Welcome back from lunch. I want to welcome PNC to our BAB conference, and very much appreciate you guys making the time to come back. This is our 42nd year for BAB, and I'm very excited to have PNC back again. Most everyone knows PNC. It is the national Main Street Bank, grown quite a bit, but still very much follows a Main Street banking model of how they serve customers. Total assets at PNC now, $557 billion. Branches across the country, 2,400 branches, more or less, and a market cap of $45 billion. So great things have happened at PNC over those years-
Yeah, sure.
-where you've grown quite a bit. And we're very lucky to have Rob Reilly back. And Rob, as most people probably know, is a CFO at PNC. He's been at PNC for a while.
36 years.
Yeah, and almost as long as-
That's a while.
Almost as long as the conference.
Yeah.
Previously, he was the head of asset management, where he was responsible for wealth management and institutional investments, et cetera. But, we also have a second guest from PNC today, and that's Mike Thomas. And Mike Thomas is the Executive Vice President and Head of PNC Real Estate. And so we get a very interesting perspective into PNC's commercial real estate business, including the balance sheet lending, the affordable housing investments, multifamily, and servicing that's done through their Midland Loan Services. So very excited to have Mike and Rob here today. I'm going to ask some questions-
Sure.
to both of you, and then I'll open it up to the audience. But, Rob, I'm going to start with you.
Yeah.
with some questions because I think there's a lot of pessimism, I guess, and if you look at the market price of banks-
Yeah
... with the big discount in bank stocks, you know, there's a lot of uncertainty around the economy and interest rates and regulation. But in your opinion, what are the catalysts that are going to get investors excited about bank stocks and particularly PNC?
Yeah, sure. Hey, thanks, Ruth, and thanks for having us here today. Congratulations on the 42 years. You, of course, haven't been here all 42 years-
No.
But, Gerard has. You know, he's just put his hand up back there. So nice to be with you today. You know, well, you're seeing it a little bit playing out even today. You know, we do obviously think that an eight multiple on the industry in general is low and disconnected to the real value, and we can talk more about that. At PNC, specifically, you know, outside of the issues that you mentioned, which I'll cover, you know, we're doing what we want to do as far as our strategies are lined up. We're growing customers across our expanded national Main Street model, particularly in the Southwest, which, as you know, we entered through the acquisition of BBVA a couple of years ago. And things are going well.
We're growing customers, we're growing products, we're growing geographically, we're growing digitally, so, you know, on track. We're leveraging our technology investments that we've made over the years. You've heard me talk about it at this conference for a number of years, and that's really helpful, obviously, in terms of internal and external controls, external client delivery of products and services. And then lastly, you know, we have a conservative credit approach. So in times of slowdown, that's typically when that model gets validated. So, you know, outside of the issues that you mentioned, fundamentally, we're executing and maybe even ahead a little bit in terms of our strategies. In regard to the all the Rs, because they all start with R, so, you know, you start with rates.
You know, we do view, and I'm sure you all agree, that we're at the, you know, at the end of the cycle, maybe not at completely the highest end. And we do see things turning, and more normalizing, and, although we don't have specific 2024 guidance for you today, you know, we do foresee, in the relative near term, net interest income and net interest expense syncing back up. They've been out of sync, as you know, in the last couple of years, and we're positioned for that. The next R is the regulatory that you mentioned. I'm just thinking with Ruth, there's another R in there-
Yeah.
and Rob, yeah, but, but we'll stick to those. On the regulatory front, there's new rules out, both in terms of capital and liquidity. For us, they're not problematic, as they're proposed. You know, we have a lot of capital. If we fully load in the proposed, elements, not taking into account the transition benefit, you know, we clear our regulatory, regulatory hurdles. And then from a liquidity standpoint, you know, we see that, see that as really being something that we can hit in stride, that we would have done anyway. So that leaves the next R, which is recession. You know, clearly things have slowed down. The, the higher interest rates have slowed things down. They might slow things down more, you know, depending on where you started.
You know, we're inclined to lean a little more heavily towards the soft landing than we might have been even this time last year. But we'll see, you know, we can hope for the best and, you know, make sure that we're prepared for the worse, and that's where that credit conservative approach, you know, is a confidence for us. And then lastly, in terms of real estate, that's what we've got Mike here. Generally speaking, within our commercial real estate portfolio, things are pretty good. Obviously, the focus is on the office space, and inside that, the multi-tenant. Mike will talk a little bit about that, but in terms of being positioned for it, as you know, we've reserved pretty aggressively.
So we've front-loaded those reserves, and naturally, we need to let this play out, but it is largely isolated in that particular portfolio.
Okay. Rob, can you talk about your expectations for NII and NIM for 2024?
Well, that's what I said. So I don't have 2024 guidance for you, so you can put that, that pen down along those lines. You know, but, you know, I think, in terms of, of that guidance, we'll be in a better position maybe later this year and certainly when we give our full year guidance for 2024. But, you know, we've seen pressure on NII, we've seen pressure on NIM as the liability costs have gone up faster, obviously, than the NII. We do see a turn. You know, there's a lot of consensus around that turn being somewhere in the mid-2024 vicinity, and I want to underline vicinity, and, you know, everything that we see sort of lines up with that.
Okay. So maybe following up on that, on the earnings call, you talked about the possibility of deposit betas continuing to move higher.
Yeah.
You know, but you outperformed your expectation in betas in 20-
Right.
-in the third quarter.
Yeah.
But, you know, you didn't really change the outlook, so-
Yeah. Well, so the issue there was... I'm glad you asked that question. The issue there is, as you know, we've all recognized, and at PNC, we saw it, too, the effects of the higher interest rates have slowed down. Even though there's a decline, it's slowed down that decline. And actually, in the third quarter, we actually exceeded, meaning to the better part of our betas than our expectations. What we were talking about on the earnings call, though, is, you know, going forward, and we don't know this, and we're watching this, but it's plausible that, because of the magnitude of the rates and the way they moved so far so fast, there is a portion of our book, our interest-bearing deposits, largely on the consumer side, on the smaller end, that are still at pretty low levels of rate fade.
So what we were saying is we could get into a 2024, where we actually have rates stable, maybe even a cut or something along those lines, and those particular deposits could continue to price up a little bit. But that'd be okay. And again, that's all in the spirit of moving towards that net interest income and net interest expense syncing up.
Mm-hmm. Okay. You also, on the call, talked about fees kind of-
Yeah
-picking up in the fourth quarter. And, you know, I think your guidance was pretty positive around capital markets and advisory. Can you kind of talk about-
Sure.
Any update on that?
Yeah, sure.
From a week ago?
Sure. So, so with our fees, our guide was up, up a little bit, because we did see a large pickup in capital markets offset by some MSR gains that we had in the mortgage business, so that's, that would sort of net out. And it, it has been in capital markets, and for us, our biggest component of capital markets is our M&A advisory shop, Harris Williams, which had a softer than expected second quarter, but pipelines grew, had a softer than expected third quarter, but pipelines grew. And the good news is, in the fourth quarter, those pipelines are actually being realized. So we expected that.
We had a good October, so we're on track with our guidance, which for capital markets was something in the fourth quarter along the lines of what we saw in the first quarter of 2023.
Okay. I guess I'll just move to expenses, just we want to-
Sure.
-kind of move quickly. So, you know, you basically, you know, gave some additional guidance on cost reduction-
Yeah, right, right.
and the Continuous Improvement Program
Yeah, right
-that you're doing. Do you think that you can generate positive operating level next year?
Yes. So again, we're not giving 2024 guidance.
I'm gonna keep-
Yeah. Maybe you want to keep asking that, Ruth.
Okay.
That's okay. No, our thinking there was in the third quarter, and it was actually just to make sure that we clarify that we did something beyond our continuous improvement program.
Mm-hmm.
We did a workforce reduction program, which we announced and have begun to implement and largely implemented, which will result in a charge in the fourth quarter, approximately $150 million, which will generate approximately $325 million of run rate savings in 2024. And the reason that we did that is because, at that time, and we still do, we see, you know, the twelve-month comparison of 2024 to the twelve-month comparison of 2023 as being a tough revenue growth environment. And because we do aspire for positive operating leverage, which we've generated for the better part of, you know, many years, your only chance at a shot of that is that expenses stay stable. And in order for us to get to that place, we needed to implement a workforce reduction program.
So that's what we've done as we position ourselves as then we will ultimately plan for 2024.
Okay. Maybe on the capital side, and you mentioned this in your earlier answer-
Yeah
... where you're in a really good position, you know, with the proposed rules.
Right.
You're already above the, you know-
Yeah
7.4
That's right
with everything included.
Right.
So how do you think about, you know, excess capital at this point, and at some, you know, does this offer an opportunity to be more offensive?
Yeah.
What about share repurchases?
Sure, yeah.
When does that start coming back?
Sure. So, you know, as I'd mentioned, and, and you just, reiterated, from a capital position with the new proposed rules, we're in a pretty good spot to start. That has afforded us capital flexibility. Most recently, example, was our purchase of the Signature loans. So we were in a position to be able to add, add RWA, at a time where a lot of others were on RWA diets. So that's a good thing. You know, we'll continue to, build capital through that transition period. You know, we'll be at, at, well above 9% through, the transition period. We get asked about share repurchases.
You know, we told everybody we're on pause as these rules, you know, get close to finalizing, so then that way, we have a fixed variable in terms of what our capital return policies are. So we're mindful of it. You know, we look at market conditions. We have the ability to do it, but that's our current thinking.
... Okay, just one, maybe one other question, because you brought this up on the earnings call as well.
Okay.
Was the Visa-
Yeah.
- Class B shares.
Right.
There's a proposal to potentially be able to monetize half of them.
Yeah.
Would you monetize them? Is that something that you would consider?
Oh, yeah. Yeah, for sure. So we have just to remind the audience, if you weren't on the earnings call, that we have, you know, unrealized gains in the Visa Class B share of about $1.3 billion. There's a proposal, as we understand it, for the Visa shareholders to approve the ability to, in effect, monetize half of that, in the first quarter. Should that happen, you know, we're likely to do it, because at that point, we would have A shares, and once they're A shares, you would need to mark to market, so we would look to monetize it, and that's a good thing. And now, that would be additional capital, because even though we have unrealized gains there, that doesn't count in terms of the,
Mm-hmm
... the CET1 ratio.
Mm-hmm. Okay, thanks.
Sure.
You know, so we have Mike here to talk about the CRE portfolio. So I really want to make sure we have enough time to get through all the questions there. So Mike, just, again, going back to the earnings call, but, PNC-
Mike wasn't on that one.
Well, no, you weren't on it.
Okay, I got that.
Rob, Rob spoke, I guess, on your behalf.
Sure.
Basically identifying multi-tenant as a specific risk area. And just, can you go into, like, and just double-click on that, so we can kind of understand a little bit more where that risk is coming from, the portion of the portfolio that might represent as well?
Sure. Sure, yeah. Well, you know, office, I think, is going to have stress everywhere. But we identified pretty early that that multi-tenant was going to be, you know, the biggest area of concern, and that and it's played out that way. When you think about the industry, there's been a demand shock, and it's probably a permanent demand shock. The question is: What's the magnitude of that demand shock? But that plays itself out over time as you see leases roll. And so the risk factor within the multi-tenant book is that you have more risks rolling a little bit more frequently than you do in other parts of the portfolio. So the average remaining term on our multi-tenant book for leases is about 5.1 years.
I think we put that out there a little while ago. And that implies that you've got about 20% of your tenants rolling within your portfolio every year, and so there's a decision point there. And as these tenants make new decisions about space based on their adoption of hybrid work, we're seeing the stress come into some of those assets. So that's resulted in higher criticized levels, and, you know, virtually all of our stress has been in that book as a result of that. The other parts of our book are somewhat insulated from some of those forces. So we'll see within our office or the medical office part of our book, that is largely inpatient care, and it's longer-term leases, seven years on average, remaining lease.
By the nature of those facilities, they require people to be in the space, so that insulates it a little bit from some of the demand shock. Then, when you look at the government part of the book and the single-tenant part of the book, there, you're talking about critical facilities, headquarters buildings. You've got largely credit tenants. So more difficult for people to relocate, better credit associated with them. So there are some parts of the book that have been pretty isolated from some of the immediate shock in the office portfolio.
Mm-hmm. So, you mentioned that, by the end of 2024, half of the multi-tenant loans will mature.
Yes.
Does that then kind of drive the charge-off cycle, or can you kind of talk a little bit about how that works?
Yeah. So maturity doesn't drive our charge-offs or our non-performing loans. In fact, in some ways, having the maturity come up gives us a little bit more optionality to work through the loan. What drives NPLs is really loan by loan, looking at the recoverability of the loan. So you think about the loss of a major tenant. You think about a change in the financial circumstances of the sponsor, their ability to pay. You think about their potential change in their willingness to pay. All of those are the kinds of things that might, you know, push a decision point on moving something into a non-performing category.
The maturity is really an option or an opportunity for us to have a conversation with our client about ways that we can restructure the loan and work through a problem, if needed.
Yeah.
Yeah.
You have 23% of your office portfolio is criticized.
Mm-hmm.
Are there characteristics that you can talk about in that portfolio of maturity or, you know, LTVs or anything like that?
Yeah. So the vast majority of that book has been reappraised within the past year. Our appraised levels are in the low 80%, almost 85% loan-to-value. We've got about a 0.6 debt service coverage on that book. But, you know, what that means is that there's still equity to protect within that portfolio, despite the fact that it's criticized. So, you know, as Rob said earlier in one of our conversations, we're kind of still in the game with working with our customers on those loans. And I think we've put in place a really good team that works through each of these loans. We have a 30-year veteran who's got experience in workouts that runs our portfolio strategy.
We've got another person on the team that has as much experience with him as him in real estate. And the two of them lead a team that go asset by asset, loan by loan, and work through that criticized portfolio. So we're kind of constantly reviewing changes in the portfolio, changes in each of those assets, and making decisions about how to to.
Real time.
Real time, how to work through it.
So your criticized assets stayed pretty stable in the quarter, but you moved some to NPA.
Mm-hmm.
Can you, again, kind of just talk about the decision-making in moving those loans into non-performing? Because I think you also said that some of those loans are still paying, so-
Yes. Yes, so our delinquencies are actually fairly low. We've had almost no delinquencies in the portfolio. And when you look at the cash flow on these properties, most of the cash flow has been pretty good. So the decision to move, as I said, is largely driven by some change in circumstance, the loss of a tenant or something that's changed with the borrower. So we've needed to make those changes over the course of this past quarter. But the larger context here is that, you know, we reserved, we think, adequately. In fact, we've got a fair amount of reserves against this office book, 8.5% against all of the office loans, 12.5% against this particular population.
And so we've known for some time that we would have this group of loans that were going to be troubled, and we'd need to work through them. So part of what you saw last quarter with, you know, the increase in non-performers is just part of the process that we've anticipated. And it'll be a little bit lumpy. You'll see some quarters will be a little bit higher, some quarters will be a little bit lower. We've seen that over the last couple of quarters, but it's all kind of anticipated in this portfolio.
Okay. I'm going to switch to multifamily.
Sure.
Is there... You know, I guess, where do you see multifamily in this-- in the cycle today? Do you see-- are there problems coming down the road?
Yeah. Yeah, I think multifamily, I get asked this question a lot, and in contrast to office, the fundamentals within multifamily have been pretty good. You still have rent growth in many markets in the country, and even the markets where you've seen flattening or maybe even some down rate growth, it's been in the 1%-2% range. So for the most part, the fundamentals have been good. You still have renters out there, and they're still willing to rent space. Occupancies have held up. The issue that you run into there is really interest rate driven and some expense, as well, as we've been in this inflationary environment, and you've seen insurance and some other line items go a little higher. But the NOIs have held up reasonably well.
I think the interest rate stress in the portfolio will experience more of that over time as we, you know, linger in this kind of an environment.
Is that more specific to certain vintages? The multifamily from 2021 or 2022, is that-
As we look through it, it's actually been pretty consistent in different vintages. Because we adjust our, you know, underwriting standards as we go. And the older vintages, while they were underwritten with less of an interest rate cushion, they actually experienced all of the inflationary pressure upward on all the rental rates for the last few years.
Mm-hmm.
They've benefited from that greatly over the last few years.
Um-
We feel that's important. We feel good about our multifamily portfolio.
Mm-hmm.
There could be some isolated deals in there that are, you know, compromised by the increase in interest rates.
Mm-hmm.
But that's more a handful rather than-
Yeah
... portfolio-wide.
Okay. And maybe just to finish off on other asset classes, I mean, you, you did mention medical office, but I mean, you know, just how do you feel about other asset classes? Do you feel like, you know, retail, that was one that I think has had pressure because of online, you know, shopping, whatever, and then you've got the pandemic that really killed a lot of retail, but that seems to be coming back, seems to be better.
Well, I think the good news about the real estate industry generally today is that the fundamentals have been strong really everywhere. And part of the reason for that is the pandemic. First of all, all of us were kind of pressure tested for a period of time, looking at our portfolios, cleaning up loans. Our sponsors were doing the same thing. But maybe most importantly, the amount of capital that was flowing into the construction of new supply virtually dried up for the period of a, you know, a year or so during that pandemic. And so some of the places where you would normally have feared oversupply, we just didn't get it. So, as much noise as there was around retail, and it was warranted, it ended up being really a story about B malls.
It was really not a story about retail writ large, despite the fact that you had a growing share taken up by online retailers.
Mm-hmm.
And in fact, that share taken up by online retailers has actually gone back down over the course of the last year a little bit, and now it's more on trend. But the consumer has held up, and the economy has been strong, so our portfolio for retail has held up really well. And we've seen the same kind of dynamic at play for lodging, and certainly warehouse industrial has done really well.
Mm-hmm
... over the course of the last few years. So our portfolio, again, outside of the multi-tenant office sector portion of it has actually done really well.
Okay. Midland Loan Services, you kind of get a unique perspective and insight into the industry.
Mm-hmm.
Can you talk a little bit about special servicing, you know, balances and, you know, have they fluctuated, and where do you see that special servicing going?
Yeah. So, we had gotten, as high as almost ten—it was about $9.8 billion, in the middle of the pandemic. Those balances went back down to about $4 billion. And today they're at about $6.9 billion. And so we've seen them creep up over time. You would have thought, given some of the stress that you see out there, that they might have gone higher. But we're actually getting lots of resolution happening in other parts of the portfolio, so it's kind of keeping those balances down a little bit lower than what you might have expected. And we would anticipate that that will continue. Again, you know, going back to some of the underlying, performance of the non-office property types.
So we would expect that those will continue to grow, but we don't anticipate it getting to the same levels as we saw during the pandemic.
Okay, thanks. I think-
That's a great leading indicator, as you know. So those are servicing other loans, CMBS, not ours.
Yes. Yes.
Just to make sure everybody understands that.
Yeah. Yeah.
I'll take a pause here and see if there's audience questions. And here in front.
A couple of questions, please. First is about overall commercial real estate exposure. I think you've got sort of $35 billion-$36 billion of-
Yeah.
CRE lending. There's also, which is, you know, very manageable level. There's also, I think, $17 billion of real estate and construction related in C&I.
Mm-hmm.
So can you tell me why that's in C&I rather than CRE, and if you can make kind of generalizations about the health of that? So that's the first question.
Sure.
And then the second question is about workouts. You mentioned workouts. There was this kind of guidance from regulators. They want you to work out with borrowers. Can you talk about what the options are, what you offer them, what you expect in return, and what it means for allowances when you do work with borrowers?
Mm-hmm.
Thank you.
You want to take the first question?
Why don't you do the second one first?
So I'll do-
Yeah, and then I can do the first.
On the second question-
Mm-hmm.
When we work out a loan with a borrower, our expectation is that our customer is going to live up to the contract. So we start with the premise that they're going to go ahead and refinance the asset out or repay us. If we don't have that as an option, there are lots of different things that are available to us. We may increase the recourse on a loan. We may ask for a larger amortization over time from cash flow. We might have equity injections. So there are a number of ways for us to handle it. And we've actually been fairly successful in doing that across the portfolio.
And we've not had any hindrance in you know being able to deploy those kinds of strategies.
And then the first part of the question is, you know, so for real estate, outside of our real estate portfolio within C&IB, the bulk of it would be, the REITs. And all of that is, largely investment grade, in many instances, publicly traded, diversified. So it has more of an operating, you know, operating sort of aspect to it.
So what do you do with the impaired loans, Mike? Do you keep the impaired loans on your balance sheet? Would you consider selling those loans? Would you force the borrower to sell, or would you repossess and actually sell the property? It seems like option four is not viable, which puts you in a corner. So of those four choices, how much are you using each one, and how might that change in the future?
Yeah, that's a good question. So this is the benefit of having that team that I spoke about earlier, looking at all of our assets, kind of asset by asset. All options are available to us, and we've deployed a number of them. We've had some discounted payoffs, we've had some note sales, and in some, you know, many cases, we've just extended and gotten pay downs and, you know, moved on from there. We have not taken back a property, although in theory, that's on the table. But our general approach is to figure out where we're going to maximize our recovery.
And so if you look at the markets, and we're constantly in contact with the brokerage community, we talk directly to private equity, et cetera, just so we have a gauge on where the best execution is. There are times when a note sale is better. There are times, there may be times in the future where having direct ownership of the asset and selling the actual asset would be a better execution for us. In some cases, it, you know, we may pursue a short sale, where the borrower is kept in place, and they go through the exercise of selling the asset because we think that they can maximize value.
So all of those options are on the table, but for the most part, for us, when we've had a situation like that, we've either sold the note or we've taken a discounted payoff.
Importantly, the loans of value, to, to your point, are still within-
Yes
... loans that are under
Yeah, there's still equity.
There's still equity.
Still equity, yeah.
So that equity has a lot of interest in terms of defending, even on the borrower's side, that value.
Right.
Here.
Hey, Mike. Just quick question on the classifications. I think you said that it was 0.6 DSCR on the criticized loan portfolio.
Yes.
Just curious how... You guys have zero delinquencies on the office loans as you published in Q3. What's the classification difference about when a loan might possibly move, be moved to delinquent?
Well, delinquency is really just about payment. So if a borrower is not paying, then it would move to delinquency. If we, if they-
That's pretty straightforward.
Yeah. So that's really what determines it. And I think maybe the question that a lot of people have is how can you have that kind of stress on the book without seeing delinquency? And really the reason is because there's still cash flow off of these assets that allows them to make their payments, even when they lose a tenant or even when we have a valuation change because an appraisal has come in. And so one of those things might actually drive it to non-performing without us seeing the cash flow impact right away.
Makes sense. Here in the back. Here we go.
I just wanted to follow up on the NPA increases.
Yeah.
Is the environment to work out some of these problem credits getting more and more difficult, and therefore, by default, your NPAs are going to accelerate higher? The reason I ask that, and now I'm talking about the total portfolio-
Yeah.
-not just CRE.
Yeah.
If you look at the last three quarters, the inflows to nonaccrual have accelerated.
Right.
The paydowns and the cures have decelerated-
Right.
which is why NPA is obviously going up.
Right. Yeah.
So is there something in the environment that's making it more difficult to work out what's in the pipeline, and therefore, by definition, that NPA number is going to just keep accelerating higher?
You want to take a shot, or I can?
Yeah, I think from the real estate perspective, you just have less liquidity in the spaces that are most stressed. But I think that, as I talked about earlier, I think the movement to NPA is, you know, largely due to decisions being made at the asset level as leases come up for expiration. And so you may have that spike in a given quarter, and it's not necessarily because there was, you know, some sea change in the environment. It might be, you know, something that was really idiosyncratic to the group of assets in that particular population. It's all within the context of the assets that we've identified as being the most stressed, so we would expect that we'll see that over time.
But timing is more difficult.
Yeah.
Yeah, but I don't think that our ability to cure has changed materially.
Yeah, I get the point of the question. I think the, you know, the biggest feeder or increase of NPAs from what we've already identified as criticized, can often be a qualitative factor, as Mike mentioned. So that doesn't really change our perspective on, you know, the health of the deal per se. And then in regard to working those out, eventually, maybe there is sort of a, you know, a cure rate that then brings those NPAs down.
Yeah.
But at the moment, that's the buildup isn't because they're not being worked out.
Yeah, I think it's a timing issue.
Right.
Good afternoon. In my experience, it's often that marks the bottom of a cycle when banks sell to private equity sponsors, you know, because that's when you need to clear out distressed portfolios. And I'm just wondering, specifically in that, you know, office, multi-tenant office segment that you're looking for, are the prices down to a point where it's mobilizing significant amounts of money, or do they need some of these buildings to go to zero before they can start investing?
I don't think they need them to go to zero. I think they're probably looking for a bigger discount than anybody who's a potential seller would think would make sense today in most cases. There's a fair amount of liquidity that's sitting on the sidelines in the private equity world, looking for opportunity. But it's, you know, there's a big gap between buyer and seller today, and our-
And to your point on the CMBS, they're being taken out before,
Yes.
So it hasn't hit that point necessarily.
Yeah.
Yeah.
Rob?
Yeah.
Question on capital. Obviously, you guys are well capitalized-
Yeah.
the buyback's on pause until what we see with Basel III Endgame. Can you share with us how much every year, let's we get beyond Basel III-
Right.
How much do you need to retain out of your annual earnings flow just to run your business organically?
Yeah.
The extra will then potentially be returned to shareholders, possibly with buybacks or dividends.
Yeah, sure. We should ask that guy to identify himself back there, after I turn to the question.
Thank God for-
Thanks, Gerard.
Yeah.
The answer to that is pretty straightforward and pretty consistent if you take a look at our model. Generally speaking, we generate more capital than we can deploy intelligently back into our businesses. You know, the first and highest use, obviously, of our capital is lending to our customers and our clients. We tend to generate more capital than we deploy because of our credit, you know, conservative approach. You like a little bit for a buffer, and right now, that buffer is a little bit undetermined as these capital rules are fluid. And then beyond that, obviously, acquisitions and capital return and dividends and share repurchases. So I don't think we're in a different step change. We're just in a place right now where we're building capital. The industry is building capital.
That's a good thing. And then I think things will normalize out. So our capital returns will be healthy, the dividends healthy. Share repurchases, when we do resume them, will be part of our, you know, our natural plan, our natural plan of what our model does.
Okay, we have one up here.
... Thank you. Can you help us understand your construction lending portfolio and how healthy it is? And then secondly, this is a kind of general industry question, but, like, the last Senior Loan Officer Opinion Survey was kind of scary about commercial real estate. I mean, do you-- it looks like there may be a credit crunch. Does it feel like a credit crunch? And if so, which specific areas are seeing a potential crunch in real estate?
Well, I think I'll take the second question first. I think that the industry has slowed down its lending activities, you know, in a noticeable way. You don't see nearly as much bid activity for every dollar that comes out in request. I think the demand for loans has gone down as well, and so, that's been part of it. But when you talk to our customers, they will tell you that they don't have nearly as much interest in bidding on new loans today as they did even six months ago. Whether that results in a crunch or not is hard to determine, because we haven't seen borrowers with a dramatic need today.
Now, on the refinancing front and office, that's a different story, because you're not able to refinance loans as easily there, and so most of those things tend to, you know, stick within the existing lender's balance sheet. On the construction portfolio, that has performed really well for us. We don't-- I mean, most of our construction has been in the multifamily space, and is underwritten with pretty pretty big cushions. And we don't trend rents. We don't anticipate growth in rental rate, et cetera. So we're-- It's not pie in the sky underwriting that we do. We underwrite to, we think current market is. And so as a result, you know, the portfolio has performed reasonably well.
Over here.
Follow up on that question specifically. Vornado said on our earnings call this week that there was no money for CRE office in Manhattan. And so there must be a price at which a bank is willing to make a loan for that asset. So what is the thought process? Does it take 12%, 15%? Does it take regulatory pressure to come off? What is the thought process?
Yeah, I-
Yeah.
Oh, go ahead.
No, no, go ahead, Mike, and then I can, I can finish up.
Yeah. I would say there is a price, and I think, you know, what people will look for today is really strong credit, great fundamentals on the office building and a great return. I think if you find that, there would be some folks that would be willing to do that. We would consider something like that. But for the most part, people are, you know, kind of digesting what's on their plate today, and I think that's largely the reason. I'm not sure that the industry has gotten to the place where they're willing to accept what it would take to attract that kind of money out of the bank market.
Which is natural.
Yeah.
But, you know, and we're a relationship-oriented business, so for our relationships, of course, we're gonna be able to facilitate those. But generally speaking, nobody wants the optics that they're growing their CRE portfolio, because of all the negative blowback on that.
Yeah.
Rob and Mike, I think we've run out of time.
That was fast.
Yeah, it was fast. Really great. So thank you very much, Mike. Thanks for coming-
Sure.
And joining our BAB conference.
Yeah.
Rob, thank you.
Yes, thanks. Thank you all.
Thank you very much.