PNC Financial Services Group Inc (PNC) 2017 Q3 法說會逐字稿

Good morning.

My name is Tommie, and I will be your conference operator for today.

At this time, I would like to welcome everyone to the PNC Financial Services Group Earnings Conference Call.

(Operator Instructions) As a reminder, this call is being recorded.

I would now turn the call over to the Director of Investor Relations, Mr. Bryan Gill.

Sir, please go right ahead.

Well, thank you.

And good morning, and welcome to today's conference call for the PNC Financial Services Group.

Participating on this call are PNC's Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and Chief Financial Officer.

Today's presentation contains forward-looking information.

Our forward-looking statements regarding PNC performance assume a continuation of the current economic trends and do not take into account the impact of potential legal and regulatory contingencies.

Actual results and future events could differ, possibly materially, from those anticipated in our statements and from historical performance due to a variety of risks and other factors.

Information about such factors, as well as GAAP reconciliations and other information on non-GAAP financial measures we discuss, is included in today's conference call, earnings release and related presentation materials and in our 10-K, 10-Qs and other SEC filings and investor materials.

These are all available on our corporate website, pnc.com, under Investor Relations.

These statements speak only as of October 13, 2017, and PNC undertakes no obligation to update them.

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

Thanks, Bryan.

Good morning, everybody.

As you've seen this morning, PNC reported net income of $1.1 billion or $2.16 per diluted common share in the third quarter.

As Rob's going to lay out in more detail in just a second, this was a good quarter for us.

A couple of things stood out, and I'm just going to comment on those very quickly before I turn it over to Rob.

First, we continued to experience solid loan growth, driven by our commercial lending business.

And we saw some growth on the consumer side as well.

Within the commercial business, we're growing loans and adding clients around a diversified product offering and we're capitalizing on opportunities in our underpenetrated and newer markets.

Importantly, we haven't changed our credit standards here, and there isn't one particular lending product that stands out.

In the end, we're effectively executing on a model that's based on patience, consistency of coverage and good ideas.

And this loan growth, together with the higher interest rates and continued low betas on our deposit pricing, allowed us to grow net interest income even as security balances declined slightly.

Second, on the fee revenue side, we saw a drop in corporate services fees, which was largely expected, given that we'd had a record second quarter.

But notwithstanding that, this was actually the second-best quarter ever for noninterest income in C&IB.

You'll notice we also saw provision up, due at least in part to the impact of the -- of Hurricanes Harvey and Irma, along with loan growth and some seasonal consumer trends.

And beyond that, it was a pretty uneventful quarter.

Now Rob's going to quickly take you through the results and then we'll take your questions.

Over to you, Rob.

Okay, good morning.

Thanks, Bill, and good morning, everyone.

As Bill just mentioned, our third quarter net income was $1.1 billion or $2.16 per diluted common share.

Our balance sheet is on Slide 4 and is presented on an average basis.

Total loans grew by $2.9 billion or 1% linked-quarter.

Commercial lending was up $2.7 billion from the second quarter as we saw growth in our secured lending businesses as well as large corporate and middle market.

Consumer lending increased by approximately $200 million linked-quarter, driven by growth in residential mortgage, auto and credit card, partially offset by lower home equity and education loans, which included our runoff portfolios.

Investment securities decreased by approximately $900 million or 1% linked-quarter as a result of lower reinvestments due in part to a relatively less attractive market opportunity during the third quarter.

Compared to the same quarter a year ago, securities were up $2.8 billion or 4%.

Our interest-earning deposits with banks, mostly at the Federal Reserve, were $23.9 billion for the third quarter, up $1.3 billion from the second quarter.

On the liability side, total deposits increased by $3.1 billion or 1% compared to the second quarter, driven by seasonal growth in commercial deposits.

Average shareholders' equity increased by approximately $300 million linked-quarter and we continue to return substantial capital to shareholders.

During the third quarter, our capital return totaled $898 million, comprised of $535 million in share repurchases and $363 million in common dividends.

This resulted in a payout ratio of approximately 86%.

Period-end common shares outstanding were 476 million, down 12 million or 2% compared to the same time a year ago.

As of September 30, 2017, our fully phased-in Basel III Common Equity Tier 1 ratio was estimated to be 9.8%.

As you can see on Slide 5, net income was $1.1 billion and we continue to generate positive operating leverage on both a linked-quarter and year-to-date basis.

Revenue was up $65 million or 2% from the second quarter, driven by growth in net interest income.

Noninterest expense remained well-managed and decreased by $23 million or 1% compared to the second quarter.

Provision for credit losses in the third quarter was $130 million and included $10 million related to Hurricanes Harvey and Irma.

In addition, loan growth and some seasonality in the performance of certain consumer categories contributed to the increase.

Our effective tax rate in the third quarter was 26.8%.

For the full year 2017, we continue to expect the effective tax rate to be between 25% and 26%.

Turning to Slide 6. Our third quarter performance is reflected in these metrics, which have all improved over the past year.

Our return on average assets for the third quarter was 1.2%.

Our return on average common equity was 9.89%.

Our return on tangible common equity was 12.66% and our tangible book value increased to $69.72 per common share as of September 30.

We believe our well-positioned balance sheet, diversified revenue mix and focus on expense management provides momentum for us to continue to deliver strong results.

Now let's discuss the key drivers of this performance in more detail.

Turning to Slide 7. Revenue increased by $296 million or 8% year-over-year, driven by higher net interest income of $250 million or 12% and noninterest income growth of $46 million or 3%.

It's worth noting that our fee income on a year-to-date basis was a record-setting $4.3 billion, reflecting efforts to grow our fee-based businesses with increases in every category except for residential mortgage.

On a linked-quarter basis, net interest income increased by $87 million or 4%.

The increase was driven by higher loan yields and balances partially offset by higher funding cost.

Additionally, the third quarter of this year benefited from one additional day compared to the second quarter.

Our net interest margin expanded by 7 basis points linked-quarter to 2.91%, driven by higher interest rates.

And our third quarter noninterest income decreased slightly linked-quarter.

Looking at the various fee categories.

Asset management revenue, which includes earnings from our equity investment in BlackRock, was up $23 million or 6% linked-quarter.

Year-over-year, asset management revenue increased by $17 million or 4%.

Both comparisons benefited from higher equity markets and client activity.

Consumer services fees were down slightly linked-quarter as credit card fee growth was offset by lower merchant services and debit card.

Compared to the same quarter a year ago, consumer services fees were up $9 million or 3% due to growth in credit card, debit card and brokerage fees.

Within that, higher credit card fees were partially offset by increased year-over-year rewards activity.

Corporate services fees decreased by $63 million or 15%, following a record second quarter which was driven by elevated loan syndication and Harris Williams revenue.

Compared to the same quarter a year ago, corporate services fees were down $18 million or 5%, primarily due to lower merger and acquisition advisory fees.

Third quarter residential mortgage noninterest income remained flat linked-quarter as increased production revenue was offset by lower net hedging gains on mortgage servicing rights.

The year-over-year comparison decreased $56 million or 35% due to both lower loan sales revenue and lower net hedging gains on mortgage servicing rights.

Service charges on deposits increased by $11 million or 6% linked-quarter and $7 million or 4% compared to the third quarter of last year.

Growth in both periods correlated with increased customer activity.

Other noninterest income increased $10 million linked-quarter or 3% and included higher gains on asset sales partially offset by lower net securities gains.

Compared to the same quarter a year ago, other noninterest income increased by $87 million or 34% and included higher revenue from private equity investments.

We expect other noninterest income in the fourth quarter to be in the range of $250 million to $300 million.

Turning to Slide 8. Expenses continue to be well managed, due in large part to our continuous improvement program.

Through the first 3 quarters of the year, we are on track and confident we will achieve our annual target of $350 million in expense savings, which as you know, have helped fund our technology and business investments.

Importantly, our efficiency ratio declined to 60% in the third quarter.

On a linked-quarter basis, our expenses decreased by $23 million or 1% as higher personnel costs were more than offset by lower equipment and marketing expense as well as the benefit of our continued focus on expense management.

Personnel expense increased primarily due to higher headcount related to business growth and an additional day in the quarter.

Compared to the third quarter last year, expenses increased by $62 million or 3%.

This reflects investments in technology and our business initiatives.

Additionally, our expenses reflected the impact of operating costs associated with the ECN acquisition which closed in April of this year.

Turning to Slide 9. Overall credit quality remained benign in the third quarter.

Total nonperforming loans were down $84 million or 4% linked-quarter and continued to represent less than 1% of total loans.

Total delinquencies however were up $93 million or 7%, although this was primarily due to early -- I'm sorry, due to higher early-stage consumer delinquencies in hurricane-affected states.

Provision for credit losses was $130 million in the third quarter.

As I mentioned, the increase included $10 million related to Hurricanes Harvey and Irma.

It also reflected loan growth and seasonal credit performance within the consumer loan categories.

Net charge offs decreased $4 million to $106 million in the third quarter.

And the annualized net charge off ratio was 19 basis points, down 1 basis point linked-quarter.

In summary, PNC posted a successful third quarter driven by growth in loans, deposits and revenue along with well-managed expenses.

For the remainder of the year, we expect continued steady growth in GDP and a 25 basis point increase in short-term interest rates in December.

As you can see on Slide 10, looking ahead to the fourth quarter of 2017 compared to the third quarter of 2017 reported results, we expect modest growth in loans.

We expect net interest income, fee income and expenses to each be up in the low single digits.

And finally, we expect provision to be between $100 million and $150 million.

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

Operator, could you please poll for questions?

(Operator Instructions) And your first question comes from the line of John Pancari with Evercore.

Just regarding the CIP program.

Wanted to see if you can give a little bit of color there in terms of how you're thinking about 2018.

I know you're confident in the $350 million for '17.

How should we think about the likelihood of a new program in '18 and the magnitude of the efficiency that you can get off of that?

Yes, sure, John.

This is Rob.

Well, we're going to refrain on this call, I'll just state this upfront, from '18 guidance.

So that's just for the future people in the line there.

The continuous improvement program, obviously, has worked well for us.

It's been in place for several years.

It's a mechanism that we use to hold expenses in check, particularly those expenses that are targeted towards investments in technology and business growth.

So we have just started our budgeting process for 2018.

We're far from complete.

My sense is we will continue to use the tool, but I don't have a number for you this morning for 2018.

Okay.

All right.

And then separately, just on the loan growth side, just wanted to get an idea -- f you could help to size up the new market initiative, how much in loan balances do you have in these newer markets right now?

And how much of the loan growth that you saw in the quarter came from this expansion into some of the corporate relationships in these newer markets?

Yes.

Again, this is Rob, John.

The -- yes, the new markets unquestionably are what we call our underpenetrated markets, are contributing at a greater rate than our legacy markets.

The balances themselves are pretty small as an overall percentage.

But the growth rates in those Southeast markets, and we include in those underpenetrated markets Chicago as well, are running at about 2x the legacy growth rate.

So they're a big part of our loan growth story in the commercial side.

We'll get to our next question on the line from the line of Betsy Graseck with Morgan Stanley.

I'll kick off with my typical question and then a follow-up.

But the typical question is excess liquidity, you've got a decent amount.

I know that rates were not that attractive this quarter and so you're kind of, I don't know, hoarding a little bit on the cash side.

Could you give us a sense as to what kind of rates, curve, shape you're looking for?

And how you think about the Fed balance sheet normalization?

I know it's not going to impact your deposits too much, but how are you thinking about whether or not that gives you opportunities on the reinvestment side?

You want to start, Rob?

That was a lot of questions...

Okay.

Why -- I can handle the hoarding part that you (inaudible).

I don't know if much has changed.

I mean, as you saw in the third quarter there, the yield curve flattened out a bit more than we would've liked, which in essence, had us dial back a bit in terms of how we deployed into investment securities.

It's improved somewhat off of those levels, so we've begun some more purchases than we had been.

But I don't know, when we look forward, Bill, the yield curve's pretty flat, so we don't see anything dramatically changing there.

Yes.

I think the issue of the Fed unwinding its balance sheet, we're going to -- we, like everybody else, are in this sort of wait-and-see, as it relates to the impact that ultimately has on rates.

We expect them to drift higher, but how much and how fast is up in the air.

And that's going to be impacted as well by the choice of the Fed Chairman, ultimately.

And we'll react to that.

I mean, we've said this for years, but we -- within what has been effectively a range-bound term rate in the market, we've been pretty good.

It's sort of getting in and getting out at the margin and deploying cash when it makes sense.

In the third quarter, the yield that we actually reinvested at, because we did reinvest, we just didn't reinvest everything that was running off.

The yield was actually below the average book yield on the remaining securities book.

So we would hope that we had, at one point, crossed that line and then rallied through that.

And we hope to get back to that at some point.

And then how are you thinking about the loan-to-deposit ratio?

I think you're currently running at about 85%.

I know it's a new world with the LCR and everything so it's hard to use history as a guide.

But just want to understand how you're thinking about managing the loan growth to deposits and how you're thinking about the deposit betas in competing there.

Well, I think it's interesting.

Loan to deposit, in some ways, ends up being a by-product these days to compliance with the LCR.

So it almost is an outcome and not directly relevant, depending on how much -- how many of our deposits come from corporate deposits, which are less impactful to the LCR.

We purposely got ahead of LCR compliance going back more than a year, thinking it would be easier to do it when rates were low than in a rising rate environment, and that has proven to be true.

As we see rates go up and other people move towards compliance at the same time as the Fed taking cash out, we're starting to see, at the margin, pretty competitive pricing on the retail side.

We haven't had to react to that yet.

We'll continue to watch and see if we do so.

But right now, what we focus on is making sure we stay in compliance with LCR, which we are.

And the loan to deposit will end up being sort of an outcome from that as much as anything else.

And just to extend on that, Betsy, around the betas.

We see a continuation of what we talked about in July on the second quarter call following the June rate hike, more activity on the commercial side and the beginning of activity on the consumer side, although still very low.

We'll get to our next question on the line from Erika Najarian of Bank of America.

Just a question on some of the loan trends this quarter.

On both an average and spot basis, your loan growth was best in class.

I'm wondering, under the financial services category, I understand that some of that growth has been for warehouse financing for CRE.

And I'm wondering if that level of growth in that category is sustainable.

Is there a seasonality that we should think about going forward?

It's -- it bounces around.

I guess what I would say on loan growth, and I kind of put this in my opening comments, is we continue across the board to win clients and do new deals and it becomes harder to predict into which buckets we're going to see growth.

So this quarter, we did see growth in the CRE warehouse side.

But we also saw it in asset-based lending, which had been down in the second quarter.

We saw some of it in utilization.

We saw middle market continue to grow.

And we saw pretty big increases in equipment finance.

But it bounces around.

So we've put kind of low guidance on loan growth and get comfortable with the notion that if we just keep growing clients, it will show up, albeit kind of across the categories without a real clear ability to predict which ones.

Yes, Erika, and I can add to that.

On the financial services category, it does represent the warehouse lending.

But in addition to that, it includes asset-backed transactions which were substantial in the third quarter.

So even though they're extended and used by companies outside of financial services, the structure requires a categorization in financial services.

Got it.

And my follow-up question is, Bill, since after the crisis, PNC has been known to manage exposures very well and not grow for the sake of growth.

And I'm wondering -- and you're also one of the few regional bank CEOs that has been talking about the Fed balance sheet reduction.

There's been a lot of discussion on the impact to deposits, but I'm wondering if you could give us a sense on how you're anticipating the impact to commercial real estate.

If we do get some steepness to the curve, how do you think that, that would impact first growth and then credit?

Yes.

So let's except out what the impact that the Fed balance sheet would have and just look at rising rates.

Rising rates to the real estate market are troublesome, right?

They impact cap rates.

They -- if -- as rates go up in the front end, since most of the borrowings on the projects are floating rate, you expose coverage ratios in those loans.

Now a lot of real estate developers use interest rate caps and other things to manage that exposure, some don't.

So at the margin, I would expect higher rates are going to cause greater delinquencies in real estate.

And it's one of the reasons we have, at the margin, dialed back our growth.

I would tell you today, our real estate book has never looked better.

I think just looking at stats, Rob, our delinquencies and nonperformers, kind of as good as it's ever been.

Yes.

Yes.

All looks good.

All look good.

But the growth has slowed.

Commercial real estate growth has slowed, reflecting some of that.

And we'll get to our next question on the line from Scott Siefers with Sandler O'Neill Partners.

I was hoping that you could spend a second just talking about that lower corporate services line.

I mean, I definitely get that you come off the record 2Q.

But it's just become a little uncharacteristic for you guys to have any year-over-year decline in that line item.

So just curious if you can impart any more color in sort of how we should be thinking about it.

Do you want me, Bill?

Go ahead, go ahead.

We feel very good about that line.

The second quarter was particularly high in 2 categories, which the combination effect made it a significant high point.

So it was loan syndications and Harris Williams.

Within that, treasury management and our other capital markets are all doing well.

So from the quarter-over-quarter, there was a bit of a decline just because the second quarter was so good in both of those categories.

But we still feel very good in...

Yes, I think importantly, if you track that line just through time, recognizing that it'll be volatile, we continue to gain share and grow the underlying businesses.

But it does bump around quarter-to-quarter.

And importantly, as part of our guidance, we expect future growth.

Yes.

Yes.

Okay, perfect.

And then maybe you could just spend just a quick second on -- even if it's just qualitative commentary, on provision and the just slightly higher guide.

I guess there's just obvious normalization and then you guys are seeing pretty steady loan growth.

But just curious, in your mind, what is it that -- at sort of where we are in the cycle causes the need for higher provision despite no real actual deterioration in credit trends?

Yes, this is Rob, Scott.

Yes, so a couple of things there, and mostly in terms of just sort of the high level.

You were right on, it's the gradual normalization that we've expected for some time off of really, really low levels.

So in this quarter, obviously on the top, it's the hurricane, the QFR.

That aside, we did have growth.

And in this quarter, the growth tended to be more on the secured transactions within corporate banking which carry a higher provision.

And then we had some seasonality on the consumer side.

So no big changes.

I would say most of it for the quarter and in our guidance reflects the gradual normalization that we've been talking about for some time.

We'll get to our next question on the line from the line of John McDonald from Bernstein.

I was wondering if you could just give us an update, where you stand on the home lending transformation, and also on some of the other consumer lending initiatives.

John, it's Rob.

On the home lending, that's a big work set for us and we continue to do a lot of work in that regard and we are making progress, although the results that you're most interested in are probably a late stage 2018 kind of occurrence.

But we are making progress in terms of combining our mortgage operations with our home equity operations.

Here in the fall, soon we'll be able to do more mortgage originations off our new platform.

Next spring, we'll be able to do servicing on both home equity and mortgage.

And then later in the year, originations on the home equity.

So we're making progress.

We have a lot of confidence and conviction it's the right thing to do.

It's just a lot of hard work and it takes time.

Yes.

The other thing I would just say on the consumer lending transformation, broadly defined.

We're making really good progress on sort of the build of digital delivery of those products.

So some of that will show up with mortgage and home equity, other parts with card and auto as we bring thing -- some things into mobile.

We're making progress, and you see it in some of our volumes on our sort of policies and procedures as it relates to things we should have been doing based on our credit appetite that we just weren't.

And where we probably underestimated the work set is the work that needs to go on inside of the core servicing and the automation of some of the new regulatory compliance that is, frankly, slowing down fulfillments inside the consumer space.

So we're making progress on everything as we kind of dig under the covers on the core operations and think about what it takes to use automation inside of that space, probably a little bit harder than we had assumed.

Okay.

And Bill, maybe a little more color similarly on your tech investments and the kind of platform transformation.

I think back office-wise, I think your shift to data centers is complete this year.

How should we think about your kind of trajectory of tech investments in transforming the customer experience as well as the back office?

Well, we're shifting the spend to customer experience, to employee enablement.

Part of that is what will happen inside of the servicing platforms.

We actually have -- it's interesting in our budgeting exercises, and Rob can talk about this.

We always show tech spend going down and I always plug it to say that it's going to at least stay even or go up, simply because I just think that it is going to accelerate into what will be a digital-based financial services network and we have to be part of that.

Now we'll talk about '18 when we get to '18.

But my best guess is we'll simply shift the dollar spent and put more and more on the client acquisition and servicing side versus building the core infrastructure, which now allows that to be something we could do.

It's the foundation for that, yes.

Yes.

Got it.

And then one quick follow up.

Rob, I don't know if you got this earlier on deposit betas.

Just on the retail side, have you guys seen anything in terms of deposit beta just on the retail banking?

And then if you can just comment on the wealth management side as well.

In the betas for...

Yes, exactly, yes.

The deposit beta on wealth management.

Yes.

We did that at the front end of the call, John.

So following the June rate hike, where consumer betas had been 0, we are seeing some activity and some pick up but still very, very low.

It is our expectation that they'll continue to rise, we'll just have to see at what pace.

But our folks feel, and we said this for most of the year, that it's probably another rate hike or 2 before they totally normalize.

So still low.

Got it.

And in wealth management, we've seen some other banks kind of pushing up there.

No, it's fairly consistent there.

Our wealth book, in terms of our deposits, it's about $12 billion, so it's relatively small.

And it's mirrored, basically, the consumer behavior, maybe a little bit more.

(Operator Instructions) And we'll get to our next question on the line with Mr. Kevin Barker from Piper Jaffray.

In regards to your auto loan growth, you guys have been outpacing most peers the past few quarters despite what we've seen is a decline in overall new car sales and auto originations.

When -- you've obviously pulled back in 2014 and '15 as the industry was getting very heated and have remained in the space.

Could you just talk about the state of the auto industry?

And what your expectations are for loan growth going forward?

Well, I think -- I mean, we ought to just step back to the basic comment that we really haven't changed what we've been doing all along.

At one point, that allowed us to do greater volume, both because we were lending when some others weren't and also because the industry itself was producing greater volume.

What's happened, of course, is we keep our box the same and more and more product goes to leasing or longer tenor or more loan-to-value, we've had less share and less growth.

Yet, as we expand our markets and into the newer markets, we had this opportunity to take share simply because we're entering new markets, notwithstanding the fact that the total size of the market is declining.

The other thing that's happening is we move more -- if you look at our growth rates in direct versus indirect and the products we're rolling out on mobile Check Ready, which we're going to enhance with some other features in the coming months, we're moving the way people borrow money from us to buy a car.

And my suspicion is that, that will likely accelerate even as the total lending volume in the industry stabilizes or falls.

Accelerate for us and others as more of this moves direct and more onto mobile.

And the attractiveness of the product to the consumer.

Yes, it's very easy.

And to add to that just in terms of our auto book, which is roughly $12.5 billion in outstandings, we feel good about the credit quality.

We're a prime book.

Average FICO is 730.

And originations actually this quarter were above that, more approximately like 750.

Tenors are 70 months.

Loan-to-value's 90%.

And we're not in the leasing business.

So we feel good about our -- the credit quality of the book.

Okay.

And then a follow-up on some -- on the commercial real estate.

You've seen quite a bit of increase in your asset yields on commercial real estate, up almost 40 basis points over the last year.

Could you talk about the shift in your book?

And where new money yields are on your commercial real estate book?

Yes.

I don't think -- I think all you're seeing is the pull-through of rising short rates.

That's right, yes.

That's right.

So there hasn't really been a shift in our book at all.

I mean, at the margin, we've seen growth in the term product that kind of comes on as a fixed rate.

But most of that is what you're seeing, it's just a run up in LIBOR.

That's right.

And the underlying spreads have been, if anything, creeping out at the margin in real estate.

But our new volume has been such that, that isn't impacting the overall market just because their volume's have been low, I think we're 0% year-on-year

Yes.

That's right.

And that's true just for commercial yields in general.

But beyond commercial real estate, it's rate-driven.

And we'll get to our next question on the line from Ken Usdin with Jefferies.

A follow-up on the balance sheet.

You guys talked about kind of restarting a little purchasing on the securities.

And obviously, you've had good loan growth which has been matched nicely by the deposit growth.

As we go forward -- and I know you've talked about this a little bit.

Again, I just want to get your updated thoughts.

Do you anticipate seeing much mix shift on the balance sheet as we look ahead and effects from Fed balance sheet normalization?

And are the deposits you're getting still just coming from new customers or are you still getting more money from existing customers?

I don't know where to jump in on that.

The -- I don't see -- I mean, on the Fed unwind, Bill said it well.

We'll see.

This is new and we'll see what the ramifications are.

So setting that aside, I don't see a big balance sheet shift.

I do see some intensifying around deposit relative to the betas and the pricing.

So I do think that, that will intensify.

But I don't see anything dramatically shifting.

Bill?

Yes, I don't think so.

Look, in a perfect world, we would use more of our liquidity for loan growth that fits within our credit capacity.

We continue to grow, but not at the pace that we're generating liquidity.

We had that liquidity to deploy, much of it would be pointed towards sort of Level 1 securities, if and when yields get to a place where that makes sense to us.

Today, we continue to run the balance sheet very short as it relates to interest rates.

That has served us well.

We'll continue to do that until we accelerate into -- hopefully accelerate into higher rates as the Fed unwinds its balance sheet.

Yes.

And let me -- I could qualify my second question more.

I was more thinking about, are you seeing mix shift?

Meaning, are you seeing customers come out of noninterest-bearing into interest-bearing?

I know we're seeing that in the betas.

But you guys are growing your commercial customers and I'm more wondering just about where the incremental deposit is going as far as the deposit mix.

That's really what I meant to get at.

Yes.

So obviously, very different on the corporate side versus the consumer side.

The corporate side, there continues to be a bit of differentiation between the larger corporates who are, frankly, shopping rates a little bit more, and that's a product that has effectively had a beta of 1 since the beginning.

Some of our more active treasury management clients who use balances to offset fees are a little bit less sensitive to that.

On the consumer side, at the margin, we've seen growth in our interest-bearing through time as people see that, hey, there's money on the table to be had.

Yes.

Which has been the case for a while, so no big shift.

Yes.

And, Bill, last little one.

On the earnings credit rate are we seeing any of that inside the treasury management business?

Are you starting to give back some more there at all?

It's a much lower beta than what a straight corporate deposit would demand, which continues to be -- for hot money that corporates kind of shop around the banks, it's -- our primary competition are the treasury-based, government-based money market funds so we're basically priced right on top of that and moving with it.

Less impact on the compensating balances.

We do have one more question queued up on the line from Gerard Cassidy with RBC.

Rob, you mentioned about the more rapid growth you're seeing in some of your newer territories that you've gone into de novo, like Chicago, on the commercial loan side.

Can you share with us how you're achieving?

I know you're coming off a low base.

But how are you achieving that faster loan growth in these new territories?

It's -- I mean, it's Bill, Gerard.

If you think about it, we got in there a bunch of years ago and we planted a bunch of seeds.

We hired very good employees.

We called on the right clients and we called on them for what is now 3 and 4 years.

And after you do that, you eventually get a shot on goal as something comes up for renewal.

There's been disruption in the market that we've taken advantage of and we're just getting business out of these markets.

And we're doing what to do in these new markets, now [here 5] which is reflecting a lot of efforts, to Bill's point, that were made years ago.

I should mention, too, as in the earlier question, we are up and running in Dallas, Kansas City and Minneapolis.

But that's early.

The energy's high.

The progress is real.

It's good.

Yes.

So we're excited about it.

But they're just, in terms of vintage, a little early to conclude anything.

Yes.

I mean, Gerard, think about it.

You go into a market, this isn't you just show up.

They don't put an RFP out for a new loan and you show up and bid some.

That's right.

So yes, we've been calling on them for years and something gets renewed, we may be already a participant.

They brings us in to see how we might do it and we displace the left lead on the syndication, take a bigger hold and have a bigger share of what we do with that client.

And that, we're good at that.

That's what we do.

But it takes a lot of years.

It's not something you just show up and do.

Because when you show up, all you can do is kind of participate in somebody else's credit, and that's not so much our game.

And requires the patience that you talked about at the opening.

Right.

And without naming names, do you guys find, when you had the successes, you're taking the business away from middle market-type banks?

Or are these very large, universal-type banks where you seem to be getting these customers from?

It's all the above.

But I would say that we have seen an acceleration in what we are getting from some of the larger banks.

Okay, good.

And Bill, just as a comment on -- obviously, the Treasury has come out with these white papers on how they want to change the regulatory outlook for the banks.

When you get your chance to sit down with the new Vice Chairman of the Federal Reserve, for example, what are the topics that are important to you, for PNC, that you'd like to see addressed and get some relief?

LCR, LCR and LCR.

No, I think, in it's simplest form, if regulation looked at a risk-based or activities-based model as opposed to an asset threshold model, in terms of the way they apply all regulations, I think we'd be in a better place.

Our business model is much more similar to the people smaller than us than it is to the people who are 4x our size, yet we tend to get caught in that bucket.

So inside of that, relief on LCR at the margin, some stuff that they do in Volcker, some of the activities around stress test and other things.

By and large, I think the treasury papers and suggestions are actually -- the one on capital markets was less directly relevant to us.

But the first one, I think, was pretty on point.

And we would agree with most of the stuff in there.

Thank you very much.

And we have no further questions on the phone lines.

Okay.

Well, thank you all for participating on the call.

Thanks a lot.

Thank you.

Thank you.

And this concludes today's conference call.

You may now disconnect.