PNC Financial Services Gr (NYSE:PNC) held its second-quarter earnings conference call on Wednesday. Below is the complete transcript from the call.

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Summary

PNC Financial Services Group Inc reported strong financial performance with $2.1 billion in net income, equating to $4.81 per diluted share. Adjusted EPS, accounting for integration costs, was $4.85.

The company experienced strong business momentum, driven by new client acquisitions and growth in net interest income from commercial loans and favorable deposit mix. Fee income saw a significant increase of 10% quarter-over-quarter and 20% year-over-year.

PNC's credit performance remained solid, with strong results in the Fed's stress tests. The board approved an 18% increase in the quarterly common stock dividend to $2 per share.

Strategic initiatives included the successful integration of First Bank, expansion into new markets with new branches, and the launch of a new mobile banking platform.

Future outlook includes expectations of continued loan and net interest income growth, stable deposit balances, and a CET1 ratio target around 10%. Full-year revenue growth is projected at 13%, with a focus on maintaining expense management.

Management highlighted the strength and broad-based nature of loan growth and capital market revenues while noting the sector's resilience and ability to adapt to economic conditions.

Full Transcript

OPERATOR

Greetings and welcome to the PNC Financial Services Group Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question during that time, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Gill. Thank you, Brian. You may now begin.

Brian Gill, Director of Investor Relations

Well, good morning and welcome to today's conference call for the PNC Financial Services Group. I am Brian Gill, the Director of Investor Relations for PNC, and participating on this call are PNC's Chairman and CEO Bill Demchak and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials.

These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of July 15, 2026, and PNC undertakes no obligation to update them. Now I'd like to turn the call over to Bill.

William Demchak, Chairman Of The Board

Thank you, Brian, and good morning everyone. As you saw, PNC delivered an impressive second quarter. We generated $2.1 billion of net income or $4.81 per diluted share. Our results included first bank integration costs and other significant items. Collectively, these items reduced earnings per share by $0.04, resulting in an adjusted diluted EPS of $4.85. Now Rob's going to take you through all those details on our financial results in a couple, but let me just hit a few highlights.

Business momentum remains really strong. We continue to win new clients and deepen existing relationships. DDA growth continues at a healthy pace while client acquisition across our corporate and private banking businesses continues to grow meaningfully. Net interest income grew on the back of continued commercial loan growth as well as favorable deposit mix and pricing, and fee income performance was a particular highlight, increasing 10% linked quarter and 20% year over year.

Growth has been broad-based across every fee category, underscoring the value of our diversified business model. We also generated positive operating leverage and improved our efficiency ratio. Credit performance remained strong reflecting the strength of our economy as well as the quality of our portfolio. The consistency of our financial strength was evident in the Fed's latest stress test results. For the fourth year in a row, PNC's start to trough capital depletion was the lowest in our peer group, further demonstrating our best-in-class resiliency.

With this in mind, our board approved an increase to our quarterly common stock dividend of $0.30 or 18% to $2 per share. Beyond these financial results, we continue to make meaningful progress on the things that will drive our future success. We successfully completed the conversion of First Bank, opened new branches in high-growth markets, introduced a new mobile banking platform, all the while continuing to advance client and infrastructure technologies.

None of these efforts are about the next quarter. They're about making PNC a better bank for our customers and positioning the company for sustained growth over the long term. In summary, we had a great quarter and importantly, we are well-positioned to drive further growth across our company. Before I turn it over to Rob, as always, I just want to thank our employees for everything they do for our company and our customers. And with that, Rob will take you through the quarter.

Rob Reilly (Executive Vice President and CFO)

Thanks, Bill, and good morning, everyone. Our balance sheet is on slide 4 and is presented on an average basis for the linked quarter. Loans of $363 billion grew $12 billion or 4%. Securities balances increased 2% to $147 billion during the quarter, and the portfolio yield improved 9 basis points to 3.45%. Average deposit balances of $457 billion were stable, consistent with seasonal patterns, and borrowings were $79 billion, an increase of $16 billion reflecting higher FHLB advances.

Our tangible book value was $111 per common share, up 2% linked quarter and up 7% compared with the same period a year ago. And our return on tangible common equity was 17.9% in the second quarter. We continue to be well positioned with capital flexibility. During the quarter, we returned $1.3 billion of capital to shareholders, which included $690 million of common dividends and $610 million of share repurchases. Going forward, we expect third-quarter repurchases to approximate this same level.

As Bill just mentioned, our board recently approved a 30-cent increase to our quarterly cash dividend on common stock, raising the dividend 18% to $2 per share. And we remain well capitalized with an estimated CET1 ratio of 9.9%. Slide 5 shows our loans in more detail. Loan balances averaged $363 billion in the second quarter, an increase of $12 billion or 4% linked quarter, and the total average loan yield decreased 3 basis points linked quarter to 5.47%.

Virtually all of the loan growth was in CNI, reflecting strong new production and higher utilization across almost every loan category. CRE balances increased $690 million during the quarter, driven primarily by growth in retail and industrial exposures, and consumer loans declined by $730 million as growth in credit card balances partially offset expected declines in residential, real estate, and auto loans. Slide 6 covers our deposit balances in more detail.

Average deposits were stable with the prior quarter as higher consumer balances were offset by a seasonal decline in commercial deposits. Our total rate paid on interest-bearing deposits decreased 5 basis points to 1.91% in the second quarter, reflecting lower rates paid across all deposit categories. Notably, average non-interest-bearing balances grew 4% linked quarter and represented 23% of total deposits. Turning to the income statement, as Bill mentioned, I want to provide a bit more detail regarding the integration costs and significant items in the quarter.

When combined, these items had a minimal impact on our net income and earnings per share. First, we incurred $127 million of integration costs related to the First Bank acquisition. Beyond these integration costs, we had several significant items. We participated in the VISA Exchange program and monetized half of our VISA Class B2 shares, resulting in a $448 million pre-tax gain. We also recorded a negative $85 million VISA derivative fair value adjustment associated with our remaining VISA Class B3 shares, primarily related to the extension of anticipated litigation resolution.

In addition, we repositioned a portion of our securities portfolio through the sale of approximately $4 billion of available-for-sale securities, resulting in a $139 million loss. We reinvested the proceeds into securities with yields approximately 120 basis points higher than the securities sold. Finally, we contributed $140 million to the PNC Foundation, which supports our communities and early childhood education initiatives. So all in, the First Bank integration costs and significant items when combined resulted in a nominal reduction to our second-quarter EPS of $0.04.

Turning to Slide 8, we highlight our income statement trends comparing the second quarter to the first quarter of 2026. Total revenue was $6.9 billion and grew $710 million or 12% and included both integration costs and significant items totaling $218 million. Non-interest expense of $4.1 billion increased $330 million or 9% and included $140 million PNC Foundation contribution as well as $121 million of integration expense. We generated 3% positive operating leverage and PPNR grew 16%.

Provision was $191 million. Our effective tax rate was 21%. As a result, our second-quarter net income was $2.1 billion or $4.81 per common share and $4.85 as adjusted. Comparing the second quarter of 2026 to the same time last year, net income grew by $412 million, resulting in EPS growth of 25%. Turning to slide 9, we detail our revenue trends. While the quarter included integration costs and significant items within the other non-interest income, our revenue growth was driven primarily by the underlying strength of our franchise.

We generated 4% growth in net interest income and 10% growth in fee revenue. Net interest income of $4.1 billion increased $146 million and included the benefit of commercial loan growth and higher non-interest-bearing deposit balances. Our net interest margin was 2.96%, an increase of 1 basis point. Fee income was $2.3 billion and increased $200 million or 10%. Looking at the details, asset management and brokerage increased $20 million or 5%, driven by increased client activity in higher average equity markets.

Capital markets and advisory revenue increased $114 million or 25%, reflecting record M&A advisory fees and strong activity across our other capital markets businesses. Card and cash management increased $34 million or 5%, driven by seasonally higher consumer transaction levels and growth in treasury management. Product revenue, lending, and deposit services increased by $6 million or 2%, primarily due to increased customer activity. Mortgage revenue increased $26 million or 22%, largely attributable to negative residential mortgage servicing rights valuations recognized in the first quarter.

Another non-interest income of $489 million increased $364 million, which included the $218 million of integration costs and significant items as well as positive private equity valuation adjustments. Compared with the second quarter of 2025 and excluding integration costs and significant items, total non-interest income increased $444 million or 21%. Importantly, this performance was driven by strong organic growth with broad-based increases across our businesses.

Turning to Slide 10, second-quarter expenses increased $330 million or 9%. Linked quarter expenses in the second quarter included integration expense and significant items totaling $261 million. While the first quarter of 2026 included $97 million of integration expense, excluding the impact of integration costs and significant items, non-interest expense increased $166 million or 5% linked quarter. The growth reflected increased business activity, higher marketing spend as well as continued investments.

We remain focused on expense management and we're on track to reach our goal to reduce costs by $350 million in 2026 through our Continuous Improvement Program, which as a reminder is independent of the First Bank 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 11. Overall credit quality remains strong with improvements in NPLs, delinquencies, and net loan charge-offs.

Non-performing loans of $2 billion decreased $216 million or 10%, and represented 0.55% of total loans, down from 0.62% last quarter. Total delinquencies declined $122 million to $1.4 billion and now represent 0.39% of total loans. Total net loan charge-offs were $226 million and our NCO ratio was 25 basis points. At the end of the second quarter, our allowance for credit losses totaled $5.5 billion for 1.48% of total loans. To summarize, PNC reported a strong second quarter of 2026 and we're well positioned for the second half of the year.

Regarding our view of the overall economy, our base case assumes GDP growth to be approximately 2.1% in 2026, with the unemployment rate holding steady and ending the year at approximately 4.3%. We expect the Federal Reserve to keep rates stable throughout 2026. For ease of comparability with our prior guidance, our full-year outlook excludes the impact of First Bank integration charges and significant items. Considering our reported first-half operating results, third-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 of approximately 12.5%, we expect full-year net interest income to be up 15 to 15.5%, we expect non-interest income to be up approximately 9%. Taking the component pieces of revenue together, we expect total revenue to be up approximately 13%, non-interest expense to be up approximately 8.5%, and we expect our effective tax rate to be approximately 19.5%. Our outlook for the third quarter of 2026 compared to the second quarter of 2026 is as follows.

We expect average loans to be up 1 to 2%, net interest income to be up between 3 and 3.5%, fee income to be down 5 to 5.5%, other non-interest income to be in the range of $150 to $200 million, we expect adjusted non-interest expense to decline 2 to 3%, and in the third quarter, we anticipate approximately $50 million of integration expenses and we expect third-quarter net charge-offs to be approximately $225 million. And with that, Bill and I are ready to take your questions.

OPERATOR

Thank you. We will now be conducting a question and answer session. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions.

Our first question today is coming from John McDonald of Truist Securities. Please go ahead.

John McDonald (Equity Analyst)

Thanks. Good morning, Rob. Wanted to ask you, had some very strong loan growth through the quarter. Could you speak a little bit to the cadence of the loan and deposit growth as the quarter progressed? There seems a little bit different dynamics between the period end and average and maybe just broadly to how you plan on funding the strong loan growth throughout the year.

Rob Reilly (Executive Vice President and CFO)

Yeah, sure. So, good morning, John. The loan growth in the first half and in the second quarter continued to be pretty strong, which is a good thing. When we take a look at the second half, we still see loan growth, but not at the same rates. We are pointing to effectively sort of GDP growth in our guidance going through the balance of the year. So more loan growth, but not to the same extent. And in terms of funding as we look forward, we do expect deposits to grow through the second half of the year. So that'll be, that'll be a key component to the funding as it replaces some wholesale debt that we picked up in the second quarter.

John McDonald (Equity Analyst)

Okay, got it. And was that just about some, the funding that you picked up on the FHLB side this quarter, was that just some temporary dynamics and you expect that you also had good nib growth this quarter? Maybe you just comment on that and the outlook there.

Rob Reilly (Executive Vice President and CFO)

Yeah. So non-interest bearing, your second question first. Non-interest bearing deposits were higher than we expected. All of that, virtually all of that was on the commercial side, you know, related to our treasury management business and some, you know, escrow monies that come through. So that's, so that's a good thing. And the, you know, I would expect that to continue not at the same rate. So we're at, we're at 23% of our total deposits and we have that pretty steady through, through the balance of the year.

I think the funding, John, you should just assume we sort of optimize against every lever, whether it's wholesale funding or what we're doing. On deposits, you know, the drops this quarter in corporate deposits are pretty easy to turn back on. You know, there's a bit of a seasonal effect, but there's also a rate effect. You saw we grew deposits in retail, which is the most important thing. And the home loan advances, you know, this quarter were, you know, think of it as the cheapest alternative to fund loans, you know, relative to other things.

And that changes all the time. I wouldn't read too much into that. It's just, it's just flexing to the optimal cost.

John Pankari (Equity Analyst)

Yeah, got it, got it. Okay, great. Thanks guys.

Rob Reilly (Executive Vice President and CFO)

Thank you.

OPERATOR

Our next question is coming from John Pankari of Evercore ISI, please go ahead.

John Pankari (Equity Analyst)

Good morning. On the, on the loan growth side, you know, I appreciate the trends. You're seeing some pretty good strengthening. Can you maybe just talk about, you know, the areas of strengthening? What do you see in terms of demand and pipelines and utilization and then separately on the loan spread front, any shift in spreads that's observable here, just amid the competitive backdrop.

Rob Reilly (Executive Vice President and CFO)

Thanks. Yeah, so inside that I would say, you know, the loan growth has been strong. Again, we expect loan growth to continue not at the same rate and that's just a function of maybe some pull forward in terms of borrowings or some pent up borrowing demand. And we'll see. As far as the mix, we don't see a lot of spread compression from a competitive standpoint, but we do have some spread compression in the continuation of what we saw in the first quarter, which is most of the lending that we're doing is to the high credit quality, lower spread entities, those who are borrowing now, it's good business, it's sufficient return.

Particularly given that those loans often come with treasury management and or capital markets. So there's a little bit of dilution to the portfolio spreads, but that's more mixed than competitive pressures. The other thing, you know, we continue to have the new markets outpace the legacy markets just in terms of growth as we grow share there. And for the first time, I'm sure this isn't true, but for the first time I can remember we had strong growth across kind of every category inside of the CNI franchise and utilization increases.

So it was broad based. Yeah, it's broad based. We're gaining share, you know, kind of all on the back of, you know, what feels like a pretty strong economy.

John Pankari (Equity Analyst)

Okay, thank you, that's helpful. And then, you know, I know you don't really guide on more specifically around the margin, but just trying to get an idea, just given some of the pricing dynamics that you're seeing and the, and the, you know, in the backdrop, in the environment. Just wanted to get an idea of how you're thinking about that the margin could project through the back half of the year. That's kind of baked into your, into your guidance here.

I know you saw a modest expansion in the, you know, in the quarter by about a bit. Just how are you thinking about how that could play out as you look through the back half?

Rob Reilly (Executive Vice President and CFO)

Yeah, so let me address that John, because there's a lot of focus on NIM. So we had said that we expect to go above 3% by the end of the year and we still are standing next to that. So that's that the second piece is if you chunk down the NIM components and it sort of gets to your earlier question. The components of our second quarter NIM, what helped our second quarter NIM, which went up a net 1 basis point was obviously the decline in the rate paid on the interest bearing as well as the increased non interest bearing deposits.

So that helped NIM. What constrained NIM was the point that I was making earlier is these commercial loans that are coming in at a pretty good rate and the majority of those being the higher credit quality, lower spread, that constrains NIM. So when you think about it and you look at it, those loans carry the fees along with them. So from an EPS perspective, those loans are hugely accretive on a standalone basis. They're dilutive to them. So you know, if we didn't have those loans, just for illustration purposes, if we didn't have that loan growth in the second quarter, our NIM would have easily popped above 3%.

So you know, we're given a choice between lower NIM, higher EPS or higher NIM and lower EPS higher. We'll take EPS every time. But having said that, we're still on the, we're on record for 3% and you know, much of that driven, you know, through the continual repricing of fixed rate assets. Well that's the longer term issue. So the longer term issue is the steepness of the yield curve. We still have a lot of fixed rate assets to reprice, so that'll, that'll determine that.

But I, I just mentioned that for illustration purposes because I think a lot of the focus on NIM is on the funding side and the issues there, but there's also the loan dynamic.

John Pankari (Equity Analyst)

Right, got it. Thanks for that, Tito. I appreciate it.

OPERATOR

Thank you. Our next question is coming from Ibrahim Poonawalla of Bank of America. Please go ahead.

Ibrahim Poonawalla (Equity Analyst)

Hey, good morning. I guess maybe Bill. Rob, sticking with loan growth. So you mentioned the high credit quality, low spread lending, which is good to hear from a credit quality standpoint. Is this different from history in terms of this kind of loan growth or this is kind of what you would expect in a good CNI environment where market spreads are tight. So one, is there something different about the quality or the type of borrower or the type of borrowing that's happening? And then I will follow up to that, but maybe if you could start there. Thanks.

Rob Reilly (Executive Vice President and CFO)

Yeah, I'd say, I wouldn't say anything is, you know, like way different, but I would say that the preponderance of the loan growth is in that higher credit quality, lower spread loans, which is probably mix wise a little bit higher than average run rate. But it's not, you know, off the charts.

Ibrahim Poonawalla (Equity Analyst)

Got it. And I guess as a follow up to that, you had all the big bank support. Like there's a significant energy around the economy around AI Capex spend. We are seeing that in the financing markets. When you sort of bring it back to, you're the second bank today that talked about broad based C and I growth. I'm just wondering, one, are you picking up some of that business tied to Data center lending, etc. And second, when you think about the broad based growth, are there other engines of the economy at work here, be it reshoring, manufacturing, et cetera, or are you able to sort of connect the dots between second derivatives of AI Capex driving that loan demand for PNC?

Rob Reilly (Executive Vice President and CFO)

It's too broad based to lay it all on AI at the margin. It's impacting what we're doing, but as I said before, it's coming from kind of all sectors, you know, which is, you know, I've heard the different explanations as to why it's showing up. You know, people are otherwise used to the chaos in the environment and have figured out that they need to, you know, operate through it and grow. The M and A environment is more robust. You know, look the economy strong and people are spending money, but it's not, you know, while I appreciate the impact AI is having on GDP, that can't be the only driver of the loan growth that we're seeing given the industry dispersion and the geographic dispersion.

Ibrahim Poonawalla (Equity Analyst)

Thank you.

OPERATOR

Thank you. Our next question is coming from Erika Najarian of UBS. Please go ahead.

Erika Najarian (Equity Analyst)

Hi, good morning. Rob, if I could just start with you to your point. There's a lot of focus on net interest, margin, trajectory because of the funding dynamic, the street currently has an exit rate of 3.08% for fourth quarter of 2026. As we think about where the loan growth is coming from, is that too fast of a ramp relative to the other opportunities in terms of fixed asset repricing and obviously maybe optimizing some of the wholesale funding that you put on this quarter to core funding?

Rob Reilly (Executive Vice President and CFO)

Yeah. So again, we don't give NIM guidance nor do we manage to it. That said, I always give NIM guidance. So we're above 3. Erica. The precise level at the exit run rate. Why do you care? Is it's, you know, at the end of the day we'll, we'll stick to our guide and we'll get there. But, but if we grow EPS and NII, you know, at 2% higher and have a lower NIM or which, you know, to Rob's earlier point, why, why do you focus on it? So I, I personally don't care.

I think that the NII dollars are more important and I couldn't quote you what JP Morgan's NIM was for this quarter. So I think you're. I'm just thinking about why the stock is down despite the beat and raise. So that's why I'm trying to clarify that question.

Erika Najarian (Equity Analyst)

More sellers than buyers. You know, look, maybe the simplest thing to say across the space is we have healthy asset growth through loan growth through which is coming from client acquisition and economic activity. And we have a great ability to fund it. We're growing our retail franchise. Retail deposits are increasing. Corporate deposits we didn't pay up for and they went down in the quarter. But we can make those whatever we want very liquid today.

And so, you know, it's not a huge focus inside the company. Even though the mechanical outcome, as we've said since the beginning of the year, will push us over 3% by the end of the year. To that end, just to take a step back, clearly the company is doing well. You've talked about organic NII dollar growth of about 1.2 billion this year. And so I guess as we think about sort of what's your plan over the next few years, is that NII dollar growth replicable for a sustainable period of time. And additionally you printed a pretty nice ROTCE this quarter. I guess I'm wondering about the path to the 20% that you've mentioned previously.

Rob Reilly (Executive Vice President and CFO)

Well, maybe I could jump in there a little bit. So we're not going to get into 27 guidance, but we're on record saying that we've got a lot of fixed great asset repricing that goes well into 27 and beyond. So that's constructive for NII in 27. And as we get closer to the end of the year, we'll sharpen that up for you. As far as the ROTCE goes, we're on record saying that we'd hit 18% annualized exit rate fourth quarter 26. We're sticking to that as well and we're tracking to that. You know, we point out this quarter we're at 17.9%, so arguably we're in the vicinity.

Erika Najarian (Equity Analyst)

Okay, thank you.

OPERATOR

Thank you. Our next question is coming from Mike Mayo of Wells Fargo. Please go ahead.

Mike Mayo (Equity Analyst)

Hi. Just a little bit more color on loan growth. Certainly it's growing faster than you had thought. Can you talk about line utilization and the potential for loans to grow even faster and how much you're assuming line utilization will increase as part of your hire guide.

Rob Reilly (Executive Vice President and CFO)

Oh, yeah. Hey Mike, it's Rob. So as we pointed out in the second quarter, utilization has increased for us and it's been pretty broad based. You know, when we look into the second half, we have continued loan growth. We have an expectation that the utilization would at least hold, maybe go up a little bit. But that's all part of our thinking in terms of sort of moderating the loan growth to roughly GDP.

Mike Mayo (Equity Analyst)

Okay, and do you ever like, look, your stock prices outperform this year when you look at it, and it's quite a bit. But do you ever wonder about, you know, this party that's taken place elsewhere as it relates to AI and this CapEx AI super cycle and all the mega IPOs and mega financings and mega mergers that you're not part of. And it's like, wow, we're not part of that, but we have our own area. What's the counter argument to that whole super cycle?

Or is there enough to go around in a trickle down effect? Bill, if you have thoughts on that, because you've been on both sides of that kind of Wall Street mega cycle.

Rob Reilly (Executive Vice President and CFO)

So many ways to answer that. I guess I'd offer the following. The first is you just look at who we are in our growth rate. Our EPS is what, up 25% year on year? We're growing single double digits on every line item on revenue and growing customers in a space that does not focus heavily on capital markets. Yet our capital markets revenue is up 80% year on year. So are we in the middle of a deal that pays 100 million in fees? You know, no, we aren't but are we actually growing the core franchise at a pace, importantly at a pace that is less cyclical than the boom you're seeing in the super cycle right now?

We are. So it's an alternative to something that I think is more volatile yet. It's, you know, we're dropping real dollars to the bottom line in a healthy economy and gaining share as we do it.

John McDonald (Equity Analyst)

Okay, appreciate the answer.

OPERATOR

Thank you. Our next question is coming from Manon Ghoslia of Morgan Stanley. Please go ahead.

Manon Ghoslia (Equity Analyst)

Hey, good morning, Rob. I wanted to check in on the trends on deposit costs. So the five basis points improvement this quarter, it's pretty good given the environment. Have you noticed anything in terms of the trajectory as you went through the quarter? Just given the increased focus on deposit competition, I'm wondering if we're seeing anything, you know, any underlying trend in either the overall portfolio or in specific geographies on deposit costs.

Rob Reilly (Executive Vice President and CFO)

Yeah, so, you know, we track that obviously pretty closely. We declined in terms of rate paid in the first quarter. Our outlook, we do have rate pay drifting back up to first quarter levels. That's all part of our guidance mostly in terms of back book repricing and some of the things that we want to do with our deposits. So that's the track that we're on. So I guess in terms of the competitive environment, I guess what do you think is driving that?

Is that just the rate outlook and the fact that rate cuts have come out of the forward curve and maybe we have a rate hike or two coming up? Is that the only thing that's driving it? Is there just more competition overall? Can you talk a little bit more about that dynamic?

Manon Ghoslia (Equity Analyst)

I think a couple things that what's happening, let's separate what's going on in wealth and corporate and assume correctly that those are competitive yields and you can kind of dial them up and down with rate. On the retail side, to the extent you are in effect a commercial bank without a retail franchise, things are really tight. Right. That's where you're seeing CD rates posted, brokered CDs, you know, at really high rates. If you're growing and own a good retail franchise, it's less severe.

And if you look inside of what we've done in retail, you know, the growth in DDA households, the increase in balance and the actual drop in rate, quarter on quarter of a basis point.

Rob Reilly (Executive Vice President and CFO)

You know, would, would kind of lead you to a, you know, to a conclusion that if you're, if your company's balanced here between, you know, retail and just commercial lending, you actually are in a pretty good spot. And I think we are. I don't think everybody is. And you know, we've talked about it forever, but retail share is, you know, moving aggressively to the larger players and it's making it more difficult to fund if you're, if you're smaller and don't focus.

Manon Ghoslia (Equity Analyst)

Yeah, I think that's right. And I think that's why even though we do expect some increase in our rate date, it's not dramatic.

OPERATOR

Thank you. Our next question is coming from Matt o' Connor of Deutsche Bank. Please go ahead.

Matt o' Connor

Good morning. I was hoping to circle back on the capital market revenues and I guess the fact that a lot of the revenues in the industry are being driven by some of these biggest, bigger headline deals and yet your revenues were so strong. Just remind us a little bit about what the mix is maybe generally from a product point of view, size of customer, and then just also any comments on like how well it's integrated with the rest of the firm as a feeder system. Thank you.

Rob Reilly (Executive Vice President and CFO)

Yeah, sure, Matt. So, you know, our capital markets was up overall, but each category was up. Harris Williams, which is about 40% of our capital markets business, had a record quarter. But beyond that, loan syndication, Solberry Trading, all up fraud based, you know, and inside of there, you know, you have derivatives and FX and you know, our share of investment grade underwriting has gone way up. It's, you know, it's a healthy market. We participate in it.

Matt o' Connor

And then just in terms of the interconnectivity with the other businesses, like when we see CI loan growth, like is that driving, you know, some of the hedging here? I mean, obviously that would make sense, but sometimes it's different. Targeted customer bases, it's all correlated. And you're exactly right. You know, loan growth gives rise to, you know, derivative activities. Oftentimes if it is a, you know, even in a middle market instance where there's going to be some loan and there's going to be, you know, which is syndicated and there might be some bonds associated with it where inside of that also. So it is all correlated and it's, you know, it's on the back of the size of the finances that are going on inside of the U.S. economy.

OPERATOR

Thank you. Our next question is coming from Gerard Cassidy of RBC Capital Markets. Please go ahead.

Gerard Cassidy (Equity Analyst)

Hey, Bill. Hey, Rob. Hey, driver. You guys have been good over the last two, three years. And getting out in front of the commercial real estate story, obviously there was a lot of fear following the pandemic about office space and the issues around it. Your credit continues to improve in commercial real estate and now you're growing commercial real estate mortgages. Can you share with us some color? What are you guys seeing there? What are the opportunities to grow that portfolio further?

Rob Reilly (Executive Vice President and CFO)

Yeah, Gerard, so you're spot on. You know, we've worked through the commercial real estate office portfolio. Still some work to do there. But we did release some reserves as we work through that book. As far as loan growth, we inflected in the first quarter for the first time after I don't know how many quarters of declines. And we see that continuing. In fact, the pipelines are forming in commercial real estate in a very constructive way across all the categories. So multifamily industrial and retail pipelines are all up. So we would expect commercial real estate to be a bigger component of our loan growth going forward.

Gerard Cassidy (Equity Analyst)

Very good. Is there any data center construction loans just out of curiosity?

Rob Reilly (Executive Vice President and CFO)

I assume not or not many. Nothing major you may know in terms of data centers. We're involved in the space, you know, we've been involved in project construction loans forever inside of the real estate space. So tangentially, but not with big risk and not big size.

Gerard Cassidy (Equity Analyst)

Yeah. Okay, good. And then as a follow up, can you share with us? Obviously, first bank is closed, it's integrated. What were some of the positive surprises you guys discovered in that process? And then what were some of the issues that maybe required extra effort that you may not have anticipated?

Rob Reilly (Executive Vice President and CFO)

So, you know, I don't know if there are surprises or not, but perhaps the biggest thing that we proved to ourselves was that we could do an acquisition of that size without slowing down at all the rest of the company in terms of technology deployment or product rollout. So you'll notice in the middle of this whole thing, we put out a new mobile banking platform. Right. So normally you do a deal, you get a free stuff. We didn't have to free stuff.

Second thing was the data factory that we built patented in its first form with BBVA. Even better inside of this integration. Third thing, I think we're the first bank, correct me where I go wrong here, but ever to do the early access where basically people could log in and credential before you did the actual account switch. So all of that was great. What we underestimated on this one was the, I'm just going to call it lack of digital awareness on a relative basis to our existing client base that maybe first bank customers had.

So we had a lot of branch traffic that was there to activate a debit card or to download a mobile app and things that we otherwise might have expected would happen outside of the branch caused traffic in the branch that we underestimated and cause some confusion and we're going to have to improve on that going forward. But all in all it, you know, mechanically and then the conversion is so much more than the mechanics, but mechanically it went really well.

Super proud of the team of people that, you know, got this done, both on the PNC side, importantly on the first bank side. Super proud and thankful for the employees inside the first bank branches that went through, you know, a couple of days of real heavy volume, heavy lifting.

William Demchak, Chairman Of The Board

The thing to add to that, Gerard too, just in terms of the financials, everything that we expected in terms of, you know, the price we paid, the return that we would have, the accretion, it's all there and then some. So from a financial perspective, we're in a really good place.

Gerard Cassidy (Equity Analyst)

Very good. Thank you guys.

OPERATOR

Thank you. The next question is coming from Ken Usten of Autonomous Research. Please go ahead.

Ken Usten (Equity Analyst)

Hey guys. Rob, I know you touched on the capital market strength before and just, and we see obviously the fee guide that you gave that would assume that that's probably coming off a little bit. Bill, you mentioned the super cycle low and I'm just wondering, well Rob, if you could kind of walk us through just your expectations for the fee areas that you usually give us, which is a good run through. And then just how strong do you think this capital market flow through could be? Or did you see any pull forward into this really strong second quarter result from a closings perspective? Thanks.

Rob Reilly (Executive Vice President and CFO)

Well then that sort of tells the story too. So for the third quarter, Ken, in terms of the fee sort of component breakdowns, you know we did, we do feel like we pulled some of capital markets forward into the second quarter. So the second quarter was elevated. So when you look at the third quarter guide for the fee breakdown, it's largely around the capital markets that we think will probably be down about 20% quarter over quarter. The rest of the fee categories are sort of flattish to up depending on sort of what happens at market conditions.

But that's the big driver to get it down the five and a half percent that we talked about. And just an aside, I mean it's like you come off a record quarter and everybody looks at the activity and says oh, we can't do that again. So, so we knocked down our estimates going into the third quarter, you know, it's, it's a handful of big deals that show up. That's a difference. You know, inside of the size of things that are getting done in this, you know, in this market.

But that's our best guess for now and.

William Demchak, Chairman Of The Board

Well, for the third quarter, but then for the full year. So if you just sort of dial it back for the full year, you know, asset management's having a great year with the equity markets up. So they're up high single digits. Capital markets for the full year, you know, will be up close to 25 to 30% year over year. That's, that's in our guidance card and cash management, you know, mid to high single digit lending and deposit services, mid single digits and then mortgage just to round it out, probably flattish to down depending on sort of hedge gains and sort of how that works out.

So the guide on capital markets, I mean just to be good, it's volume. You know, so especially in a 90 day period. Yeah, yeah, but we're no toys. Right. I just said we're in the right places, we're in the right deals. Right. We're winning business. So it's kind of a function of what's actually happening in the broader market.

Rob Reilly (Executive Vice President and CFO)

Yeah, exactly. That's why I'm pointing to that point, which is that it just seems like the potential for this type of result to continue is. It seems pretty, seems pretty good. So thanks, thanks for that caller. Thanks guys.

OPERATOR

Thank you. The next question is coming from David Schifarini of Jefferies. Please go ahead.

David Schifarini (Equity Analyst)

Hi, thanks for taking the questions. Can you give us an update on sensitivity to rates on NII? If we get a hike or two, what would that impact be?

Rob Reilly (Executive Vice President and CFO)

Very small. N26 and we said it for a while, we're sort of in a neutral position. At rates 25 basis points up or down, very little impact to 26 as you go forward. It becomes a function of how the rest of the curve reacts where they'd raise rates but within the range that we'd otherwise contemplate. There's still a healthy pickup next year just because of the continual repricing.

David Schifarini (Equity Analyst)

Got it. Thanks for that. And shifting over to capital CET1 at 9.9%. You mentioned the buyback in the third quarter should be similar to the second quarter level. Is this 9.9% kind of the new or comfort range that you guys would point to?

Rob Reilly (Executive Vice President and CFO)

Yeah, I think so. We've said 10%. We were actually very, very close to rounding the 10% but we rounded down to 9.9%. But you know, our operating target is around 10% and that's where we expect to be.

David Schifarini (Equity Analyst)

Thanks very much.

OPERATOR

Thank you. The next question is coming from Saul Martinez of HSBC. Please go ahead.

Saul Martinez (Equity Analyst)

Hi, good morning. Thanks for taking my question back on loan growth. Is there, I mean, do you guys feel like there's an element of conservatism being built into the second half guidance of roughly in line with nominal GDP growth? I get the comments about pull forward, but everything else you are talking about seems pretty constructive. The utilization rates kind of taking higher economy doing well, CRE returning the growth M and A financing is the bias if you're going to be wrong.

More to the upside. Just curious how if you think that's a logical conclusion.

Rob Reilly (Executive Vice President and CFO)

Well, I'd say, hey, re. Guide. Your guide, Rob. Yeah, I'm just saying our guide is our guide and that's what we've, you know, we've guided to lower numbers than they come in higher. We've guided the higher numbers that come into lower. So the guide's the guide. I think that the only thing I'm comfortable in saying is if there is loan growth across the economy, we will get more than our fair share simply because of the newer markets we're operating and the share growth.

But it's become so hard to predict what's happening with loan growth. We kind of, you know, pick a real simple base case and, and hopefully outperform.

Saul Martinez (Equity Analyst)

Got it. Okay, fair enough. And then, I mean, nobody asked about credit anymore, you know, for good reason. Obviously it's been, you know, really strong. I mean, are there, I mean, are there areas that you are monitoring, you know, that where you think there are vulnerabilities and you know, even if it's not a big part of your portfolio. Where do you think they're, you know, either from a sector standpoint, product, you know, income categories, what do you. Where do you feel like there is more fragility?

Rob Reilly (Executive Vice President and CFO)

You know, I didn't. I mean overall credit quality is very good on both the consumer side and the commercial side. And we don't see any big pockets forming. You know, we follow sort of the pressures in the healthcare industry. There's pressures in the distillery sector, there's some pressures in transportation around fuel costs, those sorts of things. All the things that you read about and are well aware. But I wouldn't say there's any big pocket or anything that's particularly worrisome beyond that.

Saul Martinez (Equity Analyst)

Got it. Thank you.

OPERATOR

Thank you. Our next question is coming from Chris McGrady of KBW. Please go ahead.

Chris McGrady (Equity Analyst)

Oh, great. Thanks. I hope I didn't miss it, but any comment on credit spreads over the past three months with improving low growth? Thank you.

Rob Reilly (Executive Vice President and CFO)

Sorry, I didn't catch that. Credit spread. Oh, sorry, Rob. Just a comment on credit spreads. Now. We're not seeing a lot of competitive pressure on the spreads. We are seeing some spread change relative to the mix. Change of higher credit quality, lower spread loans into our portfolio. But you know, apples to apples spreads are pretty similar quarter over quarter.

Chris McGrady (Equity Analyst)

Thank you.

OPERATOR

Once again, that is Star One. If you would like to register a question at this time, our next question is a follow up coming from Erika Najarian of UBS. Please go ahead.

Erika Najarian (Equity Analyst)

I promise this isn't about NIM or loan growth.

Rob Reilly (Executive Vice President and CFO)

Well, it's good. It's good.

Erika Najarian (Equity Analyst)

There was a news article last week about banks, including PNC Financial Services Group Inc, potentially being interested in a debit card network. And I'm just wondering, of course you're not going to comment on any live deals, but what a debit card network or how a debit card network could be beneficial to PNC. And do you have any sort of notion on how difficult it is to convert a PIN network to signature?

Rob Reilly (Executive Vice President and CFO)

We aren't going to comment. I think it's a safe assumption, hypothetically that the work set associated with a conversion like that would be pretty material. Leave it at that.

Erika Najarian (Equity Analyst)

Got it. Thank you.

OPERATOR

Thank you. At this time, I would like to turn the floor back over to Mr. Gill for closing comments.

Brian Gill, Director of Investor Relations

Okay. Well, thank you all for joining our call this morning. And please feel free to reach out to the IR team if you have any further questions.

OPERATOR

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines or log off the webcast at this time. Thank you for your participation.

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