The PNC Financial Services Group, Inc (PNC) Q2 2023 Earnings Call Transcript

The PNC Financial Services Group, Inc (NYSE: PNC) Q2 2023 earnings call dated Jul. 18, 2023

Corporate Participants:

Bryan Gill — Investor Relations

William S. Demchak — Chairman, President and Chief Executive Officer

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Analysts:

John Pancari — Evercore — Analyst

David A. George — Baird — Analyst

Erika Najarian — UBS Equities — Analyst

Scott Siefers — Piper Sandler — Analyst

Mike Mayo — Wells Fargo Securities — Analyst

Betsy Graseck — Morgan Stanley — Analyst

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Presentation:

Bryan Gill — Investor Relations

Well. good morning, and welcome to today’s conference call for the PNC Financial Services Group. Participating on this call are PNC Chairman, president and CEO, Bill Demchak; and Rob Riley, Executive Vice President and CFO.

Today’s presentation contains forward looking information. cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today’s earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website pnc.com, under investor relations. These statements speak only as of July 18, 2023, and PNC undertakes no obligation to update them.

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

William S. Demchak — Chairman, President and Chief Executive Officer

Thank you, Bryan, and good morning everyone. As you can see on the slide, we delivered solid results in the second quarter, generating exactly $1.5 billion in net income or $3.36 in diluted earnings per share. While the macro environment and the competitive dynamics playing out within the banking sector pressured our revenue during the quarte, our results reflect the overall strength of our franchise and balance sheet. And importantly, true at all, we remain focused on executing on our strategic priorities.

Our momentum across our markets remain strong, especially in the southwest. We are growing households and commercial customers throughout our footprint. Rob will take you through the details of our second quarter results in a moment, but I’d like to call out a few highlights.

First, we grew our capital during the quarter and feel very good about our positioning of our balance sheet in the current environment. In the next few weeks, we expect the Fed will announce changes to the Basel III capital framework. We believe our strong capital and liquidity levels as well as our earnings power provide the strength and flexibility to address upcoming regulatory changes. At the same time, we continue to support our customers, grow our business and deliver returns for our shareholders. And in line with our focus on shareholder returns, we recently increased our quarterly common stock dividend by $0.05. Our financial strength and stability are evidenced in the Feds latest stress tests, resulting in an improvement in our stress capital buffer to the regulatory minimum level of 2.5% in October.

Second, expense control is in focus. Rob will touch on this in a moment. We have increased our continuous improvement program target for 2023 and are taking a hard look at opportunities for even further expense improvements across the franchise.

Third, credit quality for the quarter remains strong, reflecting our diversified lending franchise and our focus on developing valuable, sustainable businesses based on long-term customer relationships.

And finally, I’d like to thank our employees for their efforts and contributions during the quarter.

And with that, I’ll turn it over to Rob.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and we’re presenting on an average basis and comparing to the first quarter. loans were stable at $325 billion. Investment securities declined $2 billion or 2%. Cash balances at the Federal Reserve were $31 billion and decreased $3 billion. Deposits of $426 billion declined $10 billion or 2%. Borrowed funds increased $3 billion. As an aside since 2021, we’ve then delivered in issuing TLAC compliant debt. So we’re confident we’ll meet the upcoming TLAC requirements through our normal course of funding.

At quarter end, AOCI was a negative $9.5 billion and tangible book value was $77.80 per common share, an increase of 5% compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 9.5% as of June 30, 2023, which increased 30 basis points linked quarter. We returned approximately $700 million of capital to shareholders in the quarter, which included $600 million of common dividends and approximately $100 million of share repurchases for 1.1 million shares.

And as Bill just mentioned, our Board recently approved a $0.05 increase to our quarterly cash dividend on common stock, raising the dividend to $1.55 per share. Our recent CCAR results underscore the strength of our balance sheet. And as previously announced, our current stress capital buffer of 2.9% will improve to the regulatory minimum of 2.5% for the fourth quarter period beginning in October 2023. Due to the expected issuance by the federal banking agencies of proposed rules to adjust the Basel III capital framework, share repurchase activity in the third quarter is expected to remain modest. We will continue to monitor this and may adjust share repurchase activity as appropriate.

Slide 4 shows our loans in more detail. Second quarter loans averaged $325 billion and increased to $20 billion, or 6% compared to the same period a year ago. This growth reflected strong loan demand during the back half of 2022 and our ability to capitalize on opportunities in our expanded franchise. Average loan balances were stable linked quarter as growth in consumer was offset by a decline in commercial, with commercial balances reflecting generally weaker demand. Consumer loans grew $400 million compared to the first quarter, reflecting higher residential mortgage, credit card and auto balances. Commercial loans average $223 billion in the second quarter, a decline of of $1 billion as limited new production was more than offset by paydowns. Loan yields increased 28 basis points to 5.57% in the second quarter, predominantly driven by the higher rate environment.

Slide 5 covers our deposits in more detail. Deposits declined 2% on both a spot and average basis linked quarter, reflecting the continuing pressure of quantitative tightening and increased spending activity as well as consumer tax payments. Deposits continue to move from noninterest-bearing to interest-bearing accounts. As expected, the mix shift is being driven by commercial deposits. In the second quarter, commercial noninterest-bearing deposits represented 45% of total commercial deposits compared to 47% in the first quarter. Our consumer deposit non-interest-bearing mix has been stable, remaining at 10%. On a consolidated basis, our level of noninterest-bearing deposits was 27% in the second quarter, down slightly from 28% in the first quarter, consistent with our expectations. And we still expect the noninterest-bearing portion of our deposits to stabilize in the mid 20% range.

Our paid on interest-bearing deposits increased to 1.96% during the second quarter, up from 1.66% in the prior quarter. And as of June 30th, our cumulative deposit beta was 39%. Looking forward, we expect a Federal Reserve to raise the benchmark rate by 25 basis points in July. We believe this will put additional pressure on betas and as a result, we expect our third quarter and year end cumulative betas to be 42% and 44% respectively.

Slide 6 details are investment securities and swap portfolios. Average investment securities of $141 billion decreased $2.4 billion or 2%, as limited purchase activity during the quarter was more than offset by portfolio paydowns and maturities. The securities portfolio yield increased 3 basis points to 2.52%, reflecting the run off of lower yield in securities. And as of June 30th, the duration of the investment securities portfolio was 4.2 years. Our received fixed swaps pointed to the commercial loan book totaled $40 billion at the end of the second quarter. The weighted average received fixed rate of our swap portfolio increased 25 basis points linked quarter to 1.73%, and the portfolio duration was 2.3 years as at June 30th.

During the second quarter, our accumulated other comprehensive loss increased by $400 million. Paydowns and maturities were in line with our expectations, but were more than offset by the negative impact from higher-than-expected rate throughout the quarter. Notwithstanding this AOCI impact, our tangible book-value increased 1% to $77.80 compared to March 31st. Importantly, as lower rate securities and swaps roll off, we expect our securities yields to continue to increase, resulting in a meaningful improvement to tangible book value from AOCI accretion.

Turning to the income statement on Slide 7. For the first half of 2023, revenue grew 11% compared to the same period a year-ago, reflecting higher interest rates and overall business growth. Noninterest expense grew 4% and was well controlled despite a higher FDIC assessment rate and inflationary pressures. As a result, PPNR grew 24%.

For the second quarter, net income was $1.5 billion or $3.36 per share. Total revenue of $5.3 billion decreased $310 million or 6% compared to the first quarter of 2023. Net interest income declined $75 million or 2%. And our net interest margin was 2.79%, a decline of 5 basis points. Noninterest income declined $235 million or a 12%, driven by both lower fee income and other noninterest income, which included Visa fair value adjustments of a negative $83 million that I will discuss in a moment. Second quarter expenses increased $51 million or 2% linked quarter. Provision was $146 million in the second quarter, reflecting portfolio activity and changes in macroeconomic variables. And our effective tax rate was 15.5%, which included the favorable impact of certain tax matters in the second quarter.

Turning to Slide eight, we’ll highlight our revenue trends. Second quarter revenue was down $310 million or 6% compared with the first quarter. Net interest income of $3.5 billion decreased to $75 million or 2%, with higher yields on interest-earning assets were more than offset by increased funding costs and lower loan and security balances. Fee income was $1.7 billion and decreased $106 million or 6% linked quarter.

The primary driver of the decline in fee income was residential and commercial mortgage revenue, which was down $79 million. Inside of that, $58 million was related to lower net valuation of mortgage servicing rights. Beyond that, capital markets and advisory revenue decreased $49 million or 19%, driven by lower merger and acquisition advisory fees and loan syndication revenue. Going forward, we expect this activity to meaningfully increase in the second half of the year, which is included in our guidance that I will cover in a few minutes. Partially offsetting these declines was a $38 million or 6% increase in card and cash management fees, reflecting seasonally higher consumer transaction volumes and increased treasury management product revenue. Other noninterest income of $129 million declined 50% linked quarter, driven by lower private equity revenue and included negative Visa fair value adjustments related to litigation escrow funding and other valuation changes totaling $83 million.

Turning to Slide 9, our second quarter expenses were up $51 million or 2% linked quarter and remain well controlled. The growth was primarily due to a $35 million increase in marketing expense reflecting seasonality. Personnel expense increased by $20 million or 1%, which included the full quarter impact of annual employee merit increases. Every other expense category remained stable or declined compared to the first quarter of 2023. As Bill mentioned, we remain diligent in our expense management efforts, particularly when considering the current revenue environment.

At the beginning of the year, we set a continuous improvement program goal of $400 million. Recently, we have identified initiatives that support increasing our CIP by an additional $50 million, raising our full-year target to $450 million. Further, we will continue to look for additional efficiencies during the remainder of 2023, and importantly, as we begin to plan for 2024.

Our credit metrics are presented on Slide 10. Our credit quality remained strong and notably the leading indicators for credit quality continue to perform well. Nonperforming loans were down $97 million or 5% and continue to represent less than 1% of total loans. And total delinquencies of $1.2 billion decreased $114 million or 9% linked quarter. Net charge-offs of $194 million were stable linked quarter. Our annualized net charge-offs to average loans ratio was 24 basis points in the second quarter. And our allowance for credit losses totaled $5.4 billion, or 1.7% of total loans on June 30th, essentially stable with March 31st.

While overall credit quality remained strong across our portfolio, the office category within commercial real estate continues to be a key area of concern. As expected, we saw increases in-charge offs related to office during the quarter. However, the portfolio metrics remain largely similar to those presented in our comprehensive view last quarter. Naturally, we’ll continue to monitor and review our assumptions to ensure they reflect real-time market conditions, and a full update is included in the appendix slide.

In summary, PNC reported a solid second quarter 2023. In regard to our view of the overall economy, we’re expecting a mild recession starting in early 2024, with a contraction in real GDP of less than 1%. Our rate path assumption includes a 25 basis point increase in the Fed funds rate in July. Following that, we expect the Fed to pause rate actions until March 2024 when we expect the Fed to begin to cut rates.

Looking ahead, our outlook for the third quarter of 2023 compared to the second quarter of 2023 is as follows. We expect average loans to decline approximately 1%. Net interest income to be down 3% to 4%. Noninterest income to be up 10% to 11%. Taking the component pieces, we expect total revenue to be up approximately 1%. We expect total noninterest expense to be stable, and we expect second quarter net charge-offs to be between $200 million and $250 million.

Considering our reported operating results for the first half of 2023, third quarter expectations and current economic forecasts for the full year 2023 compared to full year 2022, we expect spot loans to be relatively stable, which equates average loan growth of 5% to 6%. Total revenue growth to be approximately 2% to 2.5%. Inside of that, our expectation is for net interest income to be in the range about 5% to 6%. This is a move to the lower end of our previous guidance, largely driven by anticipated deposit costs moving a bit faster than we expected and slightly lower loan growth expectations.

We expect noninterest income declined 2% to 4%, which is down from our earlier expectations of stable. This change is resulting from softer-than-expected capital markets revenue in the second quarter and $127 million of Visa related charges that have been incurred year-to-date. Expenses are expected to be up approximately 2%. Credit quality is trending better-than-expected. And we expect our effective tax rate to be approximately 18%.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is coming from the line of John Pancari with Evercore. Please go ahead.

John Pancari — Evercore — Analyst

Good morning.

William S. Demchak — Chairman, President and Chief Executive Officer

Hey, good morning, John.

John Pancari — Evercore — Analyst

On the fee income side if you could just maybe elaborate a little bit on your change in your expectation to down 2% to 4% for the year. I know it represents a change in your view on capital markets as well as the impact of Visa. But I know you indicated you expect a meaningful increase in capital markets in the back half. So maybe if you can kind of talk about what’s impacting and maybe help size that up a bit? Thanks.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Yeah, sure. John, this is Rob. So in regard to our total noninterest income guidance for the full year, we did change it from stable to down 2% to 4%. Most of that in terms of that decline has occurred. So it’s really reflective of what occurred in the second quarter in regard to capital markets fees underperforming our expectations and the visa charge that we talked about, which is not in fees, but is in other noninterest income. Going forward, we do expect to pickup in capital markets fees and that’s in our guidance, both for the third quarter and the balance of the year. Just to give you some more color around that, we expect capital markets to get back to in the third quarter to first quarter levels run rate that we were at. And then some meaningful growth on top of that as well. That’s all in our guidance. So in short order, the decline in the guidance has already occurred and we’ve blended that into the full year.

John Pancari — Evercore — Analyst

Okay, that’s that’s helpful. And then separately on the capital return side I know you indicated that you expect buybacks trending somewhat minimal, so just pending Basel III. Is that leaning in perhaps in that $100 million range or is it another way to think about that? And then separately maybe, Bill, if you could talk about any thought around M&A appetite both on the non-bank side and the bank side? Thanks

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

I can handle the first one there, I guess in terms of the capital and then Bill you can talk about the — some of the changes. Yeah, no surprise there. We feel good about our capital levels. Our CET capital ratio increased 30 basis points in the quarter. So we’re at 9.5%. We did well on the stress test — the most recent stress test where our stress capital buffer decreased. So we’re in an excess capital position. The part of that thinking was the increase in the dividend that we announced recently.

As far as share repurchase is, I guess that it’s not a surprise. We’re on pause. It’s sensible to see what these new rules mean, understand the details and then build that into our capital return plans. So we’re positioned for share repurchases going forward, but it’s just sensible to take a pause right now.

William S. Demchak — Chairman, President and Chief Executive Officer

I think on the M&A side, we continue to look as we have done for the last several years. It’s small things that might augment our client offerings. The volume of things that are being shown to us has actually probably increased our appetite to do them is probably decreased a little bit at the margin. Larger things are going to be kind of a function of the environment and what the regulatory landscape looks like, but all else equal, we would be interested in extending our franchise.

John Pancari — Evercore — Analyst

Okay, great. Thanks for taking the questions.

William S. Demchak — Chairman, President and Chief Executive Officer

Sure.

Operator

Our next question is coming from the line of Dave George with Baird. Please go ahead.

David A. George — Baird — Analyst

Hey, good morning, guys. Kind of a big-picture question for both Bill and Rob. I wanted to get a sense as to how you’re thinking about managing the balance sheet today given where the cost of new money is relative to a year ago with loans and securities down a bit, I would guess economics and perhaps some capital relief are driving some of that, but I’m curious as to how you’re thinking about balancing spread revenue growth relative to managing the balance sheet for returns, and I assume you’re continuing to run the bank at the same ROE targets you always have, but I’m curious conceptually guys, how you’re thinking about that dynamic? Thanks.

William S. Demchak — Chairman, President and Chief Executive Officer

I think it’s a 10,000 foot level. Our appetite to lend and support our clients isn’t affected by short-term funding costs and so forth. There is — you’re seeing somewhat tepid loan growth largely because there is tepid loan demand. I think as a practical matter, there’s a backlog building. A lot of our clients have been hesitant to do refinance under some hope that spreads would come back down. I don’t think that’s going to happen. So I think you’ll see activity towards the back half of the year. But in any event, we just — we support clients. We don’t manage the balance sheet and the clients get the result and see other way.

With respect to interest rates, we are as neutral as we can otherwise be and I think what you’re going to see through time as deposits move back towards historical norms in terms of noninterest-bearing moving to interest-bearing and we reach that kind of cumulative beta, that’s going to be offset by swaps and securities, fixed rate assets rolling off and repricing. And that’s kind of what we target is. We run the balance sheet in a neutral position right now.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Just to add to that — I would just add to that is, so we ran for many years substantially asset-sensitive and that’s changed. So we’re slightly asset-sensitive, but really neutral right now.

David A. George — Baird — Analyst

Thank you.

Operator

Our next question is coming from the line of Erika Najarian with UBS. Please go ahead.

Erika Najarian — UBS Equities — Analyst

Hi, good morning. I guess the first question here and I just want to emphasize this. You know — and this squares with your 10-Q disclosure, you mentioned neutrally position balance sheet. So as we think about that exit run rate that is implied for your guidance on net interest income of about $3.25 billion for the fourth quarter of ’23, without taking into account balance sheet growth it sounds like if we do get the rate cuts that the market is expecting that you’re going to be able to stay within that range of $3.25 billion, again excluding any assumed growth.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah, that’s fair — that’s fair. Of course, our own plans are, as I mentioned in our opening comments that we wouldn’t see rate cuts until first quarter of next year, but you’re in the right neighborhood.

Erika Najarian — UBS Equities — Analyst

Got it. Thank you so much for all the disclosure on Slide 6. I am wondering when do you think is it time to start thinking about adding and protecting from that downside risk with regards to maybe adding new received fixed swaps at obviously higher floor than where they are coming off and what’s the pricing like for those securities — for those swaps, rather?

William S. Demchak — Chairman, President and Chief Executive Officer

Again, we are at the moment basically neutral to rates. So duration of equity that’s been bouncing around plus or minus a half a year. So, adding in this environment would be choosing to get long would basically be saying that we think the forward curve is correct and we like term rates. And I’m not sure we do that — hat we agree with that yet, which is why you’ve seen security balances roll down. I think the big unknown for us and everybody is if and when the Fed pauses and then cuts rates, what actually happens to the shape of the yield curve in term rates and expectations would be you’d see a massive flattening. So I’m not sure at the moment that there is value to be had in extending duration to the extent we do, we’re doing it in a very short and you’d in fact see that in our swaps book while balances are down, we cancelled some and put some other ones on the yield, but very short-dated.

Erika Najarian — UBS Equities — Analyst

Got it. Thank you.

Operator

[Operator Instructions] Our next question is coming 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. I just wanted to ask sort of a conceptual question on deposit pricing. The pressures seem I guess a little bit uneven by company. I was hoping you could spend a moment discussing sort of how you think about the balance between not necessarily needing to show liquidity the way some others do, but still being bound just naturally by competitive dynamics within the footprint?

William S. Demchak — Chairman, President and Chief Executive Officer

Sure. I followed the question. I mean, that the basic — out deposit outflows I guess, maybe I’ll answer it this way, are largely following the expectations, I think you’d see across the industry with QT. In side of that, we try to keep our client base and price them competitively and you’re seeing that in the mix shift from noninterest-bearing to interest-bearing and the increase in the beta. We’re not chasing, trying to do broker deposits or big CD pushes or something to boost deposits if that’s kind of where your question was going.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

That mostly protecting our core consumer — customer and commercial customer.

Scott Siefers — Piper Sandler — Analyst

Yeah. I mean, you hit on it. I guess, I probably said or [Indecipherable] about it, but if I look at your — you made the assumption it’s lower than some others, but seems sort of realistic also just within the sort of confines of what you’re actually experiencing. So I was just curious about how the competitive dynamic sort of weighed in there and I think you touched on it, so I appreciate that.

William S. Demchak — Chairman, President and Chief Executive Officer

I think if your base flows were higher than what was otherwise happening because of QTs. In other words, you were losing deposits at a pace. In that instance, your replacement cost is full rate. And I think you’re going to see that play out as earnings come out this week where you’re going to see some pretty extreme differences and what’s happened to funding cost. But our flows have been largely kind of following QT trend.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Maybe a little better.

Scott Siefers — Piper Sandler — Analyst

Okay, perfect. Thank you. And then it was something we will get back to a little more into the sort of the expected capital markets recover. I guess as I look at from a top level, if there are sort of three big chunks in the capital markets DCM, seems like it’s sort of buy an ECM, maybe has found firmer footing but M&A is the piece that’s still sort of in a logjam. I guess maybe as you think about the nuances for that recovery in the back half of the year, just what are the main drivers that you see?

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Yeah, sure. Scott, this is Rob. Yeah, and particularly for us the M&A piece, Harris Williams is a high percentage of our capital markets fees. We’re going off of pipelines. So the pipeline in our advisory businesses and largely extrapolate that the capital markets in total is up 20% over the first quarter and 6% year-over-year. And as you know, they had a pretty good second half of 2022. So we’re basing it on that.

Scott Siefers — Piper Sandler — Analyst

Okay, perfect. All right. Thank you all very much.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Sure.

Operator

Our next question is coming from the line of Mike Mayo with Wells Fargo. Please go ahead.

Mike Mayo — Wells Fargo Securities — Analyst

Hi.

William S. Demchak — Chairman, President and Chief Executive Officer

Hey, Mike.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Good morning, Mike.

Mike Mayo — Wells Fargo Securities — Analyst

I thought you might push a little harder on this. So you revised 2023 guidance using midpoints, is for NII to be 150 basis points less, fees to be 300 basis points less and expenses only 50 basis points less. So I’m just wondering how much harder you might push on the expenses? And you did mentioned the CIP going from $400 million to $450 million of savings this year, so I guess that helps. But are you preserving infrastructure and resources for potential growth? Is it just not that variable or what else can you do to get expenses more in sync with the revised lower revenue guidance? But that’s all recognized and I think you’re still guiding for positive operating leverage this year, just not as high as it once was.

William S. Demchak — Chairman, President and Chief Executive Officer

Thanks for the question, Mike. The short answer is we are going to push harder on it. The practical answer is I’m not entirely sure that the benefits of what we will be doing will show up in the run rate in ’23. If you look at our costs, right, we’re basically down in every category other than personnel. And we’re going to have to take a hard look at where we can generate savings in this company without cutting the potential for growth and the opportunity we continue to see in our growth markets and just business activity, but we’re going to look at it really hard. I’m just not sure it shows up in ’23.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Just in terms of the timing because it’s only six months left, so actions that you take don’t show up in that run rate. But we did reduce, as you pointed out, we did reduce the expectation to up 2% year-over-year. That includes the FDIC special assessment that was in there, and obviously inflationary pressures. So that’s pretty good. But we’re not going to stop there.

Mike Mayo — Wells Fargo Securities — Analyst

All right. Well, one follow-up then as we — how does that set you up for 2024? I guess is it too early to say. And just in general, you guys have been and you and the industry, it’s been about six to nine months of negative downward guidance as loan spreads for you guys, one quarter is higher interest rates and now there is capital market a little bit this quarter. And these are factors outside of your control if those are. Do you think you are level setting enough now, are we there or there’s still more risk to the downside than to the upside?

William S. Demchak — Chairman, President and Chief Executive Officer

’24 seems so far away at the moment. But I think — I guess what I would say is we’re running the company for the long-term here. We see — we continue to see once we get through rate normalization tremendous upside in the company in growth through clients in our new markets. And are we at the trough now, where we hit the trough with our guidance for the fourth quarter, I don’t know. I don’t we have a view on it. Rob?

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Now, I would say you sort of talked about. I mean, the disruption has been largely driven by the rate environment and the volatility in the rate environment that not only affects our earning assets and our deposits, but also some of our interest rate sensitive fees. So all the changes there are a function of — they have extraordinary change in the rates. Are we in the later innings of that? I think probably, but hard to be accurate exactly.

Mike Mayo — Wells Fargo Securities — Analyst

Okay. Thank you.

Operator

Our next question is coming from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck — Morgan Stanley — Analyst

Hi. How are you doing?

William S. Demchak — Chairman, President and Chief Executive Officer

Hey, Betsy

Betsy Graseck — Morgan Stanley — Analyst

Two questions. One is, I know we talked earlier about demand for loans not that great. And I’m also wondering, is there a credit box widening event that or process we should be thinking about given that credit quality is so good?

William S. Demchak — Chairman, President and Chief Executive Officer

Probably not.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Well, we’ve always said we don’t — we don’t change our box, yeah.

William S. Demchak — Chairman, President and Chief Executive Officer

I think an issue right now, it’s kind of pretty straightforward. The companies who otherwise in the normal cycle would be out refinancing and perhaps increasing lines are holding off under some assumption that credit is going to get cheaper either through rate or through spread, and so there is a backlog building. I don’t — I think we wait for that market to come to us. I don’t think there is a big appetite on anyone’s part to go out and go with a loss leading price, particularly given the funding markets today. So, I think it’ll be slow for a while until people are kind of forced into this new environment and new pricing and then you’ll see growth.

Betsy Graseck — Morgan Stanley — Analyst

Okay, all right. Separately, on the regulatory, I know you’ve said in the past that your LCR ratio is compliant no matter how you measure it. When you say no matter how you measure it, are you talking about hey, even if you were or achieve substandard is that what you’re referring to?

William S. Demchak — Chairman, President and Chief Executive Officer

I don’t know the exact quote. But we put the ratio out there for a while and well I am not sure the ratio this quarter would qualify for the 400%, but it’s very close. And historically it’s been over the 400% even though were measured at the 70% threshold.

Betsy Graseck — Morgan Stanley — Analyst

Yeah, no, it’s much higher than anyone else we count, so I was just wondering if that’s what you were thinking about.

William S. Demchak — Chairman, President and Chief Executive Officer

Yes.

Betsy Graseck — Morgan Stanley — Analyst

Okay. Last ticky-tacky thing is just on the FDIC special assessment. I’m not sure if I heard this right or not, but is that in your full year expense guide or should we be thinking about?

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Yeah, no, no, no. Thanks for asking that Betsy. The FDIC assessment that I was referring to was the one that was announced last year that went into place at the beginning of this year ’23. It doesn’t relate to the special assessment that’s being contemplated for the Silicon Valley Bank and Signature Bank, which we expect to be finalized sometime in the second half. So our guidance does not include that.

Betsy Graseck — Morgan Stanley — Analyst

And that you would be putting below the line, is that right?

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Well, we’d be expensing [Phonetic]it, but we need to understand what the what that number is.

Betsy Graseck — Morgan Stanley — Analyst

Got it, okay. All right, thanks so much.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Sure.

William S. Demchak — Chairman, President and Chief Executive Officer

Thanks Betsy

Operator

[Operator Instructions] Our next question is coming from the line of Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Hey, guys, good morning.

William S. Demchak — Chairman, President and Chief Executive Officer

Good morning

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

I had a couple of follow-up questions. One, I think you talked about interest in expansion, I guess as it pertains to M&A. When you talk to investors and bank management teams, it appears that there are three hurdles to that. One is lack of policy alignment in DC, mark-to-market purchase accounting, and then the macro. Bill, if you had to rate them, which of these three is the biggest hurdle to trigger a little bit of a consolidation in the sector?

William S. Demchak — Chairman, President and Chief Executive Officer

Look, I think for the industry broadly it’s fair value accounting targets where even MOEs at this point there have to be for most banks it would get together a fairly substantial capital raise, and that’s going to stop people from doing things. I think you’ve heard quite loudly coming out of DC, recognition that there is going to need to be consolidation in the industry to create competition against some of the giant banks. So I don’t know that shows up actually on a hurdle. And the final thing is just the franchise value of what you might look at. It’s — people used to do deals just for size. I think we’re in an environment — in a credit environment where that can be dangerous because I think there’s a lot of bad balance sheets out there, heavy real estate concentration and other things that would be a red flag.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

But the mark-to-market is the primary challenge.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Got it. And I guess no way to resolve that, the lower rates at some point. And Just as a follow-up on interest rates and your deposit beta guidance, it all feels incremental well within control. If the Fed is close to being done, do you see a big risk of deposit behavior shifting bad book repricing down the road or if the Fed is actually done, we’re getting close to the end game here?

William S. Demchak — Chairman, President and Chief Executive Officer

So a couple of things. I want to go back to your comment on it just quickly, and we’ve got to wait for rates to go lower. You don’t necessarily need rates to go lower, you need the existing book to pull to par, right? One of those — so for example, our securities book because of short duration will pull the par very quickly, others — some have long book, some have short book. So it will vary across the industry.

The issue of deposit betas, if the Fed just freezes and stays here for a long period of time, you would have deposit beta creep. We’re at the margin, there would be competition for deposits as long as QT was ongoing. And you’d see some some bleed to the upside. I don’t know how large that would be. We’re kind of assuming some of that in our guidance. But I think that’s a real issue, and we’ve seen it in past history when the Fed was done.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

And at particularly in the interest-bearing consumer deposits, which are — which could still go up even though the Fed stops or cut.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Got it. Thank you, both.

William S. Demchak — Chairman, President and Chief Executive Officer

Sure.

Operator

And our last question in queue is a follow-up question coming from the line of Mike Mayo with Wells Fargo. Please go ahead.

Mike Mayo — Wells Fargo Securities — Analyst

Hey, Bill, just your big picture perspective. So are we going into a recession, soft landing, no landing, hard landing. And remind us, your reserves are predicated on unemployment of a certain level and at what theoretical point would you say, hey, it’s okay for us to release some of those reserves?

William S. Demchak — Chairman, President and Chief Executive Officer

Well, I’ll give you the official Rob answer, which is we are appropriately reserved.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Well, thank you — thank you for doing that for me.

William S. Demchak — Chairman, President and Chief Executive Officer

We’re at this point, I think we have our unemployment assumptions somewhere over 5%, which bluntly looks like it’s going to be pretty tough to get there in my own view. I think this soft landing feels right. And we’ll reflect on that as time comes. We’re not even in a soft landing. I’d remind you that a large amount of the reserves we have appropriately are focused towards commercial real estate and office specifically, and I think even with the soft landing that asset category is going to have trouble.

Mike Mayo — Wells Fargo Securities — Analyst

Okay. And did you make any changes? Where are you right now in your commercial — the office reserving? I know you were kind of high in the industry before.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

We are 7.4% on the office book.

William S. Demchak — Chairman, President and Chief Executive Officer

But we’re over 10 on the…

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

I’m sorry, on the office book, inside of the office book, the multi-tenant piece, which is where we have the biggest concern is close to 11%.

William S. Demchak — Chairman, President and Chief Executive Officer

So, I think — we are reserved for whatever happens in that book, but that’s — we will need those reserves because we do think there’s going to be problems in the office space.

Mike Mayo — Wells Fargo Securities — Analyst

Great. All right. Thank you.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Yeah.

Operator

We have no further questions.

William S. Demchak — Chairman, President and Chief Executive Officer

Thank you all for your participation on the call. If you have any follow-up questions, please feel free to reach out to the IR team.

Robert Q. Reilly — Executive Vice President and Chief Financial Officer

Thanks, everybody. Thank you.

Operator

[Operator Closing Remarks]