Earnings Call Transcript
PNC FINANCIAL SERVICES GROUP, INC. (PNC)
Earnings Call Transcript - PNC Q3 2021
Operator, Operator
Good morning. My name is Jennifer, and I will 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. 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
Thank you, Jennifer. And 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 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 would like to turn the call over to Bill.
Bill Demchak, Chairman, President, and CEO
Thanks, Brian. Good morning, everybody. I imagine you have seen that earlier this week we completed our conversion of BBVA USA, and I have 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, and 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 I have been discussing for years to come. 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 branch operations, and in BBVA USA's legacy markets. Moreover, we are encouraged to see the teams build pipelines and, importantly, grow new clients. The BBVA legacy employees are now on PNC systems, and we believe our momentum is going to continue to accelerate. As we previously mentioned, we are following the same game plan that we've used in previous acquisitions, and we know what to do; we just have to execute 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. Similar to last quarter and as expected, we had a lot of moving parts on our reported results. 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, alongside the strategic repositioning of the BBVA portfolio, 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 encouraged by what we are 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. Additionally, on the consumer side, we are also seeing promising origination activity, particularly in the residential real estate business. Importantly, as you can see, our balance sheet remains very strong and we are well-positioned with substantial capital and liquidity to continue to support our expanded customer base while making strategic investments in our technology and businesses. Another exciting development this quarter was the announcement of our integration with a clear data access network through an application programming interface. The integration will 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. We're also giving them the choice to share their data with third-party applications. Similar to low cash mode, this integration positions us as a leader in technology and innovation, enabling us to best serve our customers. I would like to close just by thanking our employees throughout the newly-combined franchise for all their hard work, which enabled this conversion. A significant collaboration across all divisions is impressive and it gives me great confidence that we'll capitalize on the enormous opportunities ahead of us. And 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, Executive Vice President and CFO
Thanks, Bill, and good morning, everyone. As Bill just mentioned, 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. As loans grew $36 billion, securities increased $12 billion, and deposits grew $53 billion. For comparative purposes for the second quarter, which you'll recall included just one month of BBVA USA results, our balance sheet on Slide 3 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. I will 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 on September 30, and declined $4 billion reflecting the repositioning of certain BBVA USA portfolios. We ended the quarter with a tangible book value of $94.82 per share, and an estimated CET1 ratio of 10.2%. Both are 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 4 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. PNC legacy commercial loans grew $3.7 billion, driven by growth within corporate banking and asset-based lending. The stroke in balances has been aided by a slight uptake in spot utilization. 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 of the 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. As of September 30, $6.8 billion of PPP loans remained on our balance sheet. Moving to Slide 5, 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 on September 30, a decline of $4 billion, or 1% linked-quarter. Inside of this, PNC legacy deposits increased $5.4 billion, as deposits continued 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 or a 1 basis point decline linked-quarter. Slide 6 details the change in our period and securities and Federal Reserve balances. As most of you know, we have been disciplined in deploying our excess liquidity with rates at historically low levels. Back to the beginning of the year as the yield curve steepened, we accelerated our rate of purchasing activity. However, 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 to 30% by year-end. As you can see on Slide 7, our third quarter Income Statement includes the full quarter impact of the acquisition. The reported EPS was $3.30, which included pretax integration costs of $243 million. 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. The provision recapture of $203 million was primarily driven by improved credit quality and changes in portfolio composition, and 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. Turning to slide 8, these charts illustrate our diversified business mix. In total, the revenue of $5.2 billion increased by $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. A 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. The third quarter fee income of $1.9 billion increased $274 million or 17% linked quarter. BBVA USA contributed a 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 recording 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 expenses of $327 million and higher integration expenses of $134 million. PNC legacy expenses increased $76 million or 2.7% due to higher incentive compensation commensurate with a strong performance in our fee businesses, including a record quarter in M&A advisory fees. Our efficiency ratio adjusted for integration costs was 64%. With the acquisition, our expense base is now higher but nevertheless, we remain disciplined around our expense management. As we have stated previously, we have a goal to reduce PNC standalone expenses by $300 million in 2021 through our Continuous Improvement program, and we are on track to achieve our full-year target. Additionally, we are confident we'll realize the full $900 million in net expense savings off of our forecasts 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. We still expect to incur integration costs of approximately $980 million related to the acquisition. Since the announcement of the acquisition, we have 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 30, and continue to represent less than 1% of total loans. Total delinquencies of $1.4 billion on September 30 increased by $106 million or 8%. However, 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 of these operational delinquencies have been or are in the process of being resolved. Excluding these, total delinquencies would have increased by $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 treatment for the acquisition. Our annualized net charge-offs in the third quarter were 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. Regarding 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 and $425 million, excluding net securities and fees activity. In percentage terms, we expect total non-interest expense to decline 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, Operator
Thank you. Your first question comes from the line of Dave George with Baird. Please go ahead with your question.
Dave George, Analyst
Good morning, everyone. I have a question about the loans.
Rob Reilly, Executive Vice President and CFO
Good morning, Dave.
Dave George, Analyst
Good morning, Rob. Regarding the loans, you mentioned that there is an additional $5 billion in declines expected from BBVA. Can you provide some insight on the timing and how you anticipate that portfolio will run off? I also have a follow-up question.
Rob Reilly, Executive Vice President and CFO
Sure. Again, good morning, Dave. So 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 will likely roll off over the next couple of years.
Dave George, Analyst
Great. Thanks for that.
Rob Reilly, Executive Vice President and CFO
Sure.
Dave George, Analyst
In terms of the Legacy PNC CNI businesses, obviously it was encouraging to see a little bit 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 and commitments relative to the growth and outstanding in the commercial. I'm just curious how the commercial business is doing with respect to adding new names and new commitments and not seeing the benefit of that at least today in terms of outstandings because of that inventory issue.
Bill Demchak, Chairman, President, and CEO
Hi, it's Bill. We've been, for the last couple of quarters, our new money commitments have been, I think maybe at record levels, Rob, but increasing each quarter. New business, new clients, in some cases just upsizing what we already had. In that quarter, we had a little bit of utilization, but most of this was new client growth.
Dave George, Analyst
Yeah, that's right.
Bill Demchak, Chairman, President, and CEO
Right.
Rob Reilly, Executive Vice President and CFO
And as you know, Dave, as we've mentioned, that utilization kicked up a little bit. Still at historic lows, but a little bit, and that was part of it too.
Dave George, Analyst
Sounds good, guys. Thanks.
Bill Demchak, Chairman, President, and CEO
Sure.
Operator, Operator
Thank you. Our next question is from the line of John Penn Carey from Evercore ISI, please go ahead.
John Penn Carey, Analyst
Good morning.
Rob Reilly, Executive Vice President and CFO
Good morning, John.
John Penn Carey, Analyst
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, what business areas, which industries that you're starting to see that momentum start to build?
Bill Demchak, Chairman, President, and CEO
Yeah, they are kind of related, I mean, the growth in our secured lending areas stood out and they traditionally have higher utilization, so in some ways, it was an increase in the overall average because we grew the book with the highest individual average rate. But even in the straight middle-market corporate book, it finally stabilized, and I guess went up a couple of basis points there as well.
Rob Reilly, Executive Vice President and CFO
A little bit, yeah.
John Penn Carey, Analyst
Got it. Okay. And then 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. And also, if so, are there any risks to how we're thinking about the merger costs or the $900 million in net cost savings?
Bill Demchak, Chairman, President, and CEO
Regarding wage inflation, we have announced an increase in our base rate to at least $18 in some markets and beyond that in certain cases.
Rob Reilly, Executive Vice President and CFO
$18 an hour.
Bill Demchak, Chairman, President, and CEO
Yes, sorry. And so that is real, but that was already assumed in our financial assumptions. It doesn't have anything to do with our recent cost savings. But there's real pressure there and the only way through time to offset that pressure is through increased automation and then just frankly control on overall headcount.
John Penn Carey, Analyst
Okay. So 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
It's too early to determine, right? We're working on this, so average wages per employee will increase. The key factor is how quickly we can scale our franchise through automation, allowing us to grow without adding more employees. This has been in effect for some time now, John. If you look at our financial statements, even over the past five years, we need to maintain that trend in order to continue our pursuit of positive operating leverage.
Rob Reilly, Executive Vice President and CFO
And to offset what is real in terms of wage pressure.
Bill Demchak, Chairman, President, and CEO
Yeah.
John Penn Carey, Analyst
Yeah. Got it. All right, thank you.
Operator, Operator
Thank you. Our next question is from the line of Scott Siefers with Piper Sandler, please go ahead.
Scott Siefers, Analyst
Good morning, guys. Thanks for taking the question. Rob, was hoping to drill into the expense dynamics a little more, so 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? And then can you maybe 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 comes next quarter, and then how much is still into 2022?
Rob Reilly, Executive Vice President and CFO
Sure. So that's a lot there, Scott, but the easy answer to that is that's all in the guidance for the fourth quarter. To your point, fee businesses have been 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. So there will 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, but the bulk of the savings will be in 2022. So we reaffirm 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
Perfect. Thank you. And then 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?
Bill Demchak, Chairman, President, and CEO
It was a difficult situation. Essentially, we marked the securities book when we finalized the deal at very low rates, which continued to affect us throughout the quarter. The prepayment rates on their CMOs increased, and we had to consider that when we marked the book to the current yield, which was at a premium. All of those securities were prepaid due to the low rates, but we anticipate this will improve now that rates have increased again. However, we recorded them as premium securities and faced challenges as a result.
Rob Reilly, Executive Vice President and CFO
And it was a function of the timing of the acquisition, setting up those securities as premium securities.
Bill Demchak, Chairman, President, and CEO
In its simplest form, what we did if you think about it, is it knocked down goodwill in the way when we marked a book because we had a higher-valued asset. So, it, in fact, took in income upfront and paid for it a little bit this quarter.
Rob Reilly, Executive Vice President and CFO
That's right.
Bill Demchak, Chairman, President, and CEO
I mean, Rob, the securities yield once the guide on that book yielded 50 basis points or something.
Rob Reilly, Executive Vice President and CFO
That happens, yeah.
Scott Siefers, Analyst
Yeah. I'm glad to hear that.
Rob Reilly, Executive Vice President and CFO
It is acquisition-related.
Bill Demchak, Chairman, President, and CEO
Yeah, and it was painful.
Scott Siefers, Analyst
Exactly. Good. All right, well perfect, I appreciate the color.
Operator, 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
Hey, good morning.
Rob Reilly, Executive Vice President and CFO
Morning, Betsy.
Betsy Graseck, Analyst
I know we've had a lot of expense discussions already, but 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, the BBVA in 2Q, the one month there that you had, and the three or four months that you had in 3Q, it already looks like you 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, Executive Vice President and CFO
No. No. You're right. Hey, Betsy, this is Rob, but you're right. We've started, as we said, we would so we have begun to realize expense savings pretty much across all the categories. But we're just getting started so what you see in that, we still have work to go.
Betsy Graseck, Analyst
Okay. When I think about the pace of expense savings moving forward, part of it depends on the conversion and the lift and shift.
Rob Reilly, Executive Vice President and CFO
Yeah, right.
Betsy Graseck, Analyst
Can you explain what happens after the initial changes in terms of the trajectory for expense savings?
Bill Demchak, Chairman, President, and CEO
I don't even know what to talk about. I mean
Rob Reilly, Executive Vice President and CFO
Like when you discuss the activities and then like
Bill Demchak, Chairman, President, and CEO
Line items? I mean, we have.
Betsy Graseck, Analyst
No, like branch closures and what the question is.
Bill Demchak, Chairman, President, and CEO
Some of it involves branch closures, and some relates to employees who have remained with us through our retention bonuses. There will be a termination of systems and vendor contracts, as well as various other actions that will take place over time. We will keep certain elements in place for a while as a backup, even after the transition, just as a precaution.
Rob Reilly, Executive Vice President and CFO
I think that's correct. In terms of the increase in activity during the fourth quarter, we will see more savings from vendors. We have already started this process and will begin to realize these savings at a faster pace.
Betsy Graseck, Analyst
And I guess the question really is lifting the shift as a percentage of total cost savings is like round number?
Bill Demchak, Chairman, President, and CEO
That's not the right way to think about it. Completing that task at a specific time enables us to aggressively manage costs. The shutdown of legacy systems, the discontinuation of old vendors, and the reduction of support staff for outdated applications all contribute to this process starting to unfold.
Rob Reilly, Executive Vice President and CFO
I just think the way to think about it, Betsy, is it's sequential. So that conversion in the lifted shift creates a deck, so to speak, to get started sooner rather than later on realizing those savings.
Betsy Graseck, Analyst
Got it. All right. Thank you.
Operator, Operator
Thank you. Our next question is from the line of Gerard Cassidy with RBC, please go ahead.
Gerard Cassidy, Analyst
Good morning, Bill. Good morning, Rob.
Bill Demchak, Chairman, President, and CEO
Hey, Gerard.
Gerard Cassidy, Analyst
Can you share with us that you mentioned a few times within the Corporate Services numbers that the Advisory Business was at record levels according to the press release, but your guidance indicates you expect it to decline? Aside from the obvious pipeline in your book, can you tell us what else your team on the front lines is observing about M&A? Is it simply that there are fewer companies remaining for M&A as we head into '22?
Bill Demchak, Chairman, President, and CEO
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. But by the way, inside of that, we obviously have, but we also had breakout quarters for Solebury and other related advisors. If the market continues, that will continue to have great fee income out of it, but it's hard to keep, say we're going to budget or record upon a record. I think it's as simple as that.
Rob Reilly, Executive Vice President and CFO
That's right.
Gerard Cassidy, Analyst
Got it. And what does it represent now of corporate services or what did it represent in the third quarter?
Rob Reilly, Executive Vice President and CFO
I understand, let's say I'll quickly calculate that as a 25% decrease.
Gerard Cassidy, Analyst
Got it. Okay. I have a question about the loan to deposit ratio. You and your peers have significant liquidity, and the net ratio has decreased. It appears that the Fed is entering a tapering phase, yet they will continue to increase deposits in the banking system until tapering is complete. How are you approaching this situation? I understand there are numerous factors affecting loan growth and potential deposit shrinkage. Looking ahead to the end of 2022 and into 2023, with BBVA fully integrated, what do you consider to be an optimal loan to deposit ratio for your organization? And when do you anticipate achieving that ratio?
Bill Demchak, Chairman, President, and CEO
There are too many variables.
Gerard Cassidy, Analyst
Yeah, okay.
Bill Demchak, Chairman, President, and CEO
I mean, if you go back in history, right? People would operate, I don't know where we were, 80%, 85%.
Rob Reilly, Executive Vice President and CFO
85, yeah, 85 to 90.
Bill Demchak, Chairman, President, and CEO
That was essentially a safety mechanism for liquidity. If you were low on liquidity at that time, you would increase wholesale liquidity to maintain your ratio. Currently, we have ample reserves in the system, and wholesale funding is nearly nonexistent. This situation will remain until the Federal Reserve not only stops tapering but also reduces its balance sheet. While loan growth, even if it accelerates, will help absorb some of that liquidity, I think we will see low loan to deposit ratios for an extended period. Consequently, security balances as a percentage of the balance sheet will continue to rise across the industry, and I believe this trend will take years to fully materialize.
Gerard Cassidy, Analyst
Very good. I appreciate the color. Thank you.
Bill Demchak, Chairman, President, and CEO
Yeah.
Operator, 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
Hi.
Rob Reilly, Executive Vice President and CFO
Hi, Mike.
Bill Demchak, Chairman, President, and CEO
Hi, Mike.
Mike Mayo, Analyst
No good deed goes unpunished. Since you went from announcement to conversion in under 11 months, which is 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 aspects of your technology do you believe are further validated? Whether it's your use of the Cloud, Data Lakes, or something digital, what do you think others haven't advanced as far as you have?
Bill Demchak, Chairman, President, and CEO
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. The $900 million is line items we know we can get. We actually know where they're coming from and when they're going to show up. So 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. So we just put that into our guidance. We say, "Look, we'll get the $900 million." We'll talk to you about '22 when we get closer, but we haven't lost focus on the primary objective.
Rob Reilly, Executive Vice President and CFO
And the $900 million, you know that, Mike. The $900 was estimated off the expectation that we convert and when we did. So, we didn't convert sooner than we thought; we did it on time.
Bill Demchak, Chairman, President, and CEO
There was a lot to discuss, and it showed visually until we could see it clearly. We were aware of the specific line items, and the technology functioned as intended. We experienced some confusion with retail clients regarding password resets and other issues, but the main technology itself operated effectively. The effort from our team was remarkable and confirms the investments we’ve made over the years. I'm not sure about others' capabilities in this area, but the key aspect for us, Mike, as we've mentioned before, was the data lake concept. Since our applications don't store their own data, they retrieve it from a central lake and are interconnected through APIs, making them cloud-native. This setup simplifies data movement, so onboarding a new client feels similar to acquiring millions of new clients overnight. I realize I may make it sound easy, though our technologists are likely quite stressed. Nonetheless, we implemented this approach successfully. The investment encompassed the data lake, cloud-native solutions, APIs, and having technology integrated within our business operations. At PNC, technology is not just a back-office function; it actively collaborates in agile teams with business partners to create products and manage conversions, which we accomplished. This cultural aspect may be as crucial, if not more so, than all the other factors involved.
Mike Mayo, Analyst
So, just in the final look at this, how many apps did you eventually keep from them, or how much in gigabytes did it add or just one more what you added?
Bill Demchak, Chairman, President, and CEO
Well, I think we ended up keeping two or something.
Mike Mayo, Analyst
It was the last number, I think.
Bill Demchak, Chairman, President, and CEO
Yeah, one was the business transfer, you know, the personal foreign currency transfer business. I don't know what the other one was. And that's it.
Mike Mayo, Analyst
I was trying to confirm the numbers. Was it 300 out of 600? I thought this company was much smaller.
Bill Demchak, Chairman, President, and CEO
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. That feels roughly accurate.
Bryan Gill, Director of Investor Relations
- They had more than 600.
Bill Demchak, Chairman, President, and CEO
They had 600; we run the whole bank on 300.
Bryan Gill, Director of Investor Relations
A little more than 300.
Bill Demchak, Chairman, President, and CEO
It's interesting to note that even though they are significantly smaller, they still managed to develop twice as many applications as we have. I think the advantage comes from using API-based programs, which allows for almost a drag-and-drop approach. Instead of building an entire application to retrieve information like a checking account balance from our core ledger, you can simply integrate an API that provides that functionality. That's a major factor in their efficiency. Additionally, I want to acknowledge our team's efforts when we consolidated everything onto a single application after the National City acquisition. Often, after an acquisition, companies tend to maintain multiple applications to avoid making a choice, but we streamlined our operations.
Mike Mayo, Analyst
Got it. All right. Thank you.
Operator, Operator
Our next question is from the line of John McDonald with Autonomous Research, please go ahead with your question.
John McDonald, Analyst
Hi, good morning, guys.
Rob Reilly, Executive Vice President and CFO
Hi John.
John McDonald, Analyst
PPP dynamics are confusing to all of us, and I just wanted to ask a little bit about that. So, 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? And then also on NII, is PPP included in that, and what kind of PPP contribution have you had to NII this quarter? Sure.
Rob Reilly, Executive Vice President and CFO
In simple terms, John, you're right; it is confusing, but 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, and we anticipate that to decrease by approximately 25 to 30, which is reflected in our NII guidance.
John McDonald, Analyst
Yes, I understand. Another question regarding the redeployment of cash into securities. The target for this year is 25% to 30%. Over time, and this relates to the discussion you had with Gerard about loans to deposits, could that percentage increase if loan growth doesn't materialize as much as we expect?
Bill Demchak, Chairman, President, and CEO
I think it could. I think that depends on 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
Got it. Okay. Thanks, guys.
Rob Reilly, Executive Vice President and CFO
Sure.
Operator, 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
Thank you. Good morning Bill and Rob.
Rob Reilly, Executive Vice President and CFO
Good morning.
Bill Carcache, Analyst
Following up on Gerard's question as we look ahead to spend tapering and eventually rate hikes, how are you thinking about deposit relative to when we exited the last reserve cycle?
Bill Demchak, Chairman, President, and CEO
I think they're going to be a lot lower simply because there's so much cash in the system. Remember even when the Fed tapers, they're not necessarily shrinking. With the cash in the system, competition for deposits just won't be as great as it once was. So I think at the margin, they've got to be lower.
Rob Reilly, Executive Vice President and CFO
And another way of answering that, with all the deposits we have, we're not thinking a lot about it, right?
Bill Carcache, Analyst
Right. Yeah, that makes sense.
Rob Reilly, Executive Vice President and CFO
Yeah.
Bill Carcache, Analyst
Understood. That's helpful. Going back to the momentum with new money commitments, what do you think about how your discussions with customers indicate that utilization rates will remain low as long as the supply chain issues persist, versus the possibility of improvement even if those problems extend into next year? I just want to understand the impact it's having.
Bill Demchak, Chairman, President, and CEO
It varies by industry; while I can't say it’s universal, most of our clients express a need and desire to build inventory and increase capital expenditures, which is why some of the metrics have been rising. Their capacity to act on that is somewhat influenced by the supply chain and varies by industry. For manufacturers reliant on chips, it's a challenge. Other businesses are not as affected and can proceed immediately; we may already be witnessing the advantages of that.
Bill Carcache, Analyst
Got it. And if I can switch to BBVA in 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 signed RBC? It seems you guys have the playbook, but just trying to get a sense for the differences that you may see in execution this time around?
Rob Reilly, Executive Vice President and CFO
Hey, Bill, it's Rob. Regarding our contract with RBC, let's put that aside for now. As for BBVA, we're very confident in the numbers we've outlined and the plans to achieve them. It's likely a bit better than RBC because it's a larger opportunity. We're familiar with the work, and while RBC was successful, this situation is different.
Bill Demchak, Chairman, President, and CEO
I mean, in terms of contracting 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 this is.
Rob Reilly, Executive Vice President and CFO
this is more significant.
Bill Demchak, Chairman, President, and CEO
Mike, who runs a CNIB business, would say it's possibly about a year faster. He attributes this to the teams being established much quicker than we experienced with RBC, and we'll see how this develops. However, we are starting strong with teams actively reaching out to clients. Additionally, we have a better book of business with BBVA compared to what we had with RBC, allowing us to enhance that book on the fee side. Their percentage of fees to total revenue is quite low, presenting an opportunity for growth in fees early on. We have teams ready, and we should be able to acquire clients slightly quicker than we did with RBC since we're already on the ground.
Rob Reilly, Executive Vice President and CFO
That's the revenue aspect.
Bill Demchak, Chairman, President, and CEO
Yeah.
Rob Reilly, Executive Vice President and CFO
For the revenue aspect, it is significantly higher than our RBC; the expense side, I thought, was the question, the magnitude that I mentioned is the answer.
Bill Carcache, Analyst
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 love to hear your thoughts on a couple of areas versus is there a revenue opportunity for PNC as you take an astute look at it, and then second, from a risk perspective, how concerned are you about the risk of disruption from decentralized finance?
Bill Demchak, Chairman, President, and CEO
What we discussed, and what we are considering offering, has already been developed for our clients. Our clients are interested in the ability to trade cryptocurrency safely through the mobile app at PNC. I won’t comment on whether I believe this is a good or bad investment, but we know that 10% to 15% of our clients are actively moving money to and from crypto exchanges, confirming their interest through surveys. The financial disruption caused by cryptocurrency, especially stable coins, poses a significant threat that will unfold over time. There's a concern that certain stable coins may have questionable collateral backing them. Additionally, there's the risk that a substantial amount of savings, both domestic and from emerging markets, could transition into stable coins, bypassing the traditional money transmission system. This would impact the economy and our ability to manage the money supply in the long run. Regulatory bodies are aware of these issues and are working to address them, but this is separate from our decision to allow clients to trade.
Rob Reilly, Executive Vice President and CFO
Right.
Bill Carcache, Analyst
Yeah. There is a revenue opportunity from that portion of it, even by simply just providing the service to them. So is that a fair conclusion?
Bill Demchak, Chairman, President, and CEO
Sure. I mean, at the margin.
Rob Reilly, Executive Vice President and CFO
Don't see it as a big driver.
Bill Carcache, Analyst
Right, got it. That's super helpful. Thank you again for taking my questions.
Operator, Operator
Thank you. Our next question is from the line of Ken Usdin with Jefferies, please go ahead.
Ken Usdin, Analyst
Hey, thanks. Good morning, guys. Can I come back, Rob, on the premium amortization question? I'm just wondering if you can help us understand in the 1.45 for securities yield, what either the basis point impact was, or if you even have total dollars of premium aim for the company and what you expect that to look like going forward?
Rob Reilly, Executive Vice President and CFO
But that's all in our guidance in terms of the dollar amounts. But 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
Okay. That's fair. And that was my second question is, what are you seeing just on core front book, back book, and relative to these forward saddling securities, and just what you're seeing in the market today and where you get your hands on?
Rob Reilly, Executive Vice President and CFO
Well, it's looking better is what we said relative to the overall situation.
Bill Demchak, Chairman, President, and CEO
Yields were buying today but we expect the yield on the total book to increase pretty substantially next quarter largely because of its decrease in the amortization costs.
Ken Usdin, Analyst
Yes. And then lastly, just purchase accounting accretion, you said it was 30 in the second quarter. Do you have anything in the third? And how do you expect that to look like?
Rob Reilly, Executive Vice President and CFO
The maximum is in the third quarter and going into the fourth quarter, which is a good thing.
Ken Usdin, Analyst
Yeah. Okay. Great. Thanks.
Operator, Operator
Thank you. Our next question is from the line of Terry McEvoy with Stephens, please go ahead.
Terry McEvoy, Analyst
Thanks. Good morning. Bill, you mentioned in 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, or is it just internally work to improve the franchise?
Bill Demchak, Chairman, President, and CEO
It's building. I mean, it was underperforming largely because they didn't have the products and services to cover the corporate opportunity that's in California. And by the way, that opportunity is massive. So 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 and, in some cases, bring relationships with them. So 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, Executive Vice President and CFO
Which in many instances we've done already.
Terry McEvoy, Analyst
Thanks. And then 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? And then is that being it 125 to 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
The rollout has been quite smooth, and with the conversion of BBVA, we have enabled low cash mode for all their customers across other products. I can't recall the exact numbers, but there have been millions of alerts sent out, allowing countless individuals to transfer money before incurring a charge. Customers can now choose the order in which they pay their bills and return items without a fee. In many respects, we have led the industry in this area, and the response has been significant. Our leadership stemmed not only from our pricing strategies but also from our technology and the empowerment of our customers. Many who have followed us have resorted to simply reducing fees rather than providing innovative solutions, which is the core of what low cash mode offers. We are pleased with its performance, and our complaint volume in the Care Center regarding overdraft has decreased significantly.
Rob Reilly, Executive Vice President and CFO
Yeah. On overdraft even higher than that.
Bill Demchak, Chairman, President, and CEO
Yeah. So it's done exactly what we thought it would do.
Terry McEvoy, Analyst
Great. Thank you.
Operator, Operator
Thank you. Our next question is from the line of Matt O'Connor with Deutsche Bank. Please go ahead.
Matt O'Connor, Analyst
Good morning. It seems like the loan portfolio at BBVA USA will be mostly de-registered runoff by the end of 4Q if we're just a couple of billion less over the next two years. Is there an opportunity to fill that bucket 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
It's included in our guidance. You have to understand that if loans fluctuate by a billion in a quarter, we won't distort the organic results by making decisions we wouldn't typically make. The process will proceed as usual. We will attract more clients. Being a larger company allows us to take on bigger holds if we choose to. We hope utilization increases. As always, we are mindful of risk; some business segments are riskier than we prefer, and in some instances, there are no opportunities for cross-selling, resulting in a low return on the equity invested in those loans.
Rob Reilly, Executive Vice President and CFO
But I would add, Matt, I mean, obviously central premise is acquisition, these are growth markets, so we would expect through time to generate above-average growth, not necessarily in the next 90 days, but that's obviously a big opportunity for us.
Matt O'Connor, Analyst
Okay, I wasn’t just looking for a fourth-quarter outlook. I was thinking about the next few quarters and whether we can expect significant loan growth.
Bill Demchak, Chairman, President, and CEO
If we get a tailwind at all, you're definitely going to see that. And 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 the corporate loan growth. And every you 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. All of these new markets that we were 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
Okay. Thank you.
Operator, Operator
Thank you. There are no further questions.
Bryan Gill, Director of Investor Relations
All right, well thank you, everybody. I look forward to talking to you in the fourth quarter. Thanks.
Rob Reilly, Executive Vice President and CFO
Thank you.
Operator, Operator
This concludes today's conference call. You may now disconnect.