PNC Financial Services Group Inc (PNC) 2021 Q3 法說會逐字稿

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. (Operator Instructions) 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.

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 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 15, 2021, and PNC undertakes no obligation to update them.

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

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 7 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'll hear me talk about, 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 the branch operations and 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 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. Similar to last quarter and pretty much as expected, we had a lot of moving parts in our reported results. And 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. And 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. And 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. And on the consumer side, we're also seeing promising origination activity, particularly in the residential real estate business.

Importantly, and as you see, our balance sheet remains very strong, and we're 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 Akoya Data Access Network. This is through an application programming interface. The integration is 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. Similar to Low Cash Mode, this integration positions us as a leader in technology and innovation and enables us to best serve our customers.

And 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.

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.

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 he 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. And 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 to the second quarter, which you'll recall included just 1 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, 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. 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 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. This growth in balances has been aided by a slight uptick in spot utilization. And while still near the 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 in nonstrategic 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 30, $6.8 billion of PPP loans remain 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 at September 30, 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 noncore deposit-related businesses. Overall, our rate paid on interest-bearing deposits is now 4 basis points, a 1 basis point decline linked quarter.

Slide 6 details the change in our period end securities and Federal Reserve balances. And 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. 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 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. 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 2 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.

Pretax pre-provision earnings, excluding integration costs, were $1.9 billion, an increase of $25 million or 7%. 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, 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 securities -- the yield on the securities portfolio to increase.

Third quarter fee income of $1.9 billion increased $274 million or 17% linked quarter. BBVA USA contributed fee income of $184 million, an increase of $122 million linked quarter, driven by 2 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 noninterest income of $449 million decreased $19 million linked quarter as higher private equity revenue was more than offset by the impact of $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. 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%.

Obviously, with the acquisition, our expense base is now higher, but nevertheless, we remain disciplined around our expense management. And as we've stated previously, we have a goal to reduce PNC stand-alone 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.

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. And 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. Nonperforming 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 at September 30 increased $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 $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-off loans in the third quarter was 11 basis points. And 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.

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 0 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 noninterest income to be between $375 million and $425 million, excluding net securities and Visa activity. On a percentage basis, we expect total noninterest expense to be down between 3% and 5%, excluding integration expense, which we approximate to be $450 million during the fourth quarter. And we expect fourth quarter net charge-offs to be between $100 million and $150 million.

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

(Operator Instructions) Your first question comes from the line of Dave George with Baird.

I had a question on loans. So 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? And then I've got a follow-up.

Sure. Yes, again. 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 likely over the next couple of years.

Great. So in terms of kind of the legacy PNC C&I business, 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 and commitments relative to the growth in outstandings in commercial? I'm just kind of curious how the commercial business is doing with respect to adding new names and new commitments. And we're obviously not seeing the benefit of that at least today in terms of outstandings because of that inventory issue.

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

Yes, that's right and as you know, Dave, like we've mentioned, utilization ticked up a little bit, still at historic lows, but a little bit, and that was part of it, too.

Our next question is from the line of John Pancari from Evercore ISI.

On your -- on the loan growth topic, is that pickup in utilization and then also the new clients that you mentioned, could 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?

Yes. They're kind of related. I mean, the growth in our secured lending areas sort of 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 as a result of that.

Yes. So basically, business credit, our asset-based lending group and corporate banking.

Got it. Okay. And then on the expense side, I 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, is there any risks to how we're thinking about the merger cost or the $900 million in net cost saves?

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

About $18 an hour.

Yes, sorry. And it's -- so that is real. But that was kind of already assumed in our financial assumptions. It doesn't have anything to do with our assumed cost saves. But 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.

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

Too early to tell, right? We're on this -- so average wages per employee are going to go up. The issue is how quickly we -- how we scale our franchise through automation, so we become larger without more employees. And that's played out for a period of time here, John, if you just go through our financial statements, even going back for 5 years. We just need to continue that trend to be able to continue our pursuit on positive operating leverage.

And to offset what is real in terms of wage pressure.

Yes. Yes.

Our next question is from the line of Scott Siefers with Piper Sandler.

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 sort of size up how the $900 million in BBVA-related cost savings fit into the fourth quarter guidance? In other words, how much starts to come next quarter or comes next quarter and then how much is into 2022 still?

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. So we -- to your point, fee businesses have been -- they 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. And 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'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, but the bulk of the savings will be in 2022. So 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.

Perfect. 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?

It was painful. In it's simplest form, right, we marked that securities book when we closed the deal...

June 1.

Yes, at really low rates that then continued through -- in fact, rallied through the quarter. So the prepay rates on their CMOs increased, and we had -- so 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. But we marked them as premium securities and then got caught by the...

And it was a function of the timing of the acquisition setting up those securities as premium security.

Yes. In it's simplest form, what we did, if you think about it is it knocked down goodwill in the way when we mark the book because we had a higher-valued asset. So it took -- in effect, took in income upfront and to pay for it a little bit this quarter.

That's right.

I mean, the securities yield, the guide on that -- like that book yielded 50 basis points or something.

That happened. Yes.

Yes. And it's -- and we expect, going forward, the total book to increase.

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

Yes. I'm glad to hear that...

Behind the tentative, it is acquisition-related.

And that was paying...

Our next question is from the line of Betsy Graseck with Morgan Stanley.

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 that BBVA in 2Q, the 1-month there that you had and the 3 months -- 3 full months that you had in 3Q, it already looks like you brought down expenses a bit. And 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?

Well, no, no. You're right. You're right. Betsy, this is Rob. But you're right. Now 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 rate, we still have work to go.

Okay. And then when I'm thinking about the pace of that expense saved, from here, a part of it's a function of the conversion, the lift and shift, obviously, but then can you talk us through what comes after the lift and shift in terms of expense saves trajectory?

I don't know what you're talking about.

What are you talking about? the activities and the...

The line items? I mean, we have...

No, like branch closures and what -- really, the question is the lift and shift...

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 shutdown of systems and vendor contracts and all sorts of different things that will roll through dependent on time, some of which we leave around for a bit. It's sort of back up for not 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.

Yes. I think that's right. And probably, at least in terms of the pickup in the fourth quarter activity, we will, as a 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.

Yes.

And I guess the question really is lift and shift as a percentage of total cost saves. Is it like round numbers?

It gives -- that's the -- it'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, right? Because legacy systems shutdown, legacy vendors shutdown, related people who are supporting old applications, all of that stuff now starts rolling through the system.

Yes. Yes. And my point is, it's not the one and done, it's a portion of the total expense save that you'll be generating.

Yes. And the -- 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.

Yes. And I'll just say I think...

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

I just think -- I think the way to think about it, Betsy, is it's sequential. So the conversion and the lift and shift clears the deck, so to speak, to get this started sooner rather than later on realizing those savings.

Our next question is from the line of Gerard Cassidy with 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 you -- Rob, in your guidance, you expect it to come down other than the 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 much -- as many companies that are left to do M&A going into '22?

Look, in it's simplest form, you set a record, you assume you won't keep setting records. There's nothing out there that suggests necessarily that's going to weaken from here. By the way, inside of that, we obviously -- we have Harris Williams, but we also had breakout quarters for Solebury and Sixpoint and related advisers. Yes. And if the market continues, then we'll continue to have great fee income out of it. But it's hard to keep saying we're going to budget a record upon a record. I think it's as simple as that.

That's right.

Got it. And what does it represent now of corporate services? Or what did it represent in the third quarter?

Well, yes, no, I know that the -- let's say, I'll do the quick math in my head, down to 25%?

Yes.

Got it. Okay. And then 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. 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 '22 and into '23, 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?

There's too many variables. I mean, it's -- if you go back in history, right, people would operate, I don't know where we were, 80%, 85% or something.

85%. Yes, 85% to 90%.

And that was kind of a liquidity safety function. So if you were short of 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 0. And until the Fed -- forget about tapering actually shrinks its balance sheet, that's not going to change. Now loan growth even accelerated and exaggerated loan growth will absorb some of that. But 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, we've already talked about this, increase across the industry. And I -- that's going to -- I think it's going to take years to play out.

Our next question is from the line of Mike Mayo from Wells Fargo Securities.

No good deed goes unpunished. So since you -- from announcement to conversion under 11 months, it's probably a record, why aren't you increasing your $900 million cost savings? But 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 lake or something digital that you're doing that you think others have in advance as far as you have?

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. 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 -- we 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.

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

Yes. So -- but that was a number that -- how to say this, it's 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. But the basic technology, moving it over, turning it on, it all worked, which is just a 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. But 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. And they're linked through API and they're cloud-native. It just makes it very easy to move data and new -- onboard a new client. It's not much different than as if we just got a couple of million new clients overnight.

That -- and I make it sound very easy and all my technologists are ripping their hair off. But that's what we did and it worked. And the investment in that was everything from the data lake to cloud-native to API and everything. And frankly, to having businesses and technology [together]. So technology if PNC is not in the back office somewhere doing its job, they're actually side-by-side and 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.

So just in the final look of this, how many apps did you eventually keep from them? Or how much in gigabytes did it add or just one more time, what you added?

Well, we ended -- I think we ended up keeping 2 or something.

I think it was the last number, I would say.

Yes. We -- one was business transfer, the personal foreign currency transfer business. I don't know what the other one was. And that's kind of it.

And that was -- and I was just want to -- I have the numbers right. Was that out of $600 million and you have $300 million or something like that? And I mean...

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 was roughly...

$600 million they had, more than $600 million.

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

A little more than $300 million.

Yes, a little more.

Yes. Why is -- why was that? I mean, that's the number that stands out. They're so much smaller. Yes, they had twice as many apps. And what...

Yes. I mean, I think once you start using API-based programs, I mean, it's almost kind of a click and drag, right? You don't have to recreate functionality across multiple applications. You can simply bring in whatever functionality you need from a library of API. If I may -- so let's say 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, right? 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 1 or between the 2 of them.

Our next question is from the line of John McDonald with Autonomous Research.

PPP dynamics are confusing to all of us. And I just wanted to ask you 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 the NII, is PPP included in that? And what kind of PPP contribution have you had to NII like this quarter? What happened to that going forward?

Yes. Yes. In simpler terms, John, and you're 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 -- and net interest income contribution from PPP was about $100 million, and we expect that to go down approximately $25 million to $30 million, and that is in our guidance, our NII guidance.

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

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. I mean, part of the issue today, John, is you have this long-tail risk, maybe it's not such a long tail that you end up with a spike in loan 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.

Our next question is from the line of Bill Carcache with Wolfe Research.

So 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 their last reserve cycle?

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. And so with the cash in the system, the competition for deposits just won't be as great as it once was. So I think of the margin, they've got to be lower.

And another way of answering that with all the deposits that we have, we're not thinking a lot about betas, right?

Right. No, that makes sense. Understood. That's helpful. And 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 big that -- how much of an impact that's having.

It varies across industries. I mean, they -- 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, and if you're dependent on chips for your manufacturer, it's a struggle. Other businesses are not and could build immediately, and maybe we're already seeing the benefit of that.

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

Bill, it's Rob. 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. Of course, RBC was successful, but this is more of the magnitude...

I mean, Mike would say -- and Mike Lyons who runs the [CNIB] business would say it's as much as perhaps a year faster. And he gets there largely because the teams are in place much faster than we had them in place with RBC. And we'll see how that plays out. But we're hitting the ground faster in terms of teams who are out calling on clients. And then we also have a book of business with BBVA that is better than what we had with RBC. So the ability to upsell that book of business on the fee side.

You remember us talking about just their percentage of fees to total revenue being very low. So 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.

Yes. That's the revenue aspect. So the revenue aspect of it is significantly higher than RBC. The expense side, I thought, was the question. The magnitude that I mentioned is the answer.

Yes.

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? And then second, from a risk perspective, how concerned are you about the risk of disruption from a decentralized finance?

So 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 as 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% to 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 stable coin is a real threat. And it depends on how that plays out through time. There's the risk, I think, that people are aware of with certain of the stable coins having, let's call it, suspicious collateral behind them. But there is also the risk through time that a substantial portion of savings, either domestic savings or even emerging market savings, get absorbed into a stable coin and under the traditional money transmission system. And that would affect the economy and the ability to control the money supply long term.

And I think that's what -- I know that's what the various regulatory bodies are looking at to figure out how to get their arms around. But that's independent of whether we let our clients trade Bitcoin.

Right. Right.

Yes. But there is a revenue opportunity from that portion of it, even by simply just providing the service to them. And so is that a fair conclusion?

Sure. I mean, at the margin, I -- yes, at the margin.

Don't see it as a big driver.

Our next question is from the line of Ken Usdin with Jefferies.

Can I come back, Rob, on the premium amortization question? I'm just wondering if you can help us understand in the 1.54% securities yield, like what either the basis point impact was or if you even have a total dollars of premium am for the company? And what you expect that to look like going forward?

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

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 settling? And just what you're seeing in the market today and what you can get your hands on?

Well, it's looking better, is what we said relative to the...

Yes, 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.

That's right.

Yes. And then lastly, just purchase accounting accretion, you said it was $30 million in the second quarter. Do you have anything in the third? And just how do you expect that to look like, too?

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

Our next question is from the line of Terry McEvoy with Stephens.

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? Or is it just internally or to improve the franchise?

It's building it. 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.

Which, in many instances, we've done already.

Yes. Yes.

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 with the $125 million to $150 million, the decline in overdraft fees, is that still the right way to think about the impact of that product on fees?

So the rollout has been somewhat seamless. And of course, we just -- with the conversion of BBVA, we put all of their customers or enabled that Low Cash Mode on all other 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.

And look, we -- 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. And 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. So 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.

Yes. On overdraft, even higher than that.

Yes. So it's done exactly what we thought it would do.

Our next question is from the line of Matt O'Connor with Deutsche Bank.

It seems like the loan portfolio at BBVA USA will be mostly derisked or run off by the end of 4Q or just a couple of 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 run-off between this quarter and next?

It's embedded in our guidance. I mean you got to appreciate, Matt, we're not -- if loans are up or down by $1 billion in a quarter, and we're not going to putty over the organic result by doing something we otherwise wouldn't do. It will 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.

And 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. And in other cases, they just have no cross-sell opportunity. And so the return on the equity you deploy to hold those loans is just really low.

But I would add, Matt, I mean, obviously, central premises acquisition, these are growth markets. So we would expect through time to generate above-average growth, not necessarily in the next 90 days.

Yes.

But that's obviously a big opportunity for us.

Okay. Yes. And it 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 different...

If we get a tailwind at all, you're definitely going to see that. And I think, and most importantly, if you go back and look at our loan growth through the period of RBC, so kind of 2-plus years after we did RBC, we started to really accelerate in corporate loan growth. And everybody said, how are you doing that? And it's all new customers in 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 as we've seen fairly tepid at the moment.

(Operator Instructions) Our next question is a follow-up from Gerard Cassidy from RBC.

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 Montreal raised their wages 20% last week, and Bank of America has got the $25 in '25 program. So the question is this, can you share with us what it means for the people right above the entry-level -- excuse me, in 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?

It goes straight up through the pay grades. I mean, most of the cost is actually in the compression as opposed to the initial jump for the people who are at the lowest level. So part of the work set to go through is to figure out, in fact, how you move people up who are today at $18. But tomorrow, if the $15 person went to 418, the $18 person goes to $20.50 or so on, and I'm making up the numbers here, but that's the majority of the cost. And by the way, it's the majority of the work set to get right.

Our next question is a follow-up from the line of Mike Mayo with Wells Fargo Securities.

Can you put a ribbon around your expectations for loan growth? That seems to be like the big question going into the quarter. And in the past, you mentioned over half of your commercial clients or private companies, which don't have the same access to capital markets, and therefore, they might come back first. So just one final thought on loan growth. When do we think -- do you think we get the big burst of loan growth? Is it a quarter away? Is it 3 quarters away? Is it a year away? What do you think and why?

Well Mike, I think you asked me this 9 months ago. And 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, right, 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. And 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. And by the way, that's kind of what you see in our guidance. It's kind of -- you're asking me to go out and say, hey, supply chain is going to be fixed. And loan growth is going to rip and I hope it does, but I'm not the expert to answer that.

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 the normal level of utilization? What was the level? And where is it now?

It's still, what, 15 points.

If you go, we're at 49-ish and then a 54, 55 sort of normalization.

Yes. So at least 10 points off and we're probably 15, 20 points off the peak in March of last year. So there's a lot of room here. Yes.

There are no further questions.

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

Thank you.

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