The PNC Financial Services Group, inc Q1 2026 Earnings Call Transcript

The PNC Financial Services Group, inc (NYSE: PNC) Q1 2026 Earnings Call dated Apr. 15, 2026

Presentation

Operator

Greetings, and welcome to the PNC Financial Services Group Q1 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Bryan Gill, Executive VP and Director of Investor Relations.

Thank you, Bryan. You may begin.

Bryan Gill — Executive Vice President and Director of Investor Relations

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 and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO.

Today’s presentation contains forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today’s earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of April 15, 2026, and PNC undertakes no obligation to update them.

Now I’d like to turn the call over to Bill.

William S. Demchak — Chairman and Chief Executive Officer

Thank you, Bryan, and good morning, everyone. As you’ve seen, we’re off to a really strong start this year. We achieved a great deal this quarter, and we continue to build upon the strength of our franchise. As you know, we completed the acquisition of FirstBank early in the quarter, and we’re well on our way to a mid-June conversion. Our financial performance was solid. Organic loan growth hit a three-year high, net interest margin expanded meaningfully, and we had 13% year-over-year fee income growth.

Our credit quality remains strong, and we returned significant capital to shareholders. Importantly, beyond the financial results, we continue to see strong momentum across our businesses with notable increased client activities as we continue to make meaningful investments in our technology and our branch network. While we recognize that there are many market concerns out there from energy prices to AI to private credit, we are not seeing anything that suggests these issues are broadly impacting our customers or our credit quality in the near term.

Specifically in regard to the increased attention on banks’ exposure to non-depository financial institutions. Rob is going to walk through some of the details as it relates to our exposure, but the sound bite you ought to walk away with here is that we don’t see any loss content in this book and certainly don’t see any exposure to a systemic event, which, by the way, we don’t expect, but were there to be one, a systemic event in private credit.

I can’t speak to what other banks have in this category as the definition seems to capture random things, but we are very outsized in our corporate receivables financing relative to others, which is a low spread business with negligible risk. Importantly, the bulk of our loans actually have nothing to do with private credit despite the regulatory category in which they reside. Overall, our focus remains on disciplined execution of our strategy, which is clearly reflected in our results this quarter. Looking ahead, we are entering into the second quarter with a lot of momentum, and we continue to be excited about the opportunities in front of us.

Finally, as always, I 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 numbers. Rob?

Robert Q. Reilly — Chief Financial Officer

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average basis. As Bill just mentioned, during the first quarter, we successfully completed our acquisition of FirstBank. And as a result, our overall balance sheet growth includes the impact of the acquisition, which represented $15 billion in loans and $22 billion in deposits. For the linked quarter, loans of $351 billion grew by $23 billion or 7%. Investment securities of $145 billion increased $2 billion or 2%.

Deposit balances were up $19 billion or 4% and averaged $458 billion. And borrowings increased by $3 billion or 4% to $63 billion. Our tangible book value was $109.42 per common share, down 3% linked quarter due to the acquisition, but up 9% compared with the same period a year ago. We continue to be well positioned with capital flexibility. During the quarter, we returned $1.4 billion of capital to shareholders. Common dividends and share repurchases were approximately $700 million each, and we continue to expect quarterly repurchases to be in the range of $600 million to $700 million going forward.

We remain well capitalized with an estimated CET1 ratio of 10.1%, down 50 basis points from year-end 2025. The decline was primarily driven by the FirstBank acquisition, accounting for roughly 40 basis points, with the remainder attributable to strong loan growth. Regarding the recent Basel III proposal, we expect the changes to be a net positive for our CET1 ratio relative to the current framework. Our initial assessment reflects a reduction of approximately 10% of our RWAs or $45 billion to $50 billion. The reduction amount is the same under both the revised standardized and the expanded methodologies, in line with our previous expectations.

Slide 5 shows our loans in more detail. Loan balances averaged $351 billion in the first quarter, an increase of $23 billion or 7% linked quarter. The growth reflected both higher commercial and consumer balances. Compared to the same period a year ago, average loans increased $34 billion or 11% and the total average loan yield of 5.5% decreased 10 basis points linked quarter.

On a spot basis, loans increased $29 billion or 9% from year-end, including $15 billion from the FirstBank acquisition and $14 billion of growth in legacy PNC loans. Specific to our legacy business, C&I loans increased $15 billion, driven by broad-based growth across businesses, reflecting strong new production and higher utilization rates. CRE balances reached an inflection point and increased approximately $100 million, and we expect moderate growth through the remainder of the year.

And consumer loans declined $1 billion due to lower residential mortgage balances. Slide 6 covers our deposit balances in more detail. Average deposits were $458 billion, up $19 billion or 4%, driven by the addition of FirstBank balances and partially offset by a reduction in brokered CDs. Excluding those items, deposit trends were consistent with typical seasonality as growth in consumer balances more than offset a seasonal decline in commercial deposits. Non-interest-bearing balances continue to represent 22% of total deposits. And our total rate paid on interest-bearing deposits decreased 18 basis points to 1.96% in the first quarter, reflecting lower rates.

Turning to Slide 7. We highlight our income statement trends. Comparing the first quarter to the most recent fourth quarter and again, including the impact of the FirstBank acquisition, total revenue was $6.2 billion and grew $94 million or 2%. Non-interest expense of $3.8 billion increased $165 million or 5%, of which $97 million was integration expense. Excluding integration costs, non-interest expense increased 2% and PPNR grew 1%. Provision was $210 million, and our effective tax rate was 19%. As a result, our first quarter net income was $1.8 billion or $4.13 per common share and $4.32 when adjusted for integration costs.

Turning to Slide 8. We detail our revenue trends. First quarter revenue increased $94 million or 2% compared to the prior quarter. Net interest income of $4 billion increased $230 million or 6%. The growth was driven by the addition of FirstBank as well as lower funding costs and commercial loan growth. Our net interest margin was 2.95%, an increase of 11 basis points. Non-interest income of $2.2 billion decreased $136 million or 6%. Inside of that, fee income decreased $44 million or 2% linked quarter.

Looking at the details. Asset management and brokerage increased $9 million or 2% due to higher average equity markets and client activity. Capital Markets and Advisory revenue declined $26 million or 5%, reflecting lower M&A advisory activity off elevated fourth quarter levels, partially offset by higher underwriting and trading revenue. Card and cash management increased $5 million or 1% as higher treasury management revenue was partially offset by seasonally lower credit card activity.

Lending and deposit services decreased by $2 million or 1%. Mortgage revenue decreased $30 million or 20%, largely attributable to a $31 million decline in MSR valuations given the heightened rate volatility during the quarter. And other non-interest income of $125 million included $32 million of Visa derivative costs as well as negative private equity valuations, partially offset by $28 million of net security gains. Compared to the same period a year ago, we’ve demonstrated strong momentum across our franchise. Importantly, fee income grew $240 million or 13%, driven by broad-based growth in our businesses.

Turning to Slide 9. First quarter expenses increased $165 million or 5% linked quarter, which included $97 million of integration costs. Non-interest expense, excluding the impact of integration expense, increased $68 million or 2% as the addition of FirstBank’s operating expenses more than offset lower legacy PNC expenses. We remain focused on expense management. And as we’ve previously stated, we have a goal to reduce costs by $350 million in 2026 through our continuous improvement program, which is independent of the FirstBank acquisition. And this program will continue to fund a significant portion of our ongoing business and technology investments.

Our credit metrics are presented on Slide 10. Overall credit quality remains strong. Our NPL and delinquency ratios each improved on both a linked quarter and year-over-year basis, reflecting the strong credit quality we continue to see across our portfolio. And the linked quarter growth in balances was entirely attributable to the addition of FirstBank.

Non-performing loans increased $25 million or 1% and represented 0.62% of total loans, down from 0.67% last quarter. Total delinquencies increased $115 million to $1.6 billion, and our accruing loans past due declined to 0.43%, down from 0.44% last quarter. Total net loan charge-offs of $253 million included $45 million of purchase accounting related to the acquisition. Excluding these acquired charge-offs, our NCO ratio was 24 basis points. At the end of the first quarter, our allowance for credit losses totaled $5.5 billion or 1.52% of total loans.

I want to take a moment to cover the details of our NDFI loans, which are highlighted on Slide 11. We’ve discussed this topic at recent investor conferences and importantly, nothing has changed in terms of the composition of the book or the underlying risk. NDFI loans continue to represent our lowest risk loans. Approximately 90% of our NDFI loans are investment grade or investment-grade equivalent and all have robust collateral monitoring requirements. Because there’s been a lot of focus on the regulatory reporting category of business credit intermediaries, we’ve further broken out the components in detail on the slide.

This category for PNC includes asset securitizations, primarily trade receivable securitizations, of which PNC is an industry-leading provider. These are loans to bankruptcy remote subsidiaries of corporate borrowers secured by diversified pools of receivables. These loans represent approximately 80% of the business credit intermediaries category for PNC. The remaining 20% of our business credit intermediaries category, approximately $7 billion, is mostly comprised of CLOs secured by private credit provider assets. These are well-structured assets, all supported by senior positions with substantial excess collateral. So again, we’ve been in these businesses for a long time, and we’ve experienced virtually no losses going back 25-plus years. We feel very good about the risk content of our NDFI loans and based on the composition of these low-risk assets, expect zero losses going forward.

To summarize, PNC reported a strong first quarter, and we’re well positioned for the remainder of 2026. Regarding our view of the overall economy, our base case assumes GDP growth to be approximately 1.9% in 2026 and the unemployment rate to drift slightly higher to 4.6% by year-end. We do not expect the Federal Reserve to cut rates during 2026. Our outlook for the second quarter of 2026 compared to the first quarter of 2026 is as follows: we expect average loans to be up 2% to 3%, net interest income to be up approximately 3%, fee income to be up 2.5%, other non-interest income to be in the range of $150 million to $200 million.

Taking the component pieces of revenue together, we expect total revenue to be up approximately 3.5%. We expect non-interest expense, excluding integration expenses, to be up approximately 2%, and we expect second quarter net charge-offs to be approximately $225 million. Considering our first quarter operating results, second quarter expectations and current economic forecast, our outlook for the full year 2026 compared to 2025 results is as follows: we expect full year average loan growth to be up approximately 11%. We expect full year net interest income to be up approximately 14.5%. We expect non-interest income to be up approximately 6%. Taking the component pieces of revenue together, we expect total revenue to be up approximately 11%.

Non-interest expense, excluding integration expenses, to be up approximately 7%, and we expect our effective tax rate to be approximately 19.5%. As a reminder, our expectation for non-recurring merger and integration costs is approximately $325 million. We recognized $98 million in the first quarter and anticipate approximately $150 million in the second quarter, with the remaining balance to be recognized in the second half of the year.

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

Question & Answers

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

Ebrahim Poonawala — Analyst, Bank Of America

Hey. Good morning. I guess maybe, Rob, Bill, just if you could talk about deposit growth. As we think about a period, we’ve not been here in a better part of the last 15 years where rates are higher for longer. I think as you mentioned in the forward curve, we may not get any rate cuts. Just give us a sense of the algorithm to grow core deposits in this environment? Like how do you think about it? What’s the approach? And how difficult do you think it’s going to be for PNC and the industry to actually grow low-cost core deposits?

William S. Demchak — Chairman and Chief Executive Officer

I guess I would just frame it a bit different and talk about growth in DDA accounts and retail clients broadly, which in turn causes deposits to grow. So I don’t think about the average balance somebody holds as a function of how high rates are and how competitive outside alternatives are. Think about total shots on goal, as the number of clients we have. So our focus has been on growing retail clients, which is the key to growing deposits long term.

The particular rate environment where rates are just kind of steady for a period of time and people are fighting to expand, you see at the margin. And you’ve heard competitors talk about this that in certain price categories, people are paying up to maintain balances and/or attract new clients. But look, we’re opening branches. We’ve opened eight so far this year. We’re going to go — what’s our total for the year? Another 50 or something?

Robert Q. Reilly — Chief Financial Officer

Yes.

William S. Demchak — Chairman and Chief Executive Officer

Our digital acquisition has been really strong, and we just need to continue that, that ultimately will lead to deposit growth.

Robert Q. Reilly — Chief Financial Officer

And we do, Ebrahim, just as a reminder, we do have deposit growth expectations for the year, sort of staying at these levels. We had a good first quarter, sort of staying at these levels with some incremental growth in the back half of ’26.

Ebrahim Poonawala — Analyst, Bank Of America

Understood. Got it. And I guess maybe just separately around customer sentiment, I think all sorts of risks over the last month, including stagflation, what higher oil prices and energy prices would mean for the consumer. Just talk to us if we saw some decline in sentiment over the course of the last month or do you think — are you as constructive when you think about this growth outlook? Obviously, the guidance suggests nothing has dramatically changed, but I’m wondering, we came in with a lot of excitement around the tax incentives for businesses, consumers. Is all of that more or less mostly intact?

William S. Demchak — Chairman and Chief Executive Officer

Look, I don’t know that we can square for you the headline surveys on consumer confidence or small business confidence, which are all not great, how we square that with what we actually see. So when you look through it spending patterns, growth in savings, activity levels, loan growth, like everything we see day-to-day in our business is almost at complete odds with the surveys you see on confidence.

Robert Q. Reilly — Chief Financial Officer

Yes. I would just add to that. I mean, in terms of sentiment, obviously, there has to be a higher level of concern. But to Bill’s point, the activity hasn’t changed.

Ebrahim Poonawala — Analyst, Bank Of America

Everything has accelerated. Yeah. That’s actually good color. Thank you.

William S. Demchak — Chairman and Chief Executive Officer

Sure.

Operator

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

R. Scott Siefers

Good morning, guys. Thanks for taking the question. Actually, I wanted to sort of follow up on that sentiment question and also about what it suggests for loan growth. You had a pretty good performance in the first quarter. When I look at the guide, it doesn’t necessarily imply much growth in future quarters off the first quarter base. But I inferred at least that your commentary on utilization rates sounded good, it sounds like they’re increasing. Are you seeing anything specifically that would cause you to be conservative or are you just sort of approaching with an abundance of caution?

Robert Q. Reilly — Chief Financial Officer

Well, sure. I can answer that, Scott. Clearly, we saw more than what we expected in terms of loan growth in the first quarter. And on an average basis, that’s going to pull into the second quarter. On a spot basis going into the second quarter, we actually see it sort of staying flattish because we do have some paydowns that are coming that will offset continued new production. So that gets you through the second quarter. And then when you look at the back half of the year, we’re pointing to growth, but not at the rate that we’ve seen in the first quarter nor that we expect in the second quarter. And to your point, that is related to concerns that ultimately end up reducing the visibility of what can happen in the second half.

William S. Demchak — Chairman and Chief Executive Officer

Long story short, you’ve followed us long enough. We’re never going to go out there and say loan growth is going to be this big number. We can’t predict it, but we banked some in the first quarter. So we put that in the authority go forward. And if we’re pleasantly surprised, that will be great.

Robert Q. Reilly — Chief Financial Officer

And that will be accretive.

R. Scott Siefers

That’s right. Perfect. Okay. Good. And then, Rob, maybe just some expanded thoughts on how capital management might change should these — these Fed proposals or NPRs indeed come through, how much more aggressively might you think about things or what are sort of the governing factors you think about you get this big relief, but then unclear the ratings agencies are necessarily on board. So what are sort of the puts and takes you see or the kind of factors you think as you walk through that?

Robert Q. Reilly — Chief Financial Officer

Yes, sure, Scott. So both methodologies — under both methodologies, we see a reduction in our RWAs of about 10%, as I mentioned in the opening comments, which is a good thing. We’re still in the proposal stage or comment page — stage rather of the proposal. So we have to work through all the nuances there. But at first blush because AOCI is blended in under both methodologies over the five years upfront, there is no AOCI. It’s close to a full point of capital for us.

R. Scott Siefers

The other issue, you mentioned the rating agencies. And inside of their rating methodologies, they look at risk-weighted assets. So I haven’t actually thought through the notion of, hey, we have less. So does this actually just pull through to how they’re going to look at us as well. But I kind of think it will.

Robert Q. Reilly — Chief Financial Officer

But I don’t know if we’ve gotten that discussion point with the rating agencies. But they had adjusted their expectations with the change of these proposals. So they’ve worked the numbers down under the current framework. So it’s logical to expect that it would extend into the new methodologies.

R. Scott Siefers

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

Operator

Thank you. Our next questions come from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.

Manan Gosalia — Analyst, Morgan Stanley

Hey. Good morning. Thanks for taking my questions. Maybe just a follow-up on the capital question. So you noted that the ERBA adoption benefit is similar to adopting the revised standardized approach. Would it still make sense to adopt the ERBA as it relates to maybe the flexibility that it could give you in managing the business going forward, maybe if you wanted to lean in on the investment-grade credit side or lower LTV, CRE. Just wanted to know how to think about this going forward.

Robert Q. Reilly — Chief Financial Officer

Yeah. I think you’re right. On the surface, the ERBA because of the benefit coming through investment-grade equivalent loans, which are sort of our wheelhouse, that makes that methodology appealing. But we’re still in the analysis stage here. There’s still a lot of nuances to figure out and obviously, in terms of if there’s any changes after the comment period. But you’re on the right track.

Manan Gosalia — Analyst, Morgan Stanley

Got it. And maybe if I can ask the loan growth question and maybe compare to the NII guide. So I guess you’re pretty close to the 3% NIM number you had indicated and you’re taking the loan growth guide up by 3 percentage points and then the NII guide is going up, but maybe to a lesser extent. Is there anything that we should be thinking about on loan spreads or deposit rates that you’re baking in now that’s different to where we were at the start of the year

Robert Q. Reilly — Chief Financial Officer

No. Let’s start at the beginning. So I’d say the short answer to your question is it’s loan mix on the new production piece. So if you go back to January, when we called for 8% average loan growth, what we did is we just used average spreads on the new production through 2026. Where we find ourselves today after the first quarter is we’ve generated on a relative basis, a much higher volume of higher credit quality deals, which, by definition, carry relatively lower spreads. Still attractive spreads, still attractive returns, particularly given the non-credit portion of those relationships. So it’s just a mix change that when we look out for the full year, we’ll have higher volume on relatively lower spreads. And as you point out, that results in higher NII than we thought in January, which is a good thing.

And then as far as NIM — we might as well cover NIM because someone will ask the question. We saw a nice increase there in the first quarter relative to our expectations. We still expect to go above 3% in the second half. But as you pointed out, we’re at 2.95%. So if we’re going to be above 3% in the second half, you can do the math there in between. But most of the expansion of that is still coming from the fixed rate asset repricing that continues to be very strong.

Manan Gosalia — Analyst, Morgan Stanley

That’s great color. Thank you.

Operator

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

John Pancari — Analyst, Evercore

Good morning. On the fee side, I know your capital markets revs decreased a bit off the particularly solid fourth quarter, particularly on the M&A front. Can you maybe update us on the outlook here in terms of pipelines and how you’d be thinking about M&A and your other capital markets revenue just given the current backdrop?

Robert Q. Reilly — Chief Financial Officer

Yeah, sure. I missed the first part of the question, but it was all about capital markets and sort of [Speech Overlap]

William S. Demchak — Chairman and Chief Executive Officer

I was saying that Harris Williams [Speech Overlap]

Robert Q. Reilly — Chief Financial Officer

Harris Williams. Yeah. Sorry. No, I got that. Yes. So Harris Williams had a strong quarter actually in the first quarter. It was off the elevated levels of the fourth quarter, but higher than what we expected. And the good news is their pipelines are strong. So going into the second quarter, we expect them to be at the levels that they’ve been at the first quarter, which again is more than what we thought. So strong activity there, and that is leading to the guide. So in the second quarter, we have capital markets essentially being at the same level. And then more importantly, for the full year, still up double digits.

John Pancari — Analyst, Evercore

Got it. Okay. Great. And then on the capital front, I appreciate the buyback color in terms of the expectation for the second quarter. Maybe just more broadly, if you could talk about capital allocation priorities. And Bill, maybe if you could just give us the old update again on where you stand on M&A interest, just given the backdrop we’re in and the activity and the regulatory posture to deals. Just want to get your updated thoughts.

William S. Demchak — Chairman and Chief Executive Officer

About capital.

Robert Q. Reilly — Chief Financial Officer

Asked you about M&A [Speech Overlap]

William S. Demchak — Chairman and Chief Executive Officer

So real simply, right, we obviously like to use our capital on clients and grow our business. We have increased our buyback just given capacity to do so. We have and you should expect that we will continue to have healthy dividends. So in the ordinary course, we’d otherwise be giving back more capital to shareholders than perhaps we have in the last handful of years, Rob. Is that accurate?

Robert Q. Reilly — Chief Financial Officer

Yes.

William S. Demchak — Chairman and Chief Executive Officer

The M&A side, the noise and activity levels, forgetting about us, just kind of what I see going on around us seems to have died down. We’re not — we’re focused on growing our company organically. We have great momentum on that. We keep our eyes open, but you’ve heard me say a lot of times, I just don’t think there’s going to be a lot of activity, particularly with us. It’s an easy year for banks. People are happy to do what they want to do, and we’re not going to push on a string nor do we need to.

John Pancari — Analyst, Evercore

Got it. All right. Thanks, Bill. Appreciate it.

Operator

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

Kenneth Usdin — Analyst, Autonomous Research

Hi, thanks. Good morning. Hey. I was just wondering, obviously, we see the outlook for the cost still intact for the year and then hires first to second. Can you just remind us the expected closing of FirstBank and then the magnitude of saves you’re expecting and then how that cascades to a run rate as you get through the rest of the year?

Robert Q. Reilly — Chief Financial Officer

Yeah, sure, Ken. So, again, our full year guide holds in terms of expenses up 7%, which includes the operating expenses of FirstBank. You didn’t ask the question, though, in terms of sort of how the expenses have fallen in the quarter. Some people have asked that relative to the first quarter, we spent a little less than we expected that will fall into the second quarter, largely around technology investments and the timing of those investments.

On FirstBank itself, everything is going well. We are still planning to convert mid-June. So everything is holding there. We expect, as I said, $325 million or so of integration charges. And then we’ll see the decline of their run rate, obviously, in terms of the second half of ’26. There’ll be some residual integration charges in the second half, but the majority will be completed in the second quarter, which in my comments, I pointed out will be about $150 million. So that’s all in our guidance. That’s all there. It’s on track, and we feel good about it.

Kenneth Usdin — Analyst, Autonomous Research

Got it. And so then we — I would assume that the cost saves would run rate by the fourth quarter, and then that’s given you [Speech Overlap]

Robert Q. Reilly — Chief Financial Officer

I think that’s a good place to start.

Kenneth Usdin — Analyst, Autonomous Research

Okay. Cool. Great. And Rob, can you actually dig on that point a little bit? There’s a push off of some spending from first to second? That was going to be my follow-up, actually. So — does that demonstrate the flexibility that you guys have or — go ahead.

Robert Q. Reilly — Chief Financial Officer

No. I mean, of course, we have flexibility, but that wasn’t what drove it. It was just in terms of the timing, it can slip into the second quarter in terms of what we plan to do in the last couple of weeks of the first quarter. Nothing major.

Kenneth Usdin — Analyst, Autonomous Research

Okay, I got it. Thanks a lot.

Operator

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

David Chiaverini — Analyst, Jefferies

Hi, thanks for taking the question. So on deposit pricing competition, are there any differences in competitiveness by geography in your footprint?

Robert Q. Reilly — Chief Financial Officer

Not really.

William S. Demchak — Chairman and Chief Executive Officer

I was going to say in our retail memo, Midwest, right? There were comments on just the Midwest being kind of tight with high promo offers by a few of the competitors. But it’s — it depends in part of the country, you have people doing big promo CDs. In other parts of the country, they’re [Speech Overlap]

Robert Q. Reilly — Chief Financial Officer

Midwest with CDs.

William S. Demchak — Chairman and Chief Executive Officer

It’s on their money market funds. People are fighting for deposits and people are fighting for clients.

Robert Q. Reilly — Chief Financial Officer

Not particularly harder in any geography.

William S. Demchak — Chairman and Chief Executive Officer

Yes, maybe. But we’re — it relates to us, you can see our growth and our growth in clients has been really strong. And we don’t have to go and lead with our faces here on price.

David Chiaverini — Analyst, Jefferies

Yes. No, that’s fair. It sounds like it’s mostly stable. So that’s good. And then shifting on to the loan side. Can you talk about borrower sentiment, pipelines and then the competitiveness on the loan pricing front?

Robert Q. Reilly — Chief Financial Officer

Yes. So again, first quarter was really strong. It’s always competitive. Like I said, our new production was skewed towards the higher credit quality, lower spread. And the pipelines look strong, a continuation of that into the second quarter, which I mentioned earlier. So pipelines are good.

William S. Demchak — Chairman and Chief Executive Officer

The only thing we’ve really seen on spread widening as you get into any of the space on, what I’ll call, leveraged lending. We don’t do much of that. But in business credit, we’ve seen spreads move. Our partnership with TCW on cash flow lending, those spreads have got 50 basis points on new production just because of the kind of scare around what’s going on — yes. This is a good thing.

Robert Q. Reilly — Chief Financial Officer

The other thing to mention is around loans is that we did reach the inflection point on our commercial real estate balances, which we called for in the first quarter of ’26. As you know, that’s been a headwind for a number of quarters, and we’ve reached that inflection point as we expected.

David Chiaverini — Analyst, Jefferies

Great. Thank you.

Operator

Thank you. Our next questions come from the line of Chris McGratty with KBW. Please proceed with your questions.

Christopher McGratty — Analyst, KBW

Oh, great morning. Bill and Rob, you talked a lot about your confidence in the credit — of the private credit portfolio, NDFI lending. I guess where would that rank in the wall of worry within the company? It seems like the market is, to your point, overestimating the kind of loss content, but where in the risk curve does that lie?

William S. Demchak — Chairman and Chief Executive Officer

It’s not even on the curve. I mean if you go through that whole bucket, the riskiest piece and the whole thing is that little $5 billion slice that is to REITs and leasing and this and that and the other thing. It’s not like a AAA CLO senior tranche static maturity. To my memory, there’s never actually been a loss in the history of the product and the AAA on corporate. The BDC exposure is really small. Even if that whole market blows up, which I don’t think it’s going to, that just causes that product to early in. You have to have massive corporate defaults and low recovery rates to ever get hit on that.

So I just — like you want to talk — remember, when we highlighted our real estate book, we said, hey, we’re worried about this. We’re working through it. We reserved a lot of it, sorry, in office. Like this isn’t even on the page of what we’re looking at. This is nothing. I mean it’s great business. It doesn’t worry me. I worry about trucking companies, and I worry about people who are dependent on fuel and what’s going to happen to discretionary spending. This isn’t in that list.

Robert Q. Reilly — Chief Financial Officer

And just as a follow-up, that real estate piece that you point to that is very little risk. So that’s on a relative basis. But I think we had one loss back in 2014 in that category, and we’re still talking about it.

William S. Demchak — Chairman and Chief Executive Officer

The REITs. Yes. It’s — I mean, I get when the market has seen liquidity events in a small slice of what is private credit, and it has scared everybody. And maybe it should if you’re somehow trying to get money out in a hurry, but that isn’t where we are. We’re a senior position against diversified pool of loans with a low advance rate. We’ve been doing this for 30 years.

Robert Q. Reilly — Chief Financial Officer

And then just to add to that, and this is important because a lot of people are focused on it, that category of business credit intermediaries — the vast majority of ours are trade securitizations. So people sometimes mistakenly call that whole category private credit. And for us, it’s quite the opposite.

William S. Demchak — Chairman and Chief Executive Officer

So we stayed in, just to hammer on this point, way back in the financial crisis when corporate receivable securitizations used to be done through CP, it kind of all stopped with the reversal of money funds. And a handful of us just started doing it on balance sheet. Really high credit quality, not a great spread, great return on economic risk, kind of lousy return on liquidity, decent return on regulatory capital.

And we’re by far the market leader in it, and that’s what’s bowing up that category for us when you look at comparisons of how much we have in the book. But it is not risky. It’s a great business, and we’re going to keep doing it. And as an aside, we’re going to have some conversations with the regulators on the uselessness of what they’ve defined as NDFIs.

Christopher McGratty — Analyst, KBW

Great color. Just my follow-up, the — I think it was $350 million you talked about as the savings. I’m interested beyond this year, you’ve got the cost savings from this program and also the FirstBank deal. Is there more — I guess, is there more behind this potential to cut costs as you — as the narrative around AI and technology investments, is there another benefit that yields in the next couple of years?

William S. Demchak — Chairman and Chief Executive Officer

Yes, this is a short answer. I don’t like — I don’t know that it’s a standout structural change in the efficiency of banks in the sense that we’ve been automating for years and years and years and largely kept our headcount flat as we’ve doubled or tripled the size of the company. That sort of thing continues. AI allows that to continue. Maybe it accelerates through time. Maybe you can establish a competitive advantage early on, be a leader in it, but everybody is eventually going to catch up, and we’re going to get to a place where banking — same trend we’ve been on forever and ever. Banking is going — the winner is going to be low-cost providers have really good products with trust behind it. We’re going to squeeze costs out of the production of what we basically offer to customers, and you’re going to need to do them to win in a consolidated industry.

Robert Q. Reilly — Chief Financial Officer

But that’s likely over multiple years. So for ’26 or 2026, our continuous improvement, $350 million of savings is part of our guide, which is up 7%.

Christopher McGratty — Analyst, KBW

Yeah, got it. Great. Thank you. Thank you.

Operator

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

Matthew O’Connor

Good morning. Can you guys talk about your interest rate positioning right now? And I guess, how you’re thinking about hedging? Because I thought the best hedges are put on when maybe the market doesn’t really know where rates might go, which is kind of where we’re at right now, at least it feels like that. So what do you think — where are you right now? And what are you kind of more concerned about protecting downside or upside?

William S. Demchak — Chairman and Chief Executive Officer

Sort of technical answer. We are basically economic value of capital flat. So duration is zero in our equity. We’re flat to overall rate movement inside of our balance sheet. Having said that, we have continued the process, as you’ve seen us do in last year into this year of locking in forward curve rates, particularly when we see some volatility to the upside but the belly of the curve. So we’ve done that well. It gives us greater certainty around some of our comments we’ve talked about with respect to certainly with ’26, but even ’27 and into ’28 as we lock down some of these rates.

Robert Q. Reilly — Chief Financial Officer

So neutral in ’26 and looking to lock in some in ’27 and ’28, similar to what we did last year.

William S. Demchak — Chairman and Chief Executive Officer

Yeah. Part of this discussion, though, of course, is don’t — we’re going to have really good NII trajectory for the next couple of years. We’re going to do that despite being flat total rate exposure which means we’re not trading our future like five years out for the ability to produce really strong NII in the first couple of years.

Matthew O’Connor

Okay. That’s helpful. And then, I guess, specifically within some of these MSR hedges, the residential and commercial, I understand this is not like the broader interest rate risk management. But I’m wondering, is there anything kind of to read through there? You’ve had pretty strong net gains the last several quarters. And this time, I think it was more offsetting — just anything interesting to point out there?

William S. Demchak — Chairman and Chief Executive Officer

Look, we got chopped up, rate — I mean that’s a massively negative FX book and your short options every which way you try to hedge it and realized vol was way higher than implied as we tried to hedge out that risk, we got chopped up. It happens and you’re exposed to it anytime you have rate swings as aggressively as we saw in the quarter around some of the news. And you’re right, through time, that tends to be an income-producing line item for us where usually we’re plus, I don’t know [Speech Overlap]

Robert Q. Reilly — Chief Financial Officer

It’s not a driver to your point.

William S. Demchak — Chairman and Chief Executive Officer

It’s just we got chopped this quarter.

Robert Q. Reilly — Chief Financial Officer

This quarter, the heightened rate volatility was the driver of an unusually large negative for us.

William S. Demchak — Chairman and Chief Executive Officer

But it wasn’t like nobody screwed up. It wasn’t a trading thing. It was literally realized volatility is higher than what was implied. So anything that has optionality and in effect gets hurt in that environment.

Matthew O’Connor

Okay. Yes. And I realize the residential and commercial essentially offset each other. So that’s not too bad getting chopped up. Okay, thank you.

Operator

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

Michael Mayo

Hey. To the extent that RWA with Basel III might be 10% less, how would you plan to use that extra capital? And when might you start leaning into using more capital or maybe you’re doing so already. Clearly, you’re leaning into using capital with loan growth that you had and you expect, but maybe more buybacks, a deal? How do you think about using that excess capital and when? Thanks.

William S. Demchak — Chairman and Chief Executive Officer

It’s down the road. We’ve increased our buyback. We’ve seen good deployment to our growth in the franchise. We’ll see when this thing even gets — comments are in and it gets approved and it gets done and then it will be a whole new environment, and we’ll figure out what we do at that point in time. But it’s a nice problem to have. We’re going to drop a point of capital into our pocket, and we’ll figure it out when it shows up.

Michael Mayo

How do you see competition? It seems like the industry is all playing offense or everyone is front-footed. You’ve been growing unused lines of credit, and I guess that’s unused commitments, I mean, and that’s playing out to a certain degree. So you’ve already been competing, but others are coming back more in force — and so how do you see competition generally, especially with regard to loan growth? How are you getting so much more loan growth than the industry? To what degree are you competing on price? And I don’t know, it just seems like everyone has excess capital in those situations historically, you’ve seen competition swing a little too far. I don’t think you’re there, but just trying to the — just a pulse.

William S. Demchak — Chairman and Chief Executive Officer

That is in our story. I mean we — look, we’re bringing all these new markets online. We have more shots on goal. So we’re just — we’re seeing more opportunities as opposed to trying to rebid the same deal I’ve been in for 22 years in our local market. So that’s a big part of it. And that’s why we — you saw it when we kind of went through the Southeast and now it’s accelerating with BBVA and FirstBank markets.

The other issue is we have a much more, I don’t know what to call it specialty lending. I don’t read that as high risk, but we’re in a lot of lending products that aren’t commodity capital. So whether it’s our corporate receivables business or asset-based lending or equipment finance, we’re in a lot of things that isn’t simply throwing money out as a generic good. And I think at the margin, that always helps us outperform.

Robert Q. Reilly — Chief Financial Officer

The other piece of that — I’m sorry, just on the expansion of the new markets or what we call our expansion markets, for our market-based corporate loans, so our national businesses aside, they’re now half our loans.

William S. Demchak — Chairman and Chief Executive Officer

And growing twice the pace.

Robert Q. Reilly — Chief Financial Officer

That’s a big driver.

Michael Mayo

I’m sorry I missed what you said there. How much — what’s half your loans?

Robert Q. Reilly — Chief Financial Officer

51%, more than half of our market-based loans. So we have national businesses that are not market-based. But in all the markets that we’ve entered within the last 12 years, half of our corporate loans are in those markets.

Michael Mayo

That’s interesting. And what was that percentage just say, a few years ago?

Robert Q. Reilly — Chief Financial Officer

40%. I don’t know if I remember 30%. It probably started at 30%, depending on where you are. It’s growing at — yes.

Michael Mayo

It’s growing 2 times the rate? Okay.

Robert Q. Reilly — Chief Financial Officer

Yes, 2 times [Speech Overlap]

Michael Mayo

And do you want to call out any of the expansion markets in particular being a little bit stronger than others?

Robert Q. Reilly — Chief Financial Officer

Well, we’ve done very well in the Southeast where we’ve been the longest. But then certainly with the Southwest, Texas and California, Colorado now because we’re online there.

William S. Demchak — Chairman and Chief Executive Officer

California has been, in some ways, shockingly strong. It’s just — it’s a target-rich environment that the amount of commercial middle market clients that are within the ZIP codes of California. Great clients, great fee. And the other thing I’d just remind you is we haven’t done this by just doing loans, like our fee income percentage in these new markets is actually equal to or higher than our legacy markets.

Robert Q. Reilly — Chief Financial Officer

Yes, it’s an excellent point.

William S. Demchak — Chairman and Chief Executive Officer

Yes. So it’s not like we’re running out throwing money at people. We like it’s an integrated relationship but we’re really good at it, and we’re growing.

Michael Mayo

All right. That’s helpful. Thank you.

William S. Demchak — Chairman and Chief Executive Officer

Sure.

Operator

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

Gerard Cassidy — Analyst, RBC Capital Markets

Hi, Bill. Hey, Rob. And Bill, following up on your comments about the focus on organic growth, can you share with us an update? I think it was at the BAB conference in November, Rob and Gunnar gave us more details about the retail expansion that you guys are undertaking. Can you share with us how is that going? What are you learning from the process? And are you pleased with the pace at which you’re growing it?

William S. Demchak — Chairman and Chief Executive Officer

I’m chuckling here because Alex is going to be amused that the older brother gave the presentation.

Gerard Cassidy — Analyst, RBC Capital Markets

I apologize.

William S. Demchak — Chairman and Chief Executive Officer

It’s all good. First of all, it’s working. What have we learned through the process? It’s actually hard to build 60 or 100 branches a year. The site location, the teams that you need in each market to pull this off, we’ve kind of created a production factory around it. We’ve learned a lot about how to create a massive buzz around a new branch opening that is particularly when we’re trying to, in effect, get our fair share in a newer market where we’re building a lot of branches. We haven’t leaned into pricing to attract new customers necessarily, which is an accelerant if we want to use it but they’re working really well — go ahead.

Gerard Cassidy — Analyst, RBC Capital Markets

I was — and then on the metrics, have you kind of crystallized what you need in deposits or the type of deposits to bring a branch up to, let’s say, breakeven? And generally, how long does it take to reach that point?

Robert Q. Reilly — Chief Financial Officer

Yes. So everything is on track, Gerard. And as Alex pointed out back in November, we sort of plan in three years to kind of get to breakeven. Actually, we’re running a little better than that right now. But everything, to Bill’s point, is on plan, and we’re excited about it.

Gerard Cassidy — Analyst, RBC Capital Markets

Very good. Pivoting away from this growth. As I know you know, Bill, because you’ve talked about it, there’s been a change in the leverage lending guidelines by the FDIC and OCC. Have you been able to optimize any of your lending now that these — I think it went into effect in December that those restrictions went away. But are you seeing any benefits from that where you’re winning new business because you’re able to have some flexibility and optionality now?

William S. Demchak — Chairman and Chief Executive Officer

That’s a good question. Most of our struggle with that was that it was capturing business that we were going to do anyway no matter how much they yielded us because it was really good business, and they just had the definition wrong. I’m actually not — maybe at the margin, we’ve seen some acceleration in some of that stuff. But mostly what that did is it opened the window for banks just to do good, smart business and not try to write a four-paragraph description of what is a good or a bad loan, which you just can’t do today.

Gerard Cassidy — Analyst, RBC Capital Markets

Very good. Thank you very much.

Operator

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

Erika Najarian — Analyst, UBS

Hi. Good morning. Just a few quick follow-ups. Bill and Rob, I know you were asked a lot about the deposit opportunity, which you answered fully. Just wondering, just pulling up, if the Fed doesn’t cut this year, where — how do you think deposit costs behave? Do you think that you could hold the line on deposit costs if the Fed doesn’t cut?

Robert Q. Reilly — Chief Financial Officer

Erika, this is Rob. Yes, I do — I think so. If the Fed doesn’t cut, which is our expectations that they won’t, deposit costs stay fairly steady through the second quarter and then maybe in our — by our estimates, maybe go up a basis point or 2. But generally speaking [Speech Overlap]

William S. Demchak — Chairman and Chief Executive Officer

The pressure up isn’t from necessarily competition, but rather just repricing back book as things kind of roll bringing back book customers to a closer to a market level, which kind of at the margin will cause our deposit cost to go up over the next period if the Fed doesn’t move. But it’s not — it’s all in our guidance. It’s not material, and we’ll still hit the 3%.

Robert Q. Reilly — Chief Financial Officer

And that back book repricing is a dynamic that’s been in place for a while. That’s not new. So it’s generally steady. But obviously, there’s a risk if loan growth continues to exceed and there’s pressure on those deposits, but that would be a good thing.

Erika Najarian — Analyst, UBS

Got it. And just finally, Bill, one of your peers, David Solomon, actually talked about widening spreads in certain pockets of NDFI lending. Are you observing similar spread expansion in certain NDFI-type credits?

William S. Demchak — Chairman and Chief Executive Officer

So drill down on that. We’re inside of NBFIs, right, the spot everybody is focused on is in private credit. And inside of our bucket in that, our $7 billion is 90% CLOs, AAA tranches, I imagine, have widened. I imagine facilities to BDCs are going to widen as people — as the fear factor steps in. We have like $500 million of — so like the odds of me figuring out that there’s a spread movement in there is kind of unlikely because — huge in the flow. Yeah. Yeah, yeah, yeah.

Erika Najarian — Analyst, UBS

Got it. Perfect. Thank you.

Operator

Thank you. Our next questions come from the line of John McDonald with Truist. Please proceed with your questions.

John McDonald — Analyst, Truist

Hi, thanks. Good morning. Rob, I was kind of wondering as loan growth is picking up here, your reserve ratios look solid, but any need to start to provide a little bit for loan growth as we look ahead?

Robert Q. Reilly — Chief Financial Officer

Yeah, for sure. That will be part of it. In fact, that was — if you take a look at our provision increase quarter-over-quarter, that was largely driven by the loan growth that we saw. So that comes along with loan growth. These tend to be — and what we’ve seen tend to be higher credit quality, so it’s not as much. But I would expect provision expense to go up with the growth in loans.

John McDonald — Analyst, Truist

Okay. And then on ROTCE, any updated thoughts? I think you talked earlier about exiting the year at kind of an 18% ROTCE heading higher next year. Any updates there?

Robert Q. Reilly — Chief Financial Officer

No. No. Same what we said back in January. So just to remind everybody, we finished the fourth quarter of ’25 at approximately 18% ROTCE. That was elevated a little bit by the tax reserve release in the quarter. And then what we said, and we still believe we’re going to go down during ’26 because of the FirstBank acquisition and the impact on that. Then when we deliver everything that we intend to deliver in ’26 along our guidance, we’ll be back to that approximately 18% in the fourth quarter of ’26. But the really important part is we would expect to drift higher as we go into ’27. And that’s — yes, still the plan.

John McDonald — Analyst, Truist

Got it. Got it. And that’s just a function of operating leverage and growth next year in terms of moving higher?

Robert Q. Reilly — Chief Financial Officer

Yeah, that’s right.

John McDonald — Analyst, Truist

Okay. Got it. Thank you.

William S. Demchak — Chairman and Chief Executive Officer

You bet.

Operator

Thank you. We have reached the end of our question-and-answer session. With that, I would like to turn the floor back over to Bryan Gill for closing comments.

Bryan Gill — Executive Vice President and Director of Investor Relations

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

Operator

[Operator Closing Remarks]