The PNC Financial Services Group Q3 2021 Earnings Results & Report

The PNC Financial Services Group EPS Results

• Actual EPS: $3.75
• Consensus EPS: $3.64
• Beat/Miss: Beat by +$0.11
• One Year Ago EPS: $3.39
• EPS Beat Rate: 8 of last 8 quarters

The PNC Financial Services Group Revenue Results

• Actual Revenue: $5.20 billion
• Expected Revenue: $5.05 billion
• Beat/Miss: Beat by +$144.59 million
• YoY Revenue Growth: +21.40%

The PNC Financial Services Group (NYSE:PNC). is a diversified financial services company headquartered in Pittsburgh, Pennsylvania. Through its principal banking subsidiary, PNC Bank, the company provides banking, lending, investment, and related financial services to individuals, small businesses, corporations, government entities, and institutional clients.

PNC’s consumer offerings include checking and savings accounts, credit cards, mortgages, home equity loans, personal lending, and online and mobile banking. For businesses and institutions, the company provides commercial lending, treasury management, payments, capital markets services, wealth management, and investment management. PNC also operates PNC Private Bank and serves institutional investors through its asset management and retirement-related businesses.

PNC traces its roots to Pittsburgh Trust and Savings Co., founded in 1852, and adopted its current name following the 1983 merger of Pittsburgh National Corporation and Provident National Corporation. The company serves customers across the United States through a regional retail banking network and nationwide business and institutional platforms. In 2021, PNC expanded its presence in key U.S. markets through the acquisition of BBVA USA.

William S. Demchak serves as PNC’s chairman, president, and chief executive officer. The company’s shares trade on the New York Stock Exchange under the symbol PNC.

The PNC Financial Services Group Q3 2021 Earnings Call Transcript

Key Takeaways

• BBVA USA conversion completed in under 11 months, integrating $100 billion in assets, 2.6 million customers and nearly 600 branches into PNC’s platform nationally.
• Q3 revenue rose 11 percent sequentially to $5.2 billion with record fee income and adjusted EPS of $3.75, driven by solid organic growth and full-quarter BBVA results.
• PNC legacy loan balances excluding PPP grew $4.7 billion in Q3 despite PPP runoff and supply-chain headwinds, with spot utilization stabilizing and new pipelines building.
• Legacy PNC deposits increased $5.4 billion sequentially, supported by $75 billion in cash at the Federal Reserve, a 4 bp paid-deposit rate and $930 million of capital returned to shareholders.
• Integration with Acoya Data Access Network APIs will allow customers to securely share financial data with fintechs, enhancing PNC’s digital banking capabilities.

Presentation

[Operator]

Good morning. My name is Jennifer, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the PNC Bank's third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the number one followed by the number four on your telephone keypad. If you'd like to withdraw your question, please press the one and then the number three on your telephone keypad. As a reminder, this call is being recorded. I will now turn the call over to the Director of Investor Relations, Mr. Bryan Gill. Sir, please go ahead.

[Bryan Gill, Director of Investor Relations at The PNC Financial Services Group]

Well, thank you, Jennifer. Good morning, everyone. 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 CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials, as well as our SEC filings and other investor materials. These materials are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of October 15th, 2021, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Thanks, Bryan. Good morning, everybody. I imagine you have seen that earlier this week, we completed our conversion of BBVA USA, and I got to say, I'm really proud of the team and our ability to sign, close, and convert a $100 billion banking institution within a year. The dedication of our employees and our sustained investments in technology allowed us to convert roughly 9,000 employees, 2.6 million customers, in nearly 600 branches across seven states. BBVA USA is now integrated into PNC, and its customers can bank with us from coast to coast. We're bringing our technology talent and the full suite of best-in-class products and services to 29 of the nation's 30 largest markets. With attractive growth opportunities, as you've heard me talk about, for years to come.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Now, while we still have some more work to do, which is to be expected for a bank conversion of this size, we're making solid progress with our staffing levels and the branch operations in BBVA USA legacy markets. In addition, we're encouraged to see the teams build pipelines, and importantly, growing new clients. Now with BBVA legacy employees now on PNC systems, we believe our momentum is going to continue to accelerate. As we've said previously, we're following the same game plan that we've used in previous acquisitions, and we know what to do. We just have to execute on it. With respect to our third quarter results, we had a solid quarter highlighted by strong revenue growth, which included record fee income in our PNC legacy businesses and continued improvements in credit quality.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Similar to last quarter, and pretty much as expected, we had a lot of moving parts in our reported results. Of course, Rob will take you through those in a few minutes. Loan growth continues to be impacted by supply chain issues and the continued runoff of PPP loans. Also, the strategic repositioning of the BBVA portfolios, which is consistent with our acquisition projections. That said, total PNC legacy loans, if we back out the PPP runoff, actually grew almost $5 billion with growth in both commercial and consumer categories. While the environment is still challenging, we're actually pretty encouraged by what we're seeing on the corporate side, with spot utilization rates stabilizing and even rising a little on the back of strong new originations in our secured lending and corporate banking businesses.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

On the consumer side, we're also seeing promising origination activity, particularly in the residential real estate business. Importantly, as you see, our balance sheet remains very strong, and we're well-positioned with substantial capital and liquidity to continue to support our expanding customer base while making strategic investments in our technology and businesses. Another exciting development this quarter was the announcement of our integration with the Akoya Data Access Network. This is through an application programming interface. The integration's going to allow millions of our customers, if they choose to do so, to safely share their financial information with fintechs and data aggregators. It's an important step in our efforts to help our customers protect their data while also giving them the choice to share their data with third-party applications.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Similar to Low Cash Mode, this integration positions us as a leader in technology and innovation and enables us to best serve our customers. I'd like to close just by thanking our employees throughout the newly combined franchise for all their hard work, which enabled this conversion. Our significant collaboration across all divisions is impressive, and it gives me great confidence that we'll capitalize on the enormous opportunities ahead of us. With that, I'm going to turn it over to Rob for a closer look at our results, and then we'll take your questions.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Thanks, Bill, and good morning, everyone. As Bill just mentioned, and notable during the third quarter, we converted the BBVA USA franchise to the PNC platform in less than 11 months following the announcement of the deal. PNC's increased scale from this acquisition underscores the opportunity we have with the BBVA USA franchise. We have a proven track record of acquiring attractive strategic opportunities, identifying and reducing inherent risks, and successfully growing franchises to deliver enhanced shareholder value. As Bill just mentioned, we're well on our way to accomplishing this with BBVA USA. Due to the June 1 closing of the acquisition, our average balance sheet growth for the third quarter reflected the full quarter impact of the acquisition.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

As loans grew $36 billion, securities increased $12 billion, and deposits grew $53 billion. For comparative purposes to the second quarter, which you'll recall included just one month of BBVA USA results, our balance sheet on slide three is presented on a spot basis. Total spot loans declined $4.5 billion or 2% linked-quarter. Excluding the impact of PPP forgiveness, loans grew, and I'll cover the drivers in more detail over the next few slides. Investment securities declined approximately $900 million or 1%, as we slowed purchase activity throughout much of the quarter during the relatively unattractive rate environment. Our cash balances at the Federal Reserve continued to grow and ended the third quarter at $75 billion. On the liability side, deposit balances were $449 billion at September 30, and declined $4 billion, reflecting the repositioning of certain BBVA USA portfolios.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

We ended the quarter with a tangible book value of $94.82 per share and an estimated CET1 ratio of 10.2%, both substantially above the pro forma levels we anticipated at the time of the deal announcement. During the quarter, we returned capital to shareholders with common dividends of $537 million and share repurchases of $393 million. Given our strong capital ratios, we continue to be well-positioned with significant capital flexibility going forward. Slide four shows our loans in more detail. Average loans increased $36 billion linked quarter to $291 billion, reflecting the full quarter impact of the acquisition. Taking a closer look at the linked quarter change in our spot balances, total loans declined $4.5 billion. The PNC legacy portfolio, excluding PPP loans, grew by $4.7 billion or 2%, with growth in both commercial and consumer loans.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

PNC legacy commercial loans grew $3.7 billion, driven by growth within corporate banking and asset-based lending. This growth in balances has been aided by a slight uptick in spot utilization, and while still near historic lows, utilization did reach its highest level since December 2020. Growth in PNC's legacy consumer loans linked quarter was driven by higher residential real estate balances. Within the BBVA USA portfolio, loans declined $4.4 billion, primarily due to intentional runoff relating to the overlapping exposures and non-strategic loans. Looking ahead, we have approximately $5 billion of additional BBVA USA loans that we intend to let roll off over the next few years, which is in line with our acquisition assumptions. Finally, PPP loans declined $4.8 billion due to forgiveness activity, and as of September 30th, $6.8 billion of PPP loans remain on our balance sheet.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Moving to slide five, average deposits of $454 billion increased $53 billion compared to the second quarter, driven by the acquisition. On the right, you can see total period-end deposits were $449 billion at September 30th, a decline of $4 billion or 1% linked quarter. Inside of this, PNC legacy deposits increased $5.4 billion as deposits continue to grow, reflecting the strong liquidity position of our customers. BBVA USA deposits declined approximately $9.4 billion during the third quarter, which was anticipated as we rationalized the rate paid on certain acquired commercial deposit portfolios and exited several non-core deposit related businesses. Overall, our rate paid on interest-bearing deposits is now 4 basis points, a 1 basis point decline linked quarter. Slide six details the change in our period-end securities and Federal Reserve balances.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

As most of you know, we have been disciplined in deploying our excess liquidity with rates at historically low levels. Back at the beginning of the year, as the yield curve steepened, we accelerated our rate of purchasing activity. Towards the end of the second quarter, we deliberately slowed our purchases as yields declined. With the increase in rates at the end of the third quarter, we've resumed our increased levels of purchasing, including $5.4 billion of forward settling securities, which will be reflected in the fourth quarter. Average security balances now represent approximately 24% of interest earning assets, and we still expect to be in the range of approximately 25%-30% by year end. As you can see on slide seven, our third quarter income statement includes the full quarter impact of the acquisition. Reported EPS was $3.30, which included pre-tax integration costs of $243 million.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Excluding integration costs, adjusted EPS was $3.75. Third quarter revenue was up 11% compared with the second quarter, reflecting the acquisition as well as strong organic fee growth. Expenses increased $537 million or 18% linked quarter, including $235 million of integration expenses and two additional months of BBVA USA operating expenses. Legacy PNC expenses increased $76 million or 2.7%, virtually all of which was driven by higher fee business activity. Pre-tax pre-provision earnings, excluding integration costs, were $1.9 billion, an increase of $125 million or 7%. The provision recapture of $203 million was primarily driven by improved credit quality and changes in portfolio composition. Our effective tax rate was 17.8%. For the full year, we expect our effective tax rate to be approximately 17%. As a result, total net income was $1.5 billion in the third quarter. Now let's discuss the key drivers of this performance in more detail.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Turning to slide eight, these charts illustrate our diversified business mix. In total, revenue of $5.2 billion increased $530 million linked quarter. Net interest income of $2.9 billion was up $275 million or 11%, reflecting the full quarter benefit of the earning asset balances acquired from BBVA USA. Inside of that, interest income on loans increased $277 million or 13%, while investment securities income declined $9 million, driven by elevated premium amortization on the acquired BBVA USA portfolio. Net interest margin of 2.27% was down 2 basis points, driven primarily by lower security yields. Importantly, in the fourth quarter, we expect premium amortization to decline meaningfully and the yield on the securities portfolio to increase. Third quarter fee income of $1.9 billion increased $274 million or 17% linked quarter.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

BBVA USA contributed fee income of $184 million, an increase of $122 million linked quarter, driven by two additional months of operating results. Legacy PNC fees grew by $152 million linked quarter, or 10%, driven by higher corporate service fees related to record M&A advisory activity, as well as growth in residential mortgage revenue. Other non-interest income of $449 million decreased $19 million linked quarter, as higher private equity revenue was more than offset by the impact of a $169 million negative Visa derivative adjustment. This adjustment relates to the extension of the expected timing of litigation resolution. Turning to slide 9. Our third quarter expenses were up by $537 million, or 18% linked quarter. The increase was primarily driven by the impact of higher BBVA USA's expenses of $327 million and higher integration expenses of $134 million.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

PNC legacy expenses increased $76 million, or 2.7%, due to higher incentive compensation commensurate with the strong performance in our fee businesses, including a record quarter in M&A advisory fees. Our efficiency ratio adjusted for integration costs was 64%. Obviously, with the acquisition, our expense base is now higher, but nevertheless, we remain disciplined around our expense management. As we've stated previously, we have a goal to reduce PNC standalone expenses by $300 million in 2021 through our continuous improvement program, and we're on track to achieve our full year target. Additionally, we're confident we'll realize the full $900 million in net expense savings off of our forecast of BBVA USA's 2022 expense base, and expect virtually all of the actions that drive the $900 million of savings to be completed by the end of 2021.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

We still expect to incur integration costs of approximately $980 million related to the acquisition. Since the announcement of the acquisition, we've incurred approximately half of these integration costs. As Bill mentioned, we appreciate all the hard work our teammates have done to keep us on track and to achieve these goals. Our credit metrics are presented on slide 10 and reflect strong credit performance. Non-performing loans of $2.5 billion decreased $251 million or 9% compared to June 30th, and continue to represent less than 1% of total loans. Total delinquencies of $1.4 billion at September 30th increased $106 million or 8%. This increase includes approximately $75 million of operational delays in early stage delinquencies, primarily related to BBVA USA acquired loans. Subsequent to quarter end, all these operational delinquencies have been or are in the process of being resolved.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Excluding these, total delinquencies would have increased $31 million or 2%. Net charge-offs for loans and leases were $81 million, a decline of $225 million linked quarter. The second quarter included $248 million of charge-offs related to BBVA USA loans, mostly the result of required purchase accounting and treatment for the acquisition. Our annualized net charge-offs loans in the third quarter was 11 basis points. During the third quarter, our allowance for credit losses declined $374 million, primarily driven by improvement in credit quality, as well as changes in portfolio composition. At quarter end, our reserves were $6 billion, representing 2.07% of loans. In summary, PNC reported a strong third quarter, and notably earlier this week converted the BBVA USA franchise. With this step completed, we expect to add significant value to our shareholders as we continue to realize the potential of the combined company.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

In regard to our view of the overall economy, after somewhat slower growth during the third quarter of 2021, due in part to the Delta variant and supply chain problems, we expect GDP to accelerate to above 6% annualized in the fourth quarter. We also expect the Fed funds rate to remain near zero for the remainder of the year. Looking at the fourth quarter of 2021 compared to the recent third quarter results, we expect average loan balances, excluding PPP, to be up modestly. We expect NII to be up modestly. On a percentage basis, we expect fee income to be down between 3% and 5%, mostly reflecting the elevated third quarter M&A activity. We expect other non-interest income to be between $375 million and $425 million, excluding net securities and Visa activity.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

On a percentage, we expect total non-interest expense to be down between 3% and 5%, excluding integration expense, which we approximate to be $450 million during the fourth quarter. We expect fourth quarter net charge-offs to be between $100 and $150 million. With that, Bill and I are ready to take your questions.

[Operator]

Thank you. At this time if you like to ask question, please press the number one followed by the number four on your telephone keypad. Please hold while we compile the Q&A roster. Your first question comes from the line of Dave George with Baird. Please go ahead with your question.

[Dave George, Analyst at Baird]

Hey, guys. Good morning. I had a question on.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Hey. Morning, Dave.

[Dave George, Analyst at Baird]

Good morning, Rob. On loans. You said on the BBVA, there's an additional $5 billion of declines to come. Can you kind of give us a sense with respect to the timing and how you see that portfolio running off? I've got a follow-up.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Oh, sure. Yeah, again, good morning, Dave. Of the $5 billion that we've identified going forward that we intend to run off, $2 billion of that we expect to run off in the fourth quarter, and that's part of our guidance. The remainder, likely over the next two years.

[Dave George, Analyst at Baird]

Great. Thanks for that.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Sure.

[Dave George, Analyst at Baird]

In terms of kind of the legacy PNC C&I businesses, obviously it was encouraging to see a little bit of kind of organic growth in the third quarter. Can you give us a sense, and this may be difficult, but clearly supply chain is weighing on working capital needs, and I'm curious if you can contrast the growth in commitments relative to the growth in outstandings in commercial, and just kind of curious how the commercial business is doing with respect to adding new names and new commitments. And that we're obviously not seeing the benefit of that, at least today, in terms of outstandings because of that inventory issue?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Hi, it's Bill. For the last couple of quarters, our new money commitments have been, I think, maybe at record levels, Rob.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Increasing each quarter, new business, new clients, in some cases just upsizing what we already had. In the new quarter, we had a little bit in utilization, but most of this was kind of new client growth.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah, that's right.

[Dave George, Analyst at Baird]

Great.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

As you know, Dave, like we had mentioned, utilization ticked up a little bit. Still at historic lows, but a little bit, that was part of it too.

[Dave George, Analyst at Baird]

Yeah. Sounds good, guys. Thanks.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Sure.

[Operator]

Thank you. Our next question is from the line of John Pancari from Evercore ISI. Please go ahead.

[John Pancari, Analyst at Evercore ISI]

Morning.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Morning, John.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

John.

[John Pancari, Analyst at Evercore ISI]

On the loan growth topic, that tick up in utilization and then also the new clients that you mentioned, can you give us a little more detail on what areas and what business areas, which industries that you're starting to see that momentum start to build?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah, they're kind of related. I mean, the growth in our secured lending areas sort of stood out. They traditionally have higher utilization. In some ways it was an increase in the overall average because we grew the book with the highest individual average rate. Even in the straight middle market corporate book, it finally stabilized, and I guess went up a couple basis points there.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Just a little bit. Yeah.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah. Basically, business credit or asset-based lending group and corporate banking.

[John Pancari, Analyst at Evercore ISI]

Got it. Okay. On the expense side, just wanted to see if you could talk a little bit about wage inflation, if you're starting to see any signs of that in your franchise. If so, is there any risk to how we're thinking about the merger costs or the $900 million in net cost saves? Thanks.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

With respect to wage inflation, you might've seen an announcement that we increased our base rate to at least $18, and beyond that in some cases in certain markets.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

About $18 an hour.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah, sorry. That is real. That was kind of already assumed in our financial assumptions. It doesn't have anything to do with our assumed cost saves. There's real pressure there, and the only way through time to kind of offset that pressure is through increased automation and just, frankly, controlling overall headcount.

[John Pancari, Analyst at Evercore ISI]

Okay. Fair to say, though, longer-term impact on how you view the long-term efficiency ratio for the bank?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Too early to tell. Average wages per employee are going to go up. At issue is how we scale our franchise through automation so we become larger without more employees. That's played out for a period of time here, John. If you just go through our financial statements, even going back for five years. We just need to continue that trend to be able to continue our pursuit on positive operating leverage.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

To offset what is real in terms of wage pressure.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yep.

[John Pancari, Analyst at Evercore ISI]

Yep, got it. All right. Thank you.

[Operator]

Thank you. Our next question is from the line of Scott Siefers with Piper Sandler. Please go ahead.

[Scott Siefers, Analyst at Piper Sandler]

Morning, guys. Thanks for taking the question. Rob, was hoping to drill into the expense dynamics a little more. Your fees, excellent this quarter. Those will come down but still appear to remain very strong. As it relates to the kind of the related cost outlook, how much of your expense guide contemplates sort of ongoing costs related to that strong fee momentum? Can you maybe sort of size up how the $900 million in BBVA-related cost savings fit into the fourth quarter guide? In other words, how much starts to come next quarter, or it comes next quarter, and then how much is into 2022 still?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Sure. That's a lot there, Scott. The easy answer to that is that's all in the guidance for the fourth quarter. To your point, fee businesses were good in the third quarter. They've been good all year. Across the board, asset management, consumer services, corporate services, particularly in the third quarter, as well as residential mortgage. With the exception of the elevated levels of M&A activity in corporate services, we see all of that continuing into the fourth quarter, and that's part of the guide. There'll be expenses that are obviously associated with that. In terms of the $900 million in savings, we are achieving savings presently. We got some in the third quarter. We'll get some more in the fourth quarter. That's part of the guide. The bulk of the savings will be in 2022.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Reaffirming the $900 million in savings, a portion of which we'll recognize in 2021, and then of course going forward into 2022, all in our guidance.

[Scott Siefers, Analyst at Piper Sandler]

Perfect. Thank you. You touched on this in your prepared remarks, but that elevated premium amortization at BBVA that weighed on the consolidated company's securities portfolio yield, can you just expand upon that a little, please?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Sure.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

It was painful. In its simplest form, we marked that securities book when we closed the deal-

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

June 1st

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

At really low rates that continued through, in fact rallied through the quarter. The prepay rates on their CMOs increased. You think about it, we mark a book to whatever the yield was. It's at a premium. All of that prepays because of the low rates. Hopefully, we expect that to abate as rates have now kind of gone back up. We marked them as premium securities.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

It was a function of the timing of the acquisition-

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

setting up those securities as premium securities.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah. In its simplest form, what we did, if you think about it, is it knocked down goodwill in the way when we marked the book because we had a higher valued asset. It in effect took in income upfront.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

That's right.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

we paid for it a little bit this quarter.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

That's right.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Scott Siefers, Analyst at Piper Sandler]

Okay. All right.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Rob, the securities yield, that book yielded 50 basis points or something.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

About half, yeah.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

About half.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

We expect going forward the total book to increase.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

That's right. Which is what I said in my comments. That's right.

[Scott Siefers, Analyst at Piper Sandler]

Yep. I'm glad to hear that.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

It is behind us, and it is acquisition related.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah. It was painful.

[Scott Siefers, Analyst at Piper Sandler]

Exactly. Good. All right. Well, perfect. I appreciate the color.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Operator]

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

[Betsy Graseck, Analyst at Morgan Stanley]

Hey, good morning.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Morning, Betsy.

[Betsy Graseck, Analyst at Morgan Stanley]

Hey. I know we've had a lot of expense discussions already. I'm just looking at what you've done so far in the quarter. When I look at your detail around the run rate of expenses at BBVA in 2Q, the one month there that you had, and the three full months that you had in 3Q, it already looks like you've brought down expenses a bit. I'm just trying to understand what you've done so far and what's left from here because you've already executed a bit, it seems to me. Am I missing something there?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

No. You're right. Hey, Betsy, this is Rob. You're right. We've started as we said we would. We have begun to realize expense savings pretty much across all the categories. We're just getting started. What you see in that rate, we still have work to go.

[Betsy Graseck, Analyst at Morgan Stanley]

Okay. When I'm thinking about the pace of that expense save from here, part of it's a function of the conversion, the lift and shift, obviously.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yep. Correct.

[Betsy Graseck, Analyst at Morgan Stanley]

Can you talk us through what comes after the lift and shift in terms of expense save trajectory?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

I don't even know what I'm talking about.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

What are you talking about? The activities, and then I can-

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

The line items?

[Betsy Graseck, Analyst at Morgan Stanley]

No, like branch closures.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah. Right.

[Betsy Graseck, Analyst at Morgan Stanley]

Really the question is, does the lift and shift?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Some of it's branch closures. Some of it will be in the form of people who have stayed with us through conversion on stay bonuses. There'll be shut down of systems and vendor contracts and all sorts of different things that'll roll through dependent on time. Some of which we leave around for a bit as sort of backup for, notwithstanding the fact we've converted, we'll leave some stuff up and running for a little bit of time just for the in case.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah, I think that's right. Probably, at least in terms of the pickup in the fourth quarter activity, at the mix, we will pick up more vendor savings. We've already started that, and we'll start to pick those up but at an accelerated rate.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Betsy Graseck, Analyst at Morgan Stanley]

Yeah, I guess the question really is lift and shift as a percentage of total cost saves is like round numbers.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

That's the wrong way to think about it. The fact that we get that done at one point in time allows us to then aggressively move costs. Because legacy systems shut down, legacy vendors shut down, related people who were supporting old applications, all of that stuff now starts rolling through the system.

[Betsy Graseck, Analyst at Morgan Stanley]

Yeah. My point is it's not the one and done. It's a portion of the total expense save that you'll be generating.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah. Look, at the end of the day, the guidance is the guidance, right? We're going to get some more in the fourth quarter, and then we're going to get it all next year.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah, I just see it. I see it.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

If we're on track, we will get it all. We know the line items where it will come from.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

I think the way to think about it, Betsy, is it's sequential. The conversion and the lift and shift clears the deck, so to speak.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

to get started sooner rather than later on realizing those savings.

[Betsy Graseck, Analyst at Morgan Stanley]

Got it. All right. Thank you.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Sure.

[Operator]

Thank you. Our next question is from the line of Gerard Cassidy with RBC. Please go ahead.

[Gerard Cassidy, Analyst at RBC]

Good morning, Bill. Good morning, Rob.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Hey, Gerard.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Hey, Gerard.

[Gerard Cassidy, Analyst at RBC]

Can you guys share with us, you've mentioned a few times within the Corporate Services numbers that the advisory business, I think you said in the press release it was at record levels, but Rob, in your guidance, you expect it to come down. Other than the-

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Right

[Gerard Cassidy, Analyst at RBC]

obvious pipeline that you guys see in your book, can you share with us what else your guys on the front lines are seeing about M&A? Is it just that there's just not as many companies that are left to do M&A going into 2022?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Look, in its simplest form, you set a record, you assume you won't keep setting records. There's nothing out there that suggests necessarily, that it's going to weaken from here. By the way, inside of that, we obviously have Harris Williams, but we also had breakout quarters for Solebury and Sixpoint and related advisors.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

IP.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah. If the market continues, then we'll continue to have great fee income out of it. It's hard to keep saying we're going to budget a record upon a record. I think it's as simple as that.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

That's right.

[Gerard Cassidy, Analyst at RBC]

Got it. What does it represent now of corporate services, or what did it represent in the third quarter?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Well, I know that. Let's see, I'll do the quick math in my head. Done, 25%?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah.

[Gerard Cassidy, Analyst at RBC]

Got it. Okay. A question on the loan-to-deposit ratio. You and your peers, of course, have incredible amounts of liquidity, and that ratio has come down. It looks like the Fed now is going to enter into a tapering phase, and clearly they'll still be adding to the deposits of the banking system until tapering is over. How are you guys looking at, and I know there's a lot of moving parts with loan growth and maybe some deposit shrinkage, but when you look out over the end of 2022 and into 2023, BBVA is fully integrated. What do you think is an optimal loan-to-deposit ratio for you folks, and when do you think you could get there?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

There's too many variables.

[Gerard Cassidy, Analyst at RBC]

Yeah. Okay.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

If you go back in history, right, people would operate, I don't know where we were 80%, 85%.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah, 85%-90%.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

That was kind of a liquidity safety function. If you were short liquidity at that point, you'd raise wholesale liquidity to kind of keep your ratio at that point. Today, we're so flush with reserves into the system, wholesale funding is next to zero. Until the Fed, forget about tapering, actually shrinks its balance sheet, that's not going to change. Loan growth, even accelerated and exaggerated loan growth, will absorb some of that. I think you're going to see loan-to-deposit ratios low for a long period of time, and therefore, I think you're going to see security balances as a percentage of a balance sheet, and we've already talked about this, increase across the industry. I think it's going to take years to play out.

[Gerard Cassidy, Analyst at RBC]

Very good. I appreciate the color. Thank you.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Operator]

Thank you. Our next question is from the line of Mike Mayo from Wells Fargo Securities. Please go ahead with your question.

[Mike Mayo, Analyst at Wells Fargo Securities]

Hi.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Hey, Mike.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Hi, Mike.

[Mike Mayo, Analyst at Wells Fargo Securities]

No good deed goes unpunished. Since you, from announcement to conversion, under 11 months, it's probably a record, why aren't you increasing your $900 million cost savings? More generally, having completed the lift and shift conversion over the weekend, what parts of your technology do you think are further validated, whether it's your use of the cloud or data lakes or something digital that you're doing that you think others haven't advanced as far as you have?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Well, look, with the first question, at the end of the day, we're always in the business of figuring out how to become more efficient. Think of the $900 million as line items we know we can get. We actually know where they're coming from and when they're going to show up. You're right, at the margin, we'll find some other stuff. By the way, we'll probably find some stuff we need to invest in, too. We put that into our guidance. We say, "Well, look, we'll get the $900 million. We'll talk to you about 2022 when we get closer," but we haven't lost focus on the primary objective here.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Well, the $900 million, you know that, Mike, the $900 million was estimated off the expectation that we'd convert, and when we did. We didn't convert sooner than we thought.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

We did it on time.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

That was a number that, how to say this, visual too. We can see it. We know the line items. It's very precise. The technology, look, it worked. We had, at the margin, some confusion with retail clients on password resets and some other things. The basic technology, moving it over, turning it on, it all worked. Which is just phenomenal effort by our team and validates the investment we've made over the years. I don't know what people have or don't have in terms of their ability to do that. The biggest element for us, Mike, and I think we've talked to you about this, was in effect, this data lake idea where since our applications don't hold their own data, they call from a central lake. They're linked through API and they're cloud native. It just makes it very easy.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

You move data and you onboard a new client. It's not much different than as if we just got a couple million new clients overnight. I make it sound very easy, and all my technologists are ripping their hair off right now. That's what we did. It worked. The investment in that was everything from the data lake to cloud native to API and everything. Frankly, to having businesses and technology linked. Technology at PNC is not in the back office somewhere doing its job. They're actually side by side in agile teams working with their business partners to develop product, and importantly, to execute the conversion, which we did. That cultural element is probably as important or more important than all the rest.

[Mike Mayo, Analyst at Wells Fargo Securities]

Just in the final look at this, how many apps did you eventually keep from them? How much in gigabytes did it add? Just one more time, what you added?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Well, I think we ended up keeping two or something.

[Mike Mayo, Analyst at Wells Fargo Securities]

Two was the last number I heard, yeah.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah. One was the business transfer, the personal foreign currency transfer business. I don't know what the other one was. That's kind of it.

[Mike Mayo, Analyst at Wells Fargo Securities]

I just want to make sure I have the numbers right. Was that out of 600, and you have 300 or something like that? You bought this company that's much smaller.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

We went through that before, and I can't remember them off the top of my head, but they had twice the number that we have.

[Bryan Gill, Director of Investor Relations at The PNC Financial Services Group]

It was 300-600. They had more than 600.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

They had 600. We run the whole bank on 300.

[Bryan Gill, Director of Investor Relations at The PNC Financial Services Group]

A little more than 300.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah. A little more, yeah.

[Mike Mayo, Analyst at Wells Fargo Securities]

Why was that? That's the number that stands out. They're so much smaller, yet they had twice as many apps. Just how do you get to that state?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

I don't know. Yeah. I think once you start using API-based programs, it's almost a click and drag. You don't have to recreate functionality across multiple applications. You can simply bring in whatever functionality you need from a library of API. Let's say you had an application that just needs a checking account balance. Rather than you write a full application that goes and finds a checking account balance off your core ledger, we just have an API you drag in and produce it. I think that's a big part of it. It's also credit to the team. Way back when we did National City, we moved everything onto single applications. A lot of times, and BBVA might have done this, you'll do an acquisition, you just keep too many applications alive because you don't want to choose between one or between the two of them.

[Mike Mayo, Analyst at Wells Fargo Securities]

Got it. All right. Thank you.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Operator]

Thank you. Our next question is from the line of John McDonald with Autonomous Research. Please go ahead with your question.

[John McDonald, Analyst at Autonomous Research]

Hi. Good morning, guys.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Hey, John.

[John McDonald, Analyst at Autonomous Research]

PPP dynamics are confusing to all of us, I just wanted to ask a little bit about that. Rob, on the outlook, I think it's helpful that you give the core loan growth and it excludes PPP, but maybe you could give us a sense of what you expect for PPP payoffs in the fourth quarter and then beyond. Also on the NII, is PPP included in that? What kind of PPP contribution have you had to NII, like this quarter?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Sure.

[John McDonald, Analyst at Autonomous Research]

What happens to that going forward?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah. In simple terms, John, you are right, it is confusing, but simply put, we expect PPP to be down on average about $4 billion in the fourth quarter. In the third quarter, net interest income contribution from PPP was about $100 million. We expect that to go down approximately $25 million-$30 million, and that is in our guidance, our NII guidance.

[John McDonald, Analyst at Autonomous Research]

Yep. Okay. Gotcha. Great. Another cleanup question here on the securities redeployment of cash into securities, 25%-30% is the target for this year. Over time, and this gets into the discussion that you had with Gerard about loan to deposits, but could that go higher over time if loan growth doesn't surface as much as we think?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

I think it could. I think that depends on the opportunity set, where the yield curve is and how we think about long-term risk. Part of the issue today, John, is you have this long tail risk. Maybe it's not such a long tail, but that you end up with a spike in long rates because inflation becomes real, which causes you at the margin to be slower than you otherwise might be in deploying that cash. I think as that risk normalizes, if we don't see loan growth, you'll see balances increase.

[John McDonald, Analyst at Autonomous Research]

Got it. Okay. Thanks, guys.

[John McDonald, Analyst at Autonomous Research]

Sure.

[Operator]

Thank you. Our next question is from the line of Bill Carcache with Wolfe Research. Please go ahead with your question.

[Bill Carcache, Analyst at Wolfe Research]

Thank you. Good morning, Bill and Rob.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Good morning.

[Bill Carcache, Analyst at Wolfe Research]

Following up on Gerard's question, as we look ahead to Fed tapering and eventually rate hikes, how are you thinking about deposit betas relative to when we exited the last reserve cycle?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

I think they're going to be a lot lower simply because there's so much cash sloshing around. Remember, even when the Fed tapers, they're not necessarily shrinking. With the cash in the system, the competition for deposits just won't be as great as it once was. I think at the margin, they've got to be lower. Another way of answering that, with all the deposits we have, we're not thinking a lot about betas right now.

[Bill Carcache, Analyst at Wolfe Research]

Right. Yeah. No, that makes sense.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Bill Carcache, Analyst at Wolfe Research]

Understood. That's helpful. I guess going back to the momentum you're seeing in new money commitments, what's your sense from your discussions with your customers of the extent to which utilization rates are going to remain relatively depressed as long as the supply chain problems that we're seeing remain unresolved versus the potential for continued improvement even if the supply chain problems were to extend well into next year, say? Just trying to get a feel for how much of an impact that's having.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

It varies across industries. I shouldn't say without question, but the vast majority of our clients talk about the need and desire to build inventory and do more CapEx, which is why some of the lines have been increasing. Their ability to execute on that is somewhat dependent on supply chain, and it depends what industry you're in. If you're dependent on chips for your manufacturer, it's a struggle. Other businesses are not and can build immediately, and maybe we're already seeing the benefit of that.

[Bill Carcache, Analyst at Wolfe Research]

Got it. If I could switch to BBVA and the revenue synergy opportunities. When you think about those, how does your confidence level around the timing and magnitude of realizing those differ relative to what you saw in RBC? It seems like you guys have the playbook, but just trying to get a sense for differences that you may see in execution this time around.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Hey, Bill. It's Rob. In terms of contrasting with RBC, just set that aside. In terms of the BBVA, we're very confident in terms of the numbers, as Bill mentioned, that we've laid out and the plans to get there. It's probably on the increment better than RBC just because it's bigger. We know what we do. It's very familiar to us. Of course, RBC was successful, but I mean, this is more of magnitude-

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Mike would say, Mike Lyons who runs the C&IB business would say it's as much as perhaps a year faster. He gets there largely because the teams are in place much faster than we had them in place with RBC. Now we'll see how that plays out, but we're hitting the ground faster in terms of teams who are out calling on clients.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Then we also have a book of business with BBVA that is better than what we had with RBC, so we have the ability to upsell that book of business on the fee side. You'll remember us talking about just their percentage of fees to total revenue being very low. We have an opportunity for fee momentum early on. We have teams in place, and we ought to be able to grow clients a little bit faster than what we saw in RBC just because we're on the ground already.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah, that's the revenue aspect of it.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

The revenue aspect of it is significantly higher than RBC. The expense side I thought was the question.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

The magnitude that I mentioned is the answer.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Bill Carcache, Analyst at Wolfe Research]

Understood. That's really helpful. If I could squeeze in one last quick one. Bill, you've talked about having teams inside of PNC studying crypto, and I'd love to hear your thoughts on a couple of areas. First, is there a revenue opportunity for PNC as you've taken a closer look at it? Then second, from a risk perspective, how concerned are you about the risk of disruption from decentralized finance?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

What we talked about or what we are contemplating offering, we literally have built today to our clients, and look, our clients are interested in it, is an ability for them to trade crypto in a safe fashion through mobile app at PNC. I don't have to opine on whether I think that's a good investment or not a bad investment. We know with certainty that we have 10%-15% of our clients who are moving money into and out of crypto exchanges, so they're interested in it, and our surveys confirm that. The financial disruption of crypto broadly, and probably inside of that stablecoin, is a real threat. It depends on how that plays out through time. There's the risk I think that people are aware of with certain of the stablecoins having, let's call it suspicious collateral behind them.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

There is also the risk through time that.

[Bill Carcache, Analyst at Wolfe Research]

Yeah

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

substantial portion of savings, either domestic savings or even emerging market savings, get absorbed into a stablecoin and out of the traditional money transmission system. That would affect the economy and the ability to control the money supply long term. I know that's what the various regulatory bodies are looking at to figure out how to get their arms around. That's independent of whether we let our clients trade Bitcoin.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Right.

[Bill Carcache, Analyst at Wolfe Research]

Yeah. There is a revenue opportunity from that portion of it, even by simply just providing the service to them. Is that a fair conclusion?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Sure. At the margin.

[Bill Carcache, Analyst at Wolfe Research]

Right.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

At the margin.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Don't see it as a big driver.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Bill Carcache, Analyst at Wolfe Research]

Right. Got it. That's super helpful. Thank you again for taking my questions.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Sure.

[Operator]

Thank you. Our next question is from the line of Ken Usdin with Jefferies. Please go ahead.

[Ken Usdin, Analyst at Jefferies]

Hey, thanks. Good morning, guys. Can I come back, Robert, on the premium amortization question? I'm just wondering if you can help us understand, in the 1.454 securities yield, what either the basis point impact was, or if you even have the total dollars of premium am for the company and what you expect that to look like going forward?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Well, that's all in our guidance in terms of the dollar amounts. I'd say if you took a look at it in terms of the yields, you can see the decline in yields. If it wasn't for the elevated premium amortization expense, we would be close to down a little bit from those second quarter levels.

[Ken Usdin, Analyst at Jefferies]

Okay. That's fair. That was my second question is, what are you seeing just on core front book, back book, and relative to these forward settlings and just what you're seeing in the market today and where you can get your hands on?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Well, it's looking better, is what we've said.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

I don't know the yields we're buying at today, but we expect the yield on the total book to increase pretty substantially next quarter, largely because of a decrease in the amortization cost.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

That's right.

[Ken Usdin, Analyst at Jefferies]

Yep. Lastly, just purchase accounting accretion. You said it was $30 in the second quarter. Do you have anything in the third? How do you expect that to look like too? Thanks.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

De minimis in the third and going into the fourth quarter, which is a good thing.

[Ken Usdin, Analyst at Jefferies]

Yep. Okay, great. Thanks.

[Operator]

Thank you. Our next question is from the line of Terry McEvoy with Stephens. Please go ahead.

[Terry McEvoy, Analyst at Stephens]

Thanks. Good morning. Bill, you mentioned at an industry event last month that California was an underperforming franchise, I believe at Legacy BBVA U.S. What are your thoughts on turning that around? Is it build? Is it buy? Is it just internally work to improve the franchise?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

It's building it. It was underperforming largely because they didn't have the products and services to cover the corporate opportunity that's in California. By the way, that opportunity's massive. The big effort for us, and we're fairly far along in the process, is to get feet on the ground on the corporate side who can cover clients, in some cases, bring relationships with them. We don't need to buy anything. At the margin, we might rearrange some of the branches there, but the real opportunity set in California is to get corporate bankers and TM coverage and capital markets players on the ground in California.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Which in many instances we've done already.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Terry McEvoy, Analyst at Stephens]

Thanks. Just as a follow-up question, could you maybe talk about the rollout of Low Cash Mode? Is that allowing you to play more offense, or is that more defense? Was it $125-$150, the decline in overdraft fees? Is that still the right way to think about the impact of that product on fees? Thank you.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

The rollout has been somewhat seamless. Of course, with the conversion of BBVA, we put all of their customers or enabled that Low Cash Mode on all of the products who converted over. I forget the current stats, but it's millions and millions and millions of alerts that have gone out. It's millions of people who have been able to transfer money before they get hit with a charge. It's people being able to choose the order at which they want to pay a bill and return items with no return fee. Look, in some ways, we kind of led the industry into this discussion, and you've seen how people have reacted. Part of our lead was in what we charge customers, but a big part of our lead was on technology and simply empowering customers.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Most everyone who has followed is kind of doing it through brute force and just cutting fees as opposed to offering different solutions, which is the most important thing about Low Cash Mode, I think. No, we're happy with what it's doing. It's knocked our complaint volume into the care center down by, I don't know what the number is on overdraft, over 50% or some massive number.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Yeah. On overdraft, even higher than that.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah. It's done exactly what we thought it would do.

[Terry McEvoy, Analyst at Stephens]

Great. Thank you.

[Operator]

Thank you. Our next question is from the line of Matt O'Connor with Deutsche Bank. Please go ahead.

[Matt O'Connor, Analyst at Deutsche Bank]

Good morning. It seems like the loan portfolio at BBVA USA will be mostly de-risked or run off by the end of fourth Q with just $2 billion left the next few years. Is there an opportunity to kind of fill that bucket kind of relatively quickly? I guess what I'm getting at is maybe you can take down bigger holds because you're a bigger company versus legacy PNC or just some low-hanging fruit to fill some of that loan runoff between this quarter and next.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

It's embedded in our guidance. You've got to appreciate, Matt, if loans are up or down by $1 billion in a quarter, we're not going to putty over the organic result by doing something we otherwise wouldn't do. It'll follow its ordinary flow. We'll grow clients. We are a larger company, so we can take larger holds if we want to. Utilization will hopefully go up. As we always do, we're sensitive to risk, and they have some books of business that are both, in some cases, riskier than we'd like to be in. In other cases, they just have no cross-sell opportunity. The return on the equity you deploy to hold those loans is just really low.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

I would add, Matt, obviously, central premise to this acquisition, these are growth markets. We would expect through time to generate above-average growth. Not necessarily in the next 90 days.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

That's obviously a big opportunity for us.

[Matt O'Connor, Analyst at Deutsche Bank]

Okay. Yeah, I wasn't so much looking for just the fourth quarter. I guess I was just thinking like the next few quarters. Do you get outsized loan growth given all the new pieces?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

If we get a tailwind at all, you're definitely going to see that. I think, most importantly, if you go back and look at our loan growth through the period of RBC, so kind of two plus years after we did RBC, we started to really accelerate in corporate loan growth. Everybody said, "How are you doing that?" It's all new customers and new markets, and we fully expect that we're going to be able to do that in all of these new markets that we just developed. Admittedly, with some noise in the front because we're going to run off a little bit out of BBVA and outright loan growth is, as we've seen, fairly tepid at the moment.

[Matt O'Connor, Analyst at Deutsche Bank]

Okay. Thank you.

[Operator]

Thank you. Our next question is a follow-up from Gerard Cassidy from RBC. Please go ahead.

[Gerard Cassidy, Analyst at RBC]

Hi. Thank you for taking the follow-up question. Bill, you guys mentioned about raising the entry-level wage or minimum wage for your folks. Some of your peers have done the same. Excuse me. Bank of America raised their wages 20% last week, and Bank of America's got that $25 in 2025 program. The question is this: can you share with us what it means for the people right above the entry level? Excuse me. The entry-level worker, meaning like a branch manager. How far up does that ripple go in terms of the inflation on wages because of the minimum wage going up?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

It goes straight up through the pay grades. Most of the cost is actually in the compression as opposed to the initial jump for the people who are at the lowest level. Part of the work set to go through it is to figure out, in fact, how you move people up who are today at $18. Tomorrow, if the $15 person went to $18, the $18 person goes to $20.50 or so. I'm making up numbers here.

[Gerard Cassidy, Analyst at RBC]

Right.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

That's the majority of the cost. By the way, it's the majority of the work set to get right.

[Gerard Cassidy, Analyst at RBC]

Good. Okay. No, I appreciate it. Thank you.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah.

[Operator]

Thank you. Our next question is a follow-up from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

[Mike Mayo, Analyst at Wells Fargo Securities]

Hi. Could you put a ribbon around your expectations for loan growth? That seems to be the big question going into the quarter. In the past, you mentioned over half your commercial clients are private companies which don't have the same access to capital markets, and therefore they might come back first. Just one final thought on loan growth. When do you think we get the big burst of loan growth? Is it a quarter away? Is it three quarters away? Is it a year away? What do you think and why?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Mike, I think you asked me this nine months ago. I said I can wish and hope for it, but I'm not sure I can predict it any better than the next guy. What we're seeing for the first time is not just the new money going out the door, which we've been growing clients and growing committed money, but we're starting to see that move in utilization. If that is foreshadowing what happens into the fourth quarter into next year, then we're going to have really accelerated loan growth. If we bounce around where we are, then it's going to be somewhat muted. By the way, that's kind of what you see in our guidance.

[Mike Mayo, Analyst at Wells Fargo Securities]

And I know you said it was-

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

You're asking me to go out and say, "Hey, supply chain's going to be fixed and loan growth's going to rip.

[Mike Mayo, Analyst at Wells Fargo Securities]

By a given date.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

I hope it does. I'm not the expert to answer that.

[Mike Mayo, Analyst at Wells Fargo Securities]

Okay. Well, maybe just specific numbers on the utilization a little bit more. You said it's at the highest level since early last year or so, but what's a normal level of utilization? What was the low and where is it now?

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

It's still, what, 15 points?

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Well, if you go, we're at 49-ish and go to 54, 55 sort of normalization.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

Yeah. We're at least 10 points off, and we're probably 15, 20 points off the peak in March of last year.

[Mike Mayo, Analyst at Wells Fargo Securities]

Great. All right. Thank you.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

There's a lot of room here. Yeah.

[Operator]

All right. Thank you. There are no further questions.

[Bill Demchak, Chairman, President, and CEO at The PNC Financial Services Group]

All right. Well, thank you, everybody. I look forward to talking to you in the fourth quarter. Thanks.

[Rob Reilly, EVP and CFO at The PNC Financial Services Group]

Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.

Participants

Executives

• Bryan Gill, Director of Investor Relations
• Bill Demchak, Chairman, President, and CEO
• Rob Reilly, EVP and CFO

Analysts

• Dave George, Analyst at Baird
• John Pancari, Analyst at Evercore ISI
• Scott Siefers, Analyst at Piper Sandler
• Betsy Graseck, Analyst at Morgan Stanley
• Gerard Cassidy, Analyst at RBC
• Mike Mayo, Analyst at Wells Fargo Securities
• John McDonald, Analyst at Autonomous Research
• Bill Carcache, Analyst at Wolfe Research
• Ken Usdin, Analyst at Jefferies
• Terry McEvoy, Analyst at Stephens
• Matt O'Connor, Analyst at Deutsche Bank