The PNC Financial Services Group, Inc. (PNC) Earnings Call Transcript & Summary

Good morning. My name is Dick Manuel. I'm an equity research analyst with Columbia Threadneedle. I am joined on the stage here with some folks from PNC, and we have Bryan Gill, that's Investor Relations for PNC. Mike Hannon, Chief Risk Officer; and everyone knows Rob Reilly, Chief Financial Officer. Great. So we're going to start off with some questions for you, Rob.

Sure. Good morning.

So it's been all of 3 weeks since you reported earnings. Give you a chance to throw out there. If anything has changed enough such that you might want to comment on guidance or anything like that…

Let's get that out the way, and hopefully, it doesn't surprise you. No change to guidance. Generally speaking, we had a pretty good sense of how things would play out in the fourth quarter and so far, it's tracking.

Great. So let's dig into loan growth a little bit. You guys have experienced some handsome loan growth of late, but you did talk about growth moderating a little bit as we move into the rest of the year. So just what brings you to that thought?

Yes. So in terms of loan growth, we did -- we had a pretty strong third quarter, which exceeded even what we were expecting a bit in part, if you follow us closely, we had a couple of large underwritings there in the second and third quarter that drove what was good underlying loan growth even higher. As we turn to the fourth quarter, we're pointing to about 1%, which is a little bit less than that, but still pretty steady and still pretty broad across asset classes. So loan growth feels good.

Okay. And so bouncing over to the other side of the balance sheet, deposits, obviously, with this rate environment, it's a dynamic conversation with respect to deposits. But can you give us a sense of what you're seeing in terms of runoff and pricing and how you monitor whether you're pricing is right to get the level of deposits that.

Yes. So just the whole topic of deposits. In terms of the betas because everybody wants to talk about that. The short answer is our expectations for the fourth quarter haven't changed. We said back in the second quarter that we expected our cumulative betas to be about 30% at the end of the year, and we're tracking to that. We were at 22% at the end of the quarter, as you know. On the commercial side, I would say that was where betas moved and the pricing moved the fastest. We saw that in the second quarter. We responded to that. So corporates happened. And as a result, through the third quarter, commercial deposits were pretty stable. On the high net worth side, that was second, and that's happened too. So we're there. Although in our case, our deposits are high net worth or wealth management deposits are $30 billion. So not really outsized relative to our total $440 or so. The question mark had been on the consumer side, which hadn't moved through the end of the third quarter in terms of betas across the industry and also in our book. We expected it, and we built that into our guidance for the fourth quarter that we'd start to see some movement there in the fourth quarter. I'd say it's gone a little bit slower than we thought. But of course, we had the Fed increase yesterday, so that might accelerate it a bit. So we're still sticking to what we expected, that 30% at the moment. We're a little bit better than that in terms of not having moved as fast, but that could catch up here quickly. In terms of total balances, we said we expected deposits to be stable in the next 90 days. But you need to recognize, which is no great surprise that there's a lot of forces to take deposits out of the system as the Fed continues to do what it's doing. So that's going to be a headwind, obviously, for an extended period of time. the growth days of 15% are over. So a big reveal there in that regard. So we'll see why we say stable, even though we recognize those headwinds is typically commercial deposits have some seasonality where they build toward the end of the year. We have no reason to expect that, that won't happen again this year, but we don't know. So we will have to see.

And the underwriting environment isn't quite as good for commercial.

I mean, not loans, but I mean debt underwriting. So people might... Build bigger balance No, that's right. That's right. And then back on the consumer side, too, we have seen some declines there. Up until a couple of weeks ago, the majority -- the vast majority of those declines were actually spending into a high inflationary environment as opposed to rate sensitivity. Again, that might change here, and we do expect it to change a bit. But up until now, the declines have been much more around spending on the consumer side rather than rate shot.

So as a consequence of deposits going down a little bit and potentially a little bit more as we roll forward, you're faced with a decision about whether to increase federal home loan borrowings or shrink the balance sheet, lead with the asset side or lead with the liability side. Over the last couple of quarters, you've been increasing your Federal Home Loan banking. So could you talk a little bit about what your thinking is there, the trade-offs in terms of increasing the borrowings versus shrinking the balance sheet? Or just -- like what are the advantages pro…

Yes, sure, sure. And we've got that question. So we have in the last couple of quarters, increased our borrowings from 0 in the Federal Home Loan Bank up to $30 billion or so. And the idea there was it was opportunistic to bolster our liquidity going into the environment we just talked about. So the rates were very attractive. It was multiyear money. It just seemed sensible to bolster the liquidity going forward. On the early borrowings, we're already in net positive carry in terms of that. So that feels pretty good. So nothing more complicated than that.

An economic decision.

Yes, an economic decision. That's right.

Okay. So then thinking about the securities portfolio, you've moved a lot of securities into held to maturity -- and I think that you mentioned that your incremental purchases of securities are going to similarly to the borrowings question, could you just talk about the trade-offs as you see it? I mean, obviously, HCM protects you from…

Sure. Well, I don't know if earlier presenters I'm told to give you the lecture on AOCI as it relates to Category 3 banks. So I'll say you that. In short, as a Category 3 bank, AOCI is not included in our regulatory capital ratios, as you know, and we manage to regulatory capital. That said, AOCI and those unrealized losses that were built up because rates moved so far, so fast. We did switch back to a more conventional balance between held to maturity and available for sale because it seemed like a sensible thing to do. We had no intention of selling all of our $130 billion-plus of securities. So it was a function of tailoring which allowed Category 3 banks to go to 100% AFS even though none of us were ever going to utilize that flexibility, but it was a free option, so to speak. And then when rates move back and the AOC went up even though it's not part of our regulatory capital, like I said, it was a sensible thing to just return to the pragmatic split that we had retailer.

So let's just focus on the securities portfolio and the rate environment. Could you talk a little bit about what the onboarding rates are for the securities portfolio vis-a-vis? I think you were in the 2% average yield and incremental rates.

Yes, new purchases, not surprisingly, and they're largely U.S. treasuries, high-quality securities are north of 4%. So substantially higher than the run book and that's a good thing.

Absolutely. And so just on that though, can you talk a little bit about the duration dynamics like over what period of time would you...

Relatively average to the in... Yes, we're relatively short, Bryan, 4.7 years or so is what we're on in terms of that duration. So that's the time frame there. So we're increasingly going to the good side relative, but it will be a year or 2 before you see those inflection points.

So then back on the capital implications of the AOCI marks and so forth, you emphasized that you manage to regulatory capital to CET1 over RWA. And yet, we have seen tangible capital go down with the ASC -- still relatively big numbers. They've come down a fair amount since when rates start going...

No, that's right.

But how do you think about that? And is there a point at which you say, maybe.. Enough... In those line... If you will. Yes.

Yes. That's a good reference. Yes, good reference there. No. I mean, hey, we're mindful of it, and we're mindful, again, it's not part of our regulatory capital nor have we had any discussions with regulators where it's problematic or that they don't understand what's driving it. But as I said, there's an optic quality to it, particularly if you're not even looking to use that. And again, the motivation behind our switching back to a conventional split. As simple as that.

Yes. And you get -- I mean the dynamics of it also like you're pulling to par over a period of time.

We were saying that you like tangible book value growth. You're going to have a lot.

But there is a point at which the pulling to power aspect overpowers the incremental detriment to AOCI from rates rising, like when the Fed stops raising rates pulling to par is going to accelerate the.

Yes. That's right.

All right. So let's open up the conversation about credit. Obviously, we're going to go deep on credit with you, Mike. But maybe if I could start, Rob, just from your perspective, big picture, how the bank is positioned vis-a-vis the global financial crisis. Just like how do you sleep at night?

I sleep well.

With the World Series tied…

That part, yes, that part is a little jarring, but has things to do with what we're doing this morning.

No, I appreciate the question. In terms of how we're positioned as a bank, we feel good. Our -- from a strategic standpoint, the big opportunity for us, obviously, was the acquisition of BBVA USA, which we've done, which we've integrated and we're in very high-growth markets, executing our plays. That feels great. We are very optimistic and beyond that in terms of what we think we can do over a multiyear period. And that's fundamental to P&C. From a financial perspective, our balance sheet is in good shape. Capital is an excess capital position, our liquidity, we bolstered our liquidity. We're in good shape there. From a credit perspective, we're well-reserved. We'll talk about that a little bit. And as you know, PNC is a high-credit quality shop. We focus on investment-grade corporates, prime consumer borrows. Our consumer lending is smaller than our commercial side. And we've been at it a long time. So no matter what is ahead of us, we'll be well-positioned. I think from a P&L perspective, it's pretty good. NII, the rates have obviously worked in our favor. They'll continue to work in our favor as rates increase because we are asset sensitive. We recognize that the margin -- the incremental margin going forward might be a little bit less, but the total dollars are more -- and our fee businesses are robust. Some of the interest rate-sensitive ones are a little slower, asset management and mortgage, so to speak. But our steady eddies in terms of our card, our payments, our commercial treasury management continue to grow at high single-digit rates, and we expect that to continue. So I feel pretty good. And then on the credit, [ Mike ], we'll get into it. It's -- we've been through cycles before. Should a cycle occur, and it's still our view that if we do get some recession, it's -- and we may get into this with some of the questions, we still think it's some much shallow or more routine cyclical recession as opposed to anything that we were contemplating during the COVID crisis. And we've held up well in those scenarios, and we'd expect to do so again should those conditions arise.

So with that, we'll swing over to roll up our sleeves on credit with you, Mike.

Sounds good.

I know you've got a couple of slides in your quiver. Hopefully, I can pull those out of you with my questions. I'm sure you'll be successful. So -- but before that, maybe you could share with folks here your background, you've been with the company for over 30 years. Maybe you could talk a little bit about what you've done before you took this because...

Sure. Glad to, Dick, Glad to be here. Thanks for having me. I've been with P&C 40 years now. As you can see by the color of my hair, I've been at this a couple of semesters, and I started 1982 out of graduate school and then Pittsburgh National Bank. -- and spent the first 19 years in my career in our real estate banking business. In 2001, I was the President of P&C Real Estate Finance when I was asked to become the Chief Credit Officer and I've been the Chief Credit Officer since October of 2001. So 21 years in this job. During that time, I've obviously seen several cycles, as Rob mentioned. I've seen many changes in the banking industry. We were talking earlier with some folks out there about how different the names are that would have been here when I gathered this conference started maybe 40 years ago or something 40-plus years ago. We see in the training program. Absolutely. It's about right, on... And I've obviously seen P&C grow and prosper during this time as well.

Great. So it's been a while since we've all seen a credit cycle. And some people in this room perhaps have not seen a credit cycle. Maybe you could talk a little bit about how things have changed over the years in terms of how you underwrite and how that interacts with the economic environment. Then we can bring up our first slide here to speak to that.

But our basic approach to credited PNC is to have as consistent a risk profile as is imaginable. This is a slide that we show to all of our people on a regular basis, which basically says that the buy box remains the same. Market conditions change, competitive environments change, but it's our mission to be as consistent as is possible. Nobody is perfect at this, but this is a representation of how we try to approach the granting of credit and having very consistent underwriting standards. -- which over time has inured to our benefit. And you can take a look at -- this is a slide we're always happy to show, which is our performance through a fairly long cycle. And what you see here is that PNC has tended to outperform peers in terms of actual credit losses. A lot of that has to do with the way our portfolios are constructed and the approach we've taken to lending. And noteworthy here is that P&C tends to outperform peers more so in weak economic times and in strong economic times. And going into this cycle, we certainly acknowledge and Rob alluded to it, there's an expectation of a recession of some sort, and we feel that we are well positioned. We're not going to be immune nor is anybody to the effects of rising inflation, higher interest rates and an economy that may well be weakening. But we feel going into it, we've got the right approach to granting credit, have for a long time. And we're well reserved. If you look at our allowance to charge-offs here on the screen, you can see that we're at the top of the peer group for that. When you move over and you look at allowance to total loans, we feel we're very comfortably reserved there. That is, I'm sure you're all keenly aware, is very much impacted by the makeup of your portfolio if you're have a big card portfolio... Are you going to the mix... Really makes a big difference. If you're a card -- a big card player, you should have via reserves, if you're essentially just a C&I player, they're going to be lower, but we feel pretty good about how we're reserved there.

So maybe you could go into a little bit about how your loan portfolio is composed versus other folks...

Sure. Well, as you can see here on the screen, we're about a little bit over 2/3 commercial and CRE and about 1/3 consumer. And that mix has been fairly steady over the last decade. We've seen some increase over that time now in the commercial and CRE side of it as a percentage of our total loans. And we remain very focused on secured loans. We have a diversified portfolio. We believe in all 3 of those major classes, and we'll touch on that a little bit going forward here. We dive right into commercial here and you can take a look at the commercial book, which we show is a diversified portfolio. It's had strong credit quality. You can see what the charge-off experience has been. And we think charge-offs have been historically unsustainably low in commercial CRE in consumer, but the track record there is quite good. We think we're well reserved. As I mentioned, you can see the other key credit statistics there. We also give you a little breakout of our real estate portfolio there. On the consumer side of things, once again, focused on security. We're 90% roughly secured, and we have shot at a prime and prime plus market in terms of our buy box with regard to consumer. And you can see the strong FICO scores and lower LTVs, which we think put us in a fairly good stead heading into an environment where with rising rates and inflation, consumers are going to be pinched to some degree.

So as the backdrop in the economy starts to come under pressure, where would you expect the weakness to start showing up. I mean your portfolio is, as you say, secured for the most part. I'm guessing maybe you'd expect it in the parts of the portfolio that you don't have. But based on your experience, where is the Canary?

Well, I'll just break it down, C&I, CRE and consumer in terms of what we're seeing I have to say, across all 3, we're not seeing any significant signs of weakness at the moment. That past performance, not a guarantee of future. But at the moment, we haven't seen it. The C&I space what are we doing about it? We have 3 strikes thing we try to look at where we look for companies that have had increased leverage, reduced margins and reduce liquidity. And what we're trying to do by targeting those is look for opportunities to exit to reduce exposures or to restructure the transactions as necessary. One advantage we have in that regard is our asset-based lending business, we call P&C business credit, and they're lending against accounts receivable and inventory. They often have cash dominion with the borrowers. So this is a business that's been a countercyclical business for us. It's grown pretty nicely during down-economic times. It's also a natural place for -- if we have unsecured corporate borrowers or only security, not exactly what we want, and we tend to move those along to the business credit business. And that's a business that's had superior risk-adjusted returns, Rob, I'd say for...

Oh, yes, no question and very minimal losses because of the nature of what they do and the control and the dominant over the cash. Mike, it's probably worth pointing out, too, in terms of the distress that we've seen so far in the commercial book, there's no patterns or sectors. It's all idiosyncratic currently.

Yes. That's currently the case. But bears watching obviously. Sure, of course. Moving into CRE, you have to take an asset class by asset class. -- multifamily and industrial distribution have continued to do very well. Much of the growth we've had in CRE lending is multifamily and it's an asset class has performed extraordinarily well. And given the demand for housing and the rising interest rates and the difficulty for people to purchase homes, we think that will continue to be an asset class that does well. If you look at hotel, come roaring back, driven by leisure travel post-pandemic. It's really been strong. I think most everything that we've had in our criticized bucket has now moved on one way or the other. And mostly things have been upgraded, and we've been glad to see that. We've been seeing some rebound in business in group and convention travel as we see here today. It's not back to where it was before, but it is picking up. And retail has actually seemed to have weathered the storm. It seems to be mostly behind us. retail that's well located and essential, read that to be drug and grocery-anchored and high-end malls have really done pretty well. There has been a shakeout clearly, though, with less well-positioned, not essential real estate, old tired malls, they've taken some real pain in the last couple of years. But... And that was happening pre-pandemic away. So that was something that everybody had been working on for multiple number of years going into 2020 and...

Good point. Yes. The e-commerce have made a big impact there for sure. So that leaves the obvious big one, which is of -- and more to come on that, but there's no question that there are strains in the office portfolio. Given the most office leases are 5 to 10 years in length, I think that it's going to be a slow burn with office and the great undetermined thing is, at what point are people really forced to come back to work or do come back to work and what's it mean with -- I shouldn't say back to work, back to the office, people have worked and actually worked quite well during the pandemic. But what that translates to in regard to office space will be interesting. And Rob, who our real estate -- our physical real estate people report up to Rob, and we take a look at those things as long term about what we P&C will need, but it's not going to 0, but it's just tough to tell. And many companies, as we've observed are starting to request that people come back to work and have more of…

Sure. And we all know that. But importantly, in terms of our office exposure, we're just over $9 billion. So relatively small to the diversified portfolio that's deliberate, and that is where we're carrying the most reserves.

Are there any metrics that you could point to...

That's a percentage. Yes.

Are there any metrics that you could point to that you're tracking in particular, either be it in office or in like any of the commercial C&I sub books that are your -- on your special radar?

With regard to office, one thing we look at is physical occupancy daily security card swipes. And that still hasn't rebounded dramatically. When you look nationally at the numbers, it's 50% or below. And there's a geographic difference to it, too. In the Southeast and Southwest, you're trending much more towards 50%. And it was never 100% because you're not going to 100% people there. In the Northeast and Midwest and -- in the Bay Area, it's still not robust. I mean much more in the 20% to 25% range. So we track that with all types of real estate asset classes, we track starts, we track rental rates and things of that sort. And then we're tracking Moody's default reports. And as I said, on an individual borrower basis, we're looking at leverage, liquidity, margins, other things. And then of course, loan to value...

Yes, the classic LTVs and all the other credit metrics from criticized and classified to delinquencies, nonperformers and so on and so forth. That gets closer to the consumer side and maybe we could go there and talk a little bit about the health of the consumer side. And maybe you could just take us a little bit through the portfolio and give us a sense of like how you feel about the consumer?

Sure. At the moment, as I said, we expect consumers are going to be challenged. -- higher rates and higher inflation are certainly going to make it a little bit more difficult for people to pay their bill, so to speak. But the key metric we look at there is employment levels. And I know this is very simplistic, but if people have jobs, they tend to pay their bills. If they don't, it becomes much more challenging. So we'll enter into this cycle with consumers in a very liquid position still. We enter into it with consumers, very high rates of deployment and wage growth. So there's a good start to it, but there's no question these things will begin to pitch.

Yes. And consumer cash balances across all of the demographic spectrums are still elevated above pre-COVID. They're down off the peak in terms of where they peak, but there's still cash-flush from a historical perspective. And of course, where we're seeing, as you would expect, where we're seeing most of the burn down in terms of spend is at the lower levels, but still above where they were in 2019.

Got it. You showed earlier on in response to one of the questions, the long-term losses vis-a-vis the competitors. And like as you pointed out, the difference between the 2 lines is greatest when you're going through a cycle and not so different when credit is perfect. It's hard to differentiate The tide hasn't gone out and so forth. But could you comment on how you feel about over-the-cycle losses now? Or whether that orange peak after the GFC is like how that might relate relative to this, hopefully, far less than a GFC credit cycle that we're anticipating?

Sure. Historically, first of all, I'd say that losses P&C and the industry have been experiencing are abnormally low and I think we and others have been saying unsustainable. So we're expecting normalization there. For P&C, over the last 10 years, it's been about 30 basis points in losses. Over the last 20 years, it's been about 50 basis points in loss. Now that includes the great financial crisis in there. So that's what the story has been for us. And Rob, I don't know if we'd say we think 30% is a...

The number I’d point to but you're never at 30 ever. During all that time period, you never think the important point is, and we said this before, by the construction of our businesses, which matches up higher than average credit quality with fee businesses that put together provide a sufficient return. We're positioned in a downturn where we have less losses on a relative basis. That's just been a fact in every cycle that we've been in. And in those instances, although we don't look forward to those times, we move market share in our favor every time. And that's just a function of, like I said, the construction of our revenue items and our approach. So where we don't look forward to downturns, they typically are beneficial to us on a relative basis.

So then bouncing over to reserves, which you showed a graph on that -- could you just comment on how you think you're positioned in terms of reserves once losses start to go up and there's an interaction there with the new CECL accounting. So just commentary on how you think about the CECL reserving quantitative overlays -- when you're not quite in the cycle, how do they play out when you are starting to get into the cycle.

Rob and I can tag team that one. What I'd say is I'm sure is obvious to all of the reserves are impacted by 3 things that are going to move it. One is the quality of your portfolio. 2 is the economic assumptions that the go-forward assumptions you make in CECL. And 3 is you have loan growth or loan shrinking, and that will impact your level of reserves. I'd say in the near term, we don't have expectations for significant movements. One thing we've seen happen in the last couple of quarters is as the models have caught up to the pandemic and experiences we've had there, we've had quantitative reserves up and qualitative reserves down. We're at an inflection point now as we look forward with the economic expectations potentially changing for everybody. And that will have an impact going forward as well we're growing, not growing and what's the quality of our portfolio. Rob, what you...

Yes. I'll just give you some context along those lines. That's all true. I would just say, so we're running at a 1.7% of our total loans. Our day 1 CECL was 1.5-ish and then adjusted for BBVA, maybe 1.58 or 1.6%. So we're running above our day 1 CECL as a level, and we think we're well reserved. One thing that we were talking about was just in the sense that if CECL hadn't happened, and we were still running under the incurred loss math that we were talking about this last night, our ratio -- our reserve ratio would probably be about 1.3% or something -- so CECL has definitely added reserves, which could prove to be a good thing going into if we do get a down cycle. So I don't expect on a percentage change a whole lot to change. Obviously, we're in a fluid environment that could change. But it's not like we're sub 1%, and we all have to get to 1.5.

But back on the position relative to day 1, at least for me, going into day 1 of that environment with... Unemployment... Spiking through levels I hadn't seen... In my career. I was expecting a pretty bad credit environment. you're you reserved above that the day 1 at a time when we thought that we were going to fall off the edge of the flow.

It didn't happen. Well, we were north of 2 at the height of all that -- so we've had some release. We've released less than others -- and then part of that is just our view in terms of what we think we need to do.

Yes. Got it. All right. So I've still got a few questions, but perhaps I haven't hit all of Mike's questions. Shall I ask your question for you, Mike? Could you talk about your technology...

Yes.

Now we have the microphone.

So P&C stock has gone from over 220 to 155 as we speak. So I think the market disagrees with your credit assessment -- so from a -- what do you say since 1982, you've been at P&C, that's quite incredible. So the weakness, I think you said the older malls, maybe the lower-end consumer, let's just be really clear about where you see the potential weak spots. Where the stock market could potentially be right about the credit weakness? And then maybe how this cycle compares to the other cycles that you've seen since 1982.

[ Had look at ] the stock price pops on that question. Sometimes he pulls out a pump in and other things.

More theatric.

Yes. I'll talk just about the credit risk side of it and real estate in particular. What's different is we really haven't oversupplied many categories. Other downturn, other cycles we've seen have been driven by -- in the late 1980s by real estate being dramatically oversupplied driven to some degree by tax policy. We had the tech bubble that hit in the early 2000s. We had the great financial crisis that hit in the mid-2000s. So we don't see crisis-type things in front of us right now at this point in time. But they're going to be stresses and strains absolutely, but it depends on how well you're positioned going into it and how stressful it actually becomes. And I don't know that credit would be the only reason the stock price would move but it...

Yes. Well, I mean the big driver now this is as your business is, even though we're making more money year-over-year, it's the multiple compression that's occurred where we were last year at a forward PE at 15-ish, we're now at 10 P&C, the industry is lower than that. So at 100,000 feet, the stock market has priced in a very deep recession because that's the last time we've seen multiples like that. We happen to think that's not 100% lock. So there's those of us, myself included, that I think maybe the stock market has been overdone in that regard, but we'll see.

One observation I have is coming out of the CCAR for the first time P&C's expected losses or the stress capital buffer ticked over the minimum level of 2.5... So maybe just some thoughts on that. Was it related to the BBB merger or just tone change at the Fed...

Yes. So we got -- that's a good question in terms of the stress capital buffer framework. And up until this last CCAR submission, PNC always stressed below that 2.5%, which meant that you automatically defaulted to 2.5%. This year, we were above the 2.5%. And even though there's not a lot of transparency in the way that the Fed does it, we're able to see some things. Clearly, the scenarios were tougher, and that applied to everybody in the industry. Where we were different is the BBVA acquisition and the timing of that clearly led to more conservative numbers on their part. So for example, and we could see this, they just layered BBVA's expenses and added them right on to ours and didn't give us credit for the $900 million that we've taken out. They had loans in there that BBB had made that stressed harder or more difficult that we don't have anymore. So in terms of their process, it's understandable because a lot of that thing was -- a lot of the savings and all those sorts of things were going to play out over the course of '22, which, in fact, they have, but they were using just the most conservative numbers. So all else being equal in this year's submission, if the scenario stay the same, our stress capital buffer will come down by that amount. I don't know whether that's going to occur or not. They could make it tougher. But I would expect that at least that BBPA anomaly part will help us.

All right. We have a couple of questions. I'm going to go with... Well, there's a mic back there.

Yes. I just wanted to build on Mike's question and actually disagree a little bit. Maybe the marketplace isn't as worried about the loan portfolio as other parts of the balance sheet, such as an ArciGos or an LDI or a 1994 interest rate swap problem. Where do you see the risks outside of the loan portfolio in terms of your -- do you do counterparty funding or private equity or interest rate swaps? You want to answer that from a credit perspective or just you go...

Well, I would say, hey, look, our biggest risk in terms of our business configuration is the loan book. We're very simple, and this gets into -- this gets into going back to the future to argue that even though we're large, we're quite simple in terms of our approach. So we don't have a lot of those complexities that bring on the operational risks that you're talking about outside of the credit risk. We're a big bank, but we do simple things. We take deposits, we lend them out, not all of them. We like to move payments around for our commercial and our consumer clients. And if there's money to invest, we like to do that, too. So those -- it's complex in its size, but not necessarily in its activity. So we have minimal risk in terms of that operational risk that you're alluding to.

I will sneak in Julian's question here, front row. Got 30 seconds.

There's 2. So one is like on the C&I side... Just following up on my question. I understand that you have a lot of collateral coverage. But looking forward, which sectors do you think will be most squeezed from a cash flow coverage perspective? And then the other part of the question, I know if you're going to have time. But like BBVA, you didn't actually underwrite those lens in the first place. So do you see any more stress or any different stress on the acquired loans?

We've seen some more stress on the acquired loans. We had the opportunity to mark those from the beginning, which has been helpful. We've also had a reason -- since the time we've closed, we've had a period of time to work through those loans, and we've worked through a significant percentage of those. But yes, we -- they had a bit different of a target, not dramatic, but it was different than we would have targeted, both in C&I and CRE. But that's now worked down to a reasonably modest number. But we expect those will -- they'll feel more of the stress. No question about that.

I think we'll have to take the second question, perhaps offline because we'll get the hook from Gerard...

I see it now.

Thank you very much.

Thank you, all.