowed funds to total liabilities has historically averaged approximately 17% and reached an unprecedented low-level of 6% in 2021. On March 31st, our mix was 12% and we expect to move closer to the historical average over time.
In light of the current environment, we anticipate that we will be subject to a total loss-absorbing capacity requirement in some form and at some point with a reasonable phase-in period. Importantly, as our borrowed funds continue to return to a more normalized level, we would expect to be compliant through our current issuance plan under existing TLAC requirements.
Slide 16 shows our solid capital position, with an estimated CET1 ratio of 9.2% at quarter-end. As the Category 3 institution, we don’t include AOCI in our CET1 ratio, but understand why there is focus on this ratio with the inclusion of AOCI. As of March 31, 2023, our CET1 ratio, including AOCI, was estimated to be 7.5%, which remains above our 7.4% required level taking into account our current stress capital buffer. However, we also believe it’s important to take a look at the balance sheet positioning of the bank from a market value of equity perspective similar to our understanding of Basel IRRBB rules. Market value of equity doesn’t truly get reflected on the balance sheet today due to generally-accepted accounting principles, which results in a skewed approach valuing certain items, primarily on the asset side.
While AOCI takes into account the current valuation of the securities and certain portions of our swap portfolios, it does not account for the valuation of the deposit book, which can be a meaningful offset in a rising interest-rate environment. In fact, looking at PNC’s change in market value of equity over the past year, the increase in the market value of our deposits in a rapidly-rising interest-rate environment has significantly outpaced all unrealized losses on the asset side of the balance sheet, including securities in fixed-rate loans.
Total market value of equity increased substantially in the rising rate environment and further our duration of equity is now essentially 0 and well-positioned in the current environment. Importantly, our models use conservative assumptions regarding estimates for betas, mix, balances and deposit lines [Phonetic]. We also recognized early-on that large inflows of deposits during the pandemic were driven by a combination of QE and fiscal stimulus, which were likely to be short-lived.
Recall our fed balances peaked in the first-quarter of 2021 around $86 billion. As a result, we modeled an economic value associated with those deposits at a fraction of the value of core deposits.
Turning to slide 17, I wanted to spend a few minutes talking about our commercial real-estate portfolio. While credit quality is strong across the majority of our CRE book, Office as a segment receiving a lot of attention in this environment due to the shift to remote work and higher interest rates. So we thought it would be worthwhile to highlight our exposure and our position with this portfolio. At the end of the first-quarter, we had $8.9 billion or 2.7% of our total loans in our office portfolio. Turning to slide 18, you can see the composition of this portfolio, which is well-diversified across geography, tenant type and property classification. Reserves against these loans which we have built over several quarters now totals 7.1%, a level that we believe adequately covers expected losses.
In regard to our underwriting approach, we adhere to conservative standards, focus on attractive markets and work with experienced, well-capitalized sponsors. The office portfolio was originated with an approximate loan to value of 55% to 60% and a significant majority of those properties are defined as Class A. We have a highly-experienced team that is reviewing each asset in the portfolio to set appropriate action plans and test reserve adequacy. We don’t solely rely on third-party appraisals, which will naturally be slow to adjust to the rapidly shifting market conditions. Rather, we are stress-testing property performance to set realistic expectations.
To appropriately sensitize our portfolio, we significantly discounted net operating income levels and property values across the entire office book. Additionally, tenant retention, build-out costs, and concession levels are all updated to accurately reflect market conditions.
Credit quality in our office portfolio remains strong today, with only 0.2% of loans delinquent, 3.5% nonperforming and a net charge-off rate of 47 basis-points over the last 12 months. Along those lines, we continue to see solid performance within the single-tenant, medical and government loans, which represent 40% of our total office portfolio. These have occupancy levels above 90% and watchlist levels of 3% or less.
Where we do see increasing stress and a rising level of criticized assets is in our multi-tenant loans, which represents 58% of our office portfolio. Multi-tenant loans are currently running in the mid 70% occupancy range. Watch, those levels are greater than 30% and 60% of the portfolio is scheduled to mature by the end of 2024.
In the near-term, this is our primary concern area as it relates to expected losses and by extension comprises the largest portion of our office reserves. Multi-tenant reserves on a standalone basis are 9.4%. Obviously, we’ll continue to monitor and review our assumptions to ensure they reflect real-time market conditions.
For each of the key areas of focus I just discussed, we believe we are well-positioned. And Slide 19 summarizes our balance sheet strength during this volatile time. Our deposits are up. Our capital and liquidity positions are strong and our overall credit quality is solid.
In summary, PNC reported a strong first quarter, 2023. In regard to our view of the overall economy, we are expecting a recession starting in the second-half of 2023, resulting in a 1% decline in real GDP. Our rate path assumption includes a 25 basis-point increase in the Fed funds rate in May. Following that, we expect the Fed to pause rate actions until early 2024 when we expect a 25 basis-point cut.
Looking ahead, our outlook for full-year 2023 compared to 2022 results is as follows. We expect spot loan growth of 1% to 3%, which equates to average loan growth of 5% to 7%. Total revenue growth to be up 4% to 5%. Inside of that, our expectation is for net interest income to be up 6% to 8%. At this point, visibility remains challenging and our full year NII guidance assumes the continuation of the recent intensity on deposit pricing, which is being driven by recent events.
We expect noninterest income to be stable, expenses to be up 2% to 3% and we expect our effective tax-rate to be approximately 18%. Based on this guidance, we expect we will generate positive operating leverage in 2023. Looking at the second-quarter of 2023 compared to the first-quarter of 2023, we expect average loans to be stable, net interest income to be down 2% to 4%, fee income to be stable to down 1%. Other non-interest income to be between $200 and $250 million, excluding net securities and Visa activity.
Taking all the component pieces, we expect total revenue to decline approximately 3%. We expect total non-interest expense to be up 1% to 2%. And we expect second-quarter net charge-offs to be between $200 million and $250 million. Further, given our strong credit metrics, our credit quality is trending better than our expectations. And with that, Bill and I are ready to take your questions.
Questions and Answers:
Operator
Thank you.[Operator Instruction] Our first question comes from the line of Betsy Graseck with Morgan Stanley. Please go-ahead.
Betsy Graseck — Morgan Stanley — Analyst
Hi, good morning.
Bill Demchak — Chairman, President & Chief Executive Officer
Hey, good morning, Betsy.
Betsy Graseck — Morgan Stanley — Analyst
First-off. I just wanted to say your slide deck is phenomenal. I just — you answered so many of the questions that I had coming into this. I felt like you were reading my mind ahead of this call.
Bill Demchak — Chairman, President & Chief Executive Officer
Could have been, could have event, yeah. Thank you. The team did a nice job putting that together. Thank you for recognizing that.
Betsy Graseck — Morgan Stanley — Analyst
No, that was great, you guys. That is a great job. I have two questions. One is on the beta, the deposit beta. When you’re talking about the 42%, obviously that is aligned with the outlook that you just expressed for interest-rate movements. I guess, I wanted to just understand how you’re thinking about the flex between deposit beta and deposit growth because part of me says. hey, I could have expected even more deposit growth than you gave me Q-Q. And is there a rate paid element to that that maybe you’re holding back on and that’s why the deposits weren’t maybe as high as what some folks like me had hoped.
Bill Demchak — Chairman, President & Chief Executive Officer
We’re sitting here puzzled. We grew deposits average and spot against the backdrop of — absent the volatility in the market, deposits still overall leaving the system, particularly in the government money funds and the shrinkage of the total on the [Indecipherable] QT. Our rate paid, if you look year on year, I think our total deposits are down 3% or something which is less than most anybody would compare to, and we have purposefully been protecting the franchise. And of course of doing that, I recognize some other people don’t do that and that’s, we’ll see how that plays out through time. But, we kind of feel we outperformed on deposits. So I’m a little bit [Speech Overlap] by your question.
Betsy Graseck — Morgan Stanley — Analyst
Yeah, no, Q-Q definitely and I would expect after all the banks finished reporting, we can have a better conversation on this. I was just wondering if you felt that, if you had a slightly higher-rate paid, would you have pulled in more and I suppose the way you have answered that question is, you don’t feel the need to so, that’s great.
And then just separately, as a fallout of what has happened with the Signature, etc., do you feel like there is any need at all to reassess the duration of the commercial operating account deposit liability life? Is that something that, you know, having seen what happened to [Indecipherable], you would want to take a closer look at or do you feel like it’s just such a different animal given, you know, what you outlined on slide 10 with the granularity you’ve got it, thanks.
Bill Demchak — Chairman, President & Chief Executive Officer
Well, first of all, we look at that all the time and as Rob put into his comments, a large portion of the deposit growth that we saw through COVID, so stimulus and the growth in the Fed’s balance sheet, we just assumed had a life of a day 0, you know, because we are in an abnormal period of time. The core operating deposits that we have, particularly as you go in the middle-market are basically the monies. The working capital monies that the companies use to run their companies. We truncate and always have truncated the modeled lives of those deposits well below what the practical experience would show us. Yeah, so it’s conservative.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
And deposits are spread-out over diverse industries and diverse geographies.
Bill Demchak — Chairman, President & Chief Executive Officer
And accounts — you almost can’t compare what happened, Silicon Valley and Signature it to any other bank I’ve ever seen in terms of the concentration of the deposit accounts.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
And the nature of the clients.
Bill Demchak — Chairman, President & Chief Executive Officer
It is just the nature of them. I mean, a lot of that money was capital raised money that was sitting there.
Betsy Graseck — Morgan Stanley — Analyst
Right. Okay, that’s super. Thank you so much, appreciate it.
Operator
Our next question from the line of Mike Mayo with Wells Fargo Securities, please go-ahead.
Mike Mayo — Wells Fargo Securities — Analyst
Hi. I guess this question goes in the category of no good deed goes unpunished. Your operating leverage in the first-quarter year-over-year was over 10%. You’ve guided for positive operating leverage this year of 1% to 3%. Your cycle to date beta I estimate that being below 40%. So all that looks really good. But on the other hand, you did, I guess, lower your guidance for how much positive operating leverage this year. You mentioned NII. You mentioned the intensity on deposit pricing. So just can you help talk about the trade-off of pursuing growth with more deposits versus maybe scaling back if that deposit pricing is really that much more intense or do you see that not being so at some point?
Bill Demchak — Chairman, President & Chief Executive Officer
I think, Mike, part of the issue that we face here is you have a interest rate forward curve is suggesting cuts out there. So if you believe that betas would be less, we kind of think the Fed is going to hold through the year and cut next year. Personally. I think they might hold longer than that. So everybody’s NII guide is going to be all over the place depending on what they actually think the Fed is doing as we go into this, the back end of this year.
Separately, we have seen just this heightened awareness of interest rates and what you do with deposits on the back of the banks have failed. You’ve seen the growth in the government money funds on the back of the Fed’s reverse repo facility, which is a real thing. As long as they allow that to keep growing. they are at the market deposits, but they’re basically getting drained from the banking system, making liquidity more expensive. So that’s — we took all that into account and said, look, if rates are higher for longer, if the Fed keeps training deposits through it’s reverse repo facility, the smaller banks really need to pay up at super high rates to fund their balance sheets. It’s going to be painful for us and that’s where we put in our guide. That may or may not happen.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
And I would just add, we’ve got a focus on our core franchise and our clients. So on the commercial side, it’s really the effect of commercial clients choosing to switch to interest-bearing from non-interest bearing.
Bill Demchak — Chairman, President & Chief Executive Officer
Yeah.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
And the relationship is fully intact. And then on the consumer side, as Bill just mentioned, the interest-bearing deposits and the pressure around rates paid there.
Mike Mayo — Wells Fargo Securities — Analyst
And the one other point you guys have made is that either NII will be better or we might have to — you might get it released some of your credit reserves. Have you seen any improvement in that loan pricing commensurate with some of the standards? The capital markets, you know, your pricing for risk a lot more. In the lending market, you have not been pricing for risk and you brought that up before. Are you seeing that at all or is still not yet?
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Our new production is a little bit better than it was, but in fairness, at the moment, credit looks much better than we otherwise would have assumed. So it’s a trade-off. Now, it’s going to be interesting mike, because the marginal cost of funds for the U.S. banking system has just gone up a lot as a result of this flurry. And so, all else equal, you would expect, credit spreads to widen here, simply because the cost of funds for all banks has gone up. Haven’t seen that play-out yet, but it continues to be at least my expectation that it will.
Mike Mayo — Wells Fargo Securities — Analyst
All right. Thank you.
Operator
Our next question comes from the line of Gerard Cassidy with RBC. Please go-ahead.
Gerard Cassidy — RBC — Analyst
Hi, guys, how are you.
Bill Demchak — Chairman, President & Chief Executive Officer
Hey, good morning Gerard.
Gerard Cassidy — RBC — Analyst
Bill, can you give us — you guys pointed out about, Rob, the expectations on TLAC in your prepared remarks, but can you guys give us some color on what changes may come as a result of the Signature and Silicon Valley bank failures. the regulators look like they’re going to reassess the situation. We will get the postmortem on May 1st, of course. But what do you guys think may happen in terms of additional requirements for regional banks like yours, and I know TLAC you’re already planning on that, but outside of TLAC.
Bill Demchak — Chairman, President & Chief Executive Officer
I don’t know what it is they might do. There’s a lot of talk around should they eliminate the available for sale, opt-in or opt-out AOCI for banks our size. And they may well do that. Pardon me though, the reason we put economic value of equity in our presentation is, as soon as you start isolating specific fixed-rate assets and ignore others, so what do you do with fixed-rate whole loan mortgages, what do you do, withheld them. You know, it’s all the same stuff, it’s an accounting entry. And so, I would hope that they would have a more holistic look as they do in Europe on measuring balance sheet risk to interest rates. I don’t know where that’s going to-end up. And whatever it is they do is going to take a period of time. TLAC, I think is a certainty at this point. It’s a function of how much it will be and whether it’s varied as a function of size and complexity of bank.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
And there some tailor [Speech Overlap]
Bill Demchak — Chairman, President & Chief Executive Officer
Yeah, yeah.
Gerard Cassidy — RBC — Analyst
No, Bill and Rob, go ahead.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Those are the two prominent subjects TLAC and AOCI inclusion.
Bill Demchak — Chairman, President & Chief Executive Officer
By the way, the issue, It’s worth-mentioning you know basic interest-rate risk management and the test around liquidity that banks go through, I mean, we do this, we run this stuff every single day with all sorts of different scenarios and the the regulators require us to and we get measured on it and do even more than up on it, and like I don’t even know who is looking at these other banks. It’s sort of come in and say, we ought to do more. We’re already doing it is I guess my point.
Gerard Cassidy — RBC — Analyst
Very-very clear and I’m glad you guys put the whole balance sheet, the equity valuation, because that message has to get out and I’m glad you guys did that. Thank you.
Moving on to commercial and industrial loans, you guys have seen really good growth over the past year. Can you give us a little more color on, do you see a reintermediation coming into the banking system, because the capital markets are still disrupted or is it just you guys have had success with BBVA and that’s working for you. What — can you give us some color of that growth that you’re seeing?
Bill Demchak — Chairman, President & Chief Executive Officer
A couple of comments. If you look-back through our history when we entered new markets, this is particularly true back to RBC and what we’ve seen with BBVA. We tend to grow loans at a pace in the new markets that would be above what you would expect in the long-term trend, and then over time we cross-sell into those new relationships. So I almost think of it as, you know, it’s kind of advertising dollars. You otherwise participate in that deal on the hope that you’re going to get TM revenue and other things. What we’ll see going-forward is the cross-sell into the new relationships we’ve established. The ability to continue to grow loans at that pace should we choose to is probably still there. Do you get paid for it today the way you did when rates were much lower offer question. The whole reintermediation and the banks from capital markets. I’ve heard some of that buzz. By the way I’ve heard the buzz the other way. You know, all else equal, I suspect the long-term trend will be less in the banking system and more out of the banking system in over a long, long period of time, notwithstanding what happens in the near future.
Gerard Cassidy — RBC — Analyst
Got it. Very helpful. Thank you. And to really reiterate what Betsy said, great deck. Thank you very much.
Bill Demchak — Chairman, President & Chief Executive Officer
Thanks, Gerard.
Operator
Next question from the line of John Pancari with Evercore, please go-ahead.
John Pancari — Evercore — Analyst
Good morning.
Bill Demchak — Chairman, President & Chief Executive Officer
Hey, John.
John Pancari — Evercore — Analyst
And I agree on the slide deck very-very helpful detail. Thanks for giving it. On the on the deposit front, just a couple additional bit of detail. The beta expectation — terminal beta of 42% looks a little bit more conservative then the Group and probably appropriately so. So, it’s good to see it. Can you maybe give us how that breaks down by way of commercial deposit beta expectation at this point versus consumer.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Yeah, sure. Hi, John, good morning, it’s Rob. The way that we look at it in terms of determining where we’re going to end up and again, it’s an expectation. We’ll see how it plays out ultimately, but you’re on the right track. So if you take a look at our total deposits of $437 billion and you take commercial and the high net worth, the consumer portion which is high-net worth, which is around $230 billion, those betas have moved. They are already at terminal. It’s done. So that leaves roughly $200 billion or so in consumer deposits. As I mentioned in my comments, 10% of those are non-interest bearing, which are transactional accounts and we don’t expect to change.
So you’re at a $170 billion, the minority of our total deposits of interest bearing consumer deposits that are sort of in play and that we expect to pay higher higher rates on. So, that’s how we get to maybe a more conservative number than what you’re seeing on peers that don’t have the same mix.
John Pancari — Evercore — Analyst
Okay, that’s helpful. Also on the deposit front, if I could also have a little bit detail on the amount of inflows that you may have seen during the March time period around the failures. Can you maybe quantify the amount and If you expect any outflow of any of the of those inflows that you saw?
Bill Demchak — Chairman, President & Chief Executive Officer
So we did see — we did see in mid March. We saw some inflows during that week that the height of the disruption, but a lot of that settled out. So we don’t expect — we don’t expect to see that be a factor for us positively or negatively as we move into the second quarter.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Only thing, I’d say, we actually opened in March twice the number of accounts in our C&I franchise that we would otherwise open in a month. So, away from the deposits that came in, we actually got a bunch of clients. The deposits will stay and get mixed, some will go, but we grew our account portfolio pretty substantially in one month.
John Pancari — Evercore — Analyst
Okay, great. If I could put one more in there. Just on the office front, do you happen to have perhaps the refreshed LTVs that you’re starting to see in that portfolio?
Bill Demchak — Chairman, President & Chief Executive Officer
That’s a good question and I haven’t seen them, but it’s worth. Yeah, I don’t know if we put in the deck or not, but we underwrite to about 55 to 65 and all of that stuff is still and all the appraisals that you get are stale. And so in effect what we end up doing is, you assume that less leases renew than you otherwise would have normal cash-flow analysis. You dropped out pretty materially. Assume that lease rates, all else equal, you’re going to go down and then you have to put in the rehab costs to re-lease it and then just counted at lower rates. We’ve done all that building by building. And then taken reserves against it. And, I guess the final point I would make, you think about Rob’s number was at 9.6%, we have against multi-tenant.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Multi-tenant right.
Bill Demchak — Chairman, President & Chief Executive Officer
You know, effectively you’re saying, alright I can have 20% of Class-A office default, at least $0.50 on the dollar on a portfolio that was originally underwritten at 60%. That’s a pretty severe outcome.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Yeah. And I would just add to that John, and so and Bill mentioned it in a relatively small portfolio. So we’re able to go asset-by-asset rather than just broad strokes across a general portfolio.
Bill Demchak — Chairman, President & Chief Executive Officer
We — you know, look, we know how to do this, right. We’ve been in the business for a long time. We have all the resources and have seen the activity in Midland. We know all the borrowers were with an — we think we’ve laid it out pretty clearly. We’re going to have charge-offs, but we’ve.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
That’s why we’ve got good reserves.
Bill Demchak — Chairman, President & Chief Executive Officer
[Speech Overlap] where they’re coming from and we’ve built the reserves.
John Pancari — Evercore — Analyst
Got it, very helpful. Thank you.
Operator
Next question from the line of Bill Carcache with Wolfe Research. Please go-ahead.
Bill Carcache — Wolfe Research — Analyst
Thanks, good morning Bill and Rob. I wanted to follow up on the deposit beta commentary. Rob, you mentioned that mid 20% non-interest bearing deposit mix that’s implicit I believe in your 42% terminal beta assumption. And it looks like that would get you back to pre COVID levels on Slide 11, I think. How are you thinking about the risks that that non-interest bearing mix will continue to fall, not just to pre COVID levels but potentially even lower. Perhaps some have talked about it [Speech Overlap].
Bill Demchak — Chairman, President & Chief Executive Officer
Yeah, we can see and we take a look at the nature of the accounts. Mid 20s is our estimate. It could go lower. Our expectations are though, that it would be in the mid 20s and that’s really, really on the basis of the nature of the operating accounts that we have, that is, we just were mentioning, we know really well and we know the nature of their activities. So it’s really knowledge of our operating book that gives us that indication.
Bill Carcache — Wolfe Research — Analyst
Understood. And then separately following-up on your your commentary around potential regulatory uncertainty in light of bars, your recent stand at testimony, I was hoping you could address broadly how you’re all thinking about the levers at your disposal to the extent that the regulatory environment grows more challenging. Certainly, it seems like you’re well-positioned. But in terms of levers, whether it’s RWA growth, buyback, dividend if you could just frame, how you think about those to the extent that it does get more challenging?
Bill Demchak — Chairman, President & Chief Executive Officer
Not sure if I have hear you. You know, if you put ASCI and we’re already kind of over that threshold. All else equal, I think we’re well-positioned and fine. We, as Rob mentioned, we’re at least at the moment being conservative on our thoughts on share repurchase, but most of that is to kind of wade out the current environment, get through earnings and see where we are. I don’t see any issue coming out of regulation that we won’t be able to handle in the due course.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
And largely — you know, obvious areas of capital and liquidity where we’re strong.
Bill Demchak — Chairman, President & Chief Executive Officer
Next question please.
Operator
Next question from the line of Scott Siefers with Piper Sandler. Please go-ahead.
Scott Siefers — Piper Sandler — Analyst
Good morning, everyone. Thank you for taking the question. So, you reduced the full-year 2023 loan growth expectation a bit. I was wondering if you could comment for a second on how much of that is sort of lower either existing or anticipated demand. And how much is you guys just sort of being more conservative about where you hope to kind of direct your capital and liquidity?
Bill Demchak — Chairman, President & Chief Executive Officer
It’s a great question. It’s probably fifty-fifty. So demand has softened a little bit and then the marginal cost of syncing new clients has gone up so we’re a little more picky than we were. It’s probably fifty-fifty.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
And that spread issue that we talked about that we think that we should be paid more for the risk.
Scott Siefers — Piper Sandler — Analyst
Okay, perfect. Thank you. And then I was hoping you could explain just a bit on that commercial account opening comment, you made a couple of questions ago. Maybe as you sort of think of, how the sort of the world might look going-forward for commercial customers, do you think they’ll just maybe diversify their relationships to protect themselves a little. How will an operational account work? Will people just keep less than their operational accounts and sprinkle it elsewhere. Any thoughts on how things might evolve.
Bill Demchak — Chairman, President & Chief Executive Officer
I’m not sure. We haven’t seen anything with our legacy clients in terms of behavior. You know, they’ve — we’ve seen money go into sweep accounts, government funds from corporates and individuals, largely as a function of rate. I don’t know that it has anything to do with diversification. Now if you go for smaller banks, I suppose that could become an issue depending on how much visibility there is into that particular bank’s balance sheet, but we just haven’t seen any of that.
Scott Siefers — Piper Sandler — Analyst
Yeah. Okay. All right, perfect, thank you very much.
Bill Demchak — Chairman, President & Chief Executive Officer
Yeah.
Operator
Next question from the line of Ken Usdin with Jefferies. Please go-ahead.
Ken Usdin — Jefferies — Analyst
Thanks, good morning, everyone. Hey guys, just wanted to dig on the guidance a little bit. The second quarter guidance is clear for the revenue step down and kind of that implies in the full year guide that second half revenue is pretty equal to first-half revenue. I’m just wondering if you kind of maybe give us some NII versus fees, are you expecting any just better stability or increase it, as you go through the year, perhaps in in fees versus what might happen in NII. Thanks.
Bill Demchak — Chairman, President & Chief Executive Officer
Okay. I think you’re asking in terms of the full-year. So, we’ve given you the new guidance around our NII and we’ve been through that. As far as fees go, you know, we’re calling it to be stable year-over-year and there is some moving parts in there. Some of the fee categories are doing a little better than we expected. Some are doing a little bit worse, but altogether, it’s still stable.
Ken Usdin — Jefferies — Analyst
Okay and within that, can I just ask your question. Your Harris Williams business has just been a great one over the years. And in this environment, obviously M&A is slower. But is there also — is there any sense or chance that also like mid sized companies have to do a rethink here and I am just kind of wondering just where you think the pipelines and outlook for that business specifically. Thanks.
Bill Demchak — Chairman, President & Chief Executive Officer
Yeah. So, Harris Williams, you’re accurate in terms of that’s our biggest driver of our capital markets advisory businesses and they had a slower than usual quarter in the first-quarter obviously reflecting a lot of disruption. And the pipelines are still pretty good. We’re not expecting a big rebound in the second-quarter, but potentially in the second half. But to your point, lot of that depends on the psychology at the time and the ability and the support for both buyers and sellers to do deals.
Ken Usdin — Jefferies — Analyst
Okay, hi, Rob, one more quick one. I know your footnote on your beta slide says that you don’t include time deposits in your beta calculations [Phonetic], which generally to assume that the beta on time deposits is obviously very high just given what we know your point that Bill made about, about industry funding costs.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Yeah, that’s right. And again, that’s a conventional measures. So that’s not our own personal PNC measure, that’s how the industry calculates it.
Ken Usdin — Jefferies — Analyst
Okay, understood. Thank you.
Operator
[Operator Instructions]. Next question from the line of Stefan Shed [Phonetic] with Point72. Please go-ahead.
Stefan Shed — Point72 — Analyst
Yes, thank you. Quick question if I may on the commercial real estate follow up one on criticized loans on slide 18, you said 20% twice as much as the rest of your commercial real estate book. So, I would just like to understand what was this number before and why you all would expect this number to evolve from here? Thank you.
Bill Demchak — Chairman, President & Chief Executive Officer
I’m sorry, I’m sorry, I didn’t follow all of that.
Stefan Shed — Point72 — Analyst
Yes, yes, sorry. On slide 18, you mentioned that for office loan ratio is 20%. I just would like to know what was this number before for previous quarters and how you expect this number to evolve.
Bill Demchak — Chairman, President & Chief Executive Officer
So the 2.7%, it’s been pretty steady. So, it’s been a small percentage of our total commercial real estate, hasn’t changed nor do we expect it, certainly not to go up.
John Pancari — Evercore — Analyst
That’s it. Thank you.
Operator
Next question from the line of Alan Davies, NatWest Markets. Please go ahead.
Alan Davies — NatWest Markets — Analyst
All right, thank you very much. Yeah, Alan Davies here from NatWest Markets just a very quick question and echo what everybody said that the disclosure information here is fantastic. With all the market noise that went on after SVB and I totally get the difference and I totally agree with what you’re saying about the accounting standards and so on. Nevertheless as a lot of keen interest in the unrealized losses on the hold to maturity portfolio. Are you able to provide any color or guidance there? I don’t think all of that would be in AOCI. Is there anything that you can help guide me with regards.
Bill Demchak — Chairman, President & Chief Executive Officer
The add on held to maturity. So, inside of AOCI today is one number and then we have another a smaller loss in held to maturity, which as we disclosed.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
$3.5 billion.
Bill Demchak — Chairman, President & Chief Executive Officer
Yeah, yeah,
Alan Davies — NatWest Markets — Analyst
Oh, it did, I apologize. I did not see that fantastic. Sorry, I didn’t mean to waste your time. Thank you.
Bill Demchak — Chairman, President & Chief Executive Officer
No problem, its not a waste. Bye
Operator
We have no further questions on the phone line.
Bill Demchak — Chairman, President & Chief Executive Officer
Okay, well thank you for joining our call and your interest in PNC. And if you have any other additional questions or need follow-up, please feel free to reach out to the IR team. Thank you. Bye. Thanks everybody.
Robert Q. Reilly — Executive Vice President & Chief Financial Officer
Thank you.
Operator
[Operator Closing Remarks]