Vertex Pharmaceuticals Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 14, 2021

There are 14 speakers on the call.

Operator

Good morning. My name is Jennifer, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the PNC Bank's Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Followed by the number 4 on your telephone keypad. If you'd like to withdraw your question, please press the 1 and then the number 3 on your telephone keypad. As a reminder, this call is being recorded. I will now turn the call over to the Director of Investor Relations, Mr. Brian Gill.

Operator

Sir, please go ahead.

Speaker 1

Thank you, Jennifer, and good morning, everyone. Welcome to today's conference call for the PNC Financial Services Group. Participating on this call 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.

Speaker 1

These materials are all available on our corporate website, pnc.com, under Investor Relations. 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.

Speaker 2

Thanks, Brian. 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 $100,000,000,000 banking institution within a year. The dedication of our employees and our sustained investments in technology allowed us to convert roughly 9,000 employees, 2,600,000 customers and nearly 600 branches across 7 states.

Speaker 2

BBVA USA is now integrated into PNC and its customers can bank with us from coast to coast. We're bringing our technology, talent and the full suite of best in class products and services to 29 of the nation's 30 largest markets, with attractive growth opportunities as you've heard me talk about for years to come. Now while we still have some more work to do, which is to be expected for a bank conversion of this size, we're making solid progress with our staffing levels and the branch operations in BBVA USA legacy markets. In addition, we're encouraged to see the teams build pipelines and importantly growing new clients. Now with BBVA legacy employees now on PNC Systems, we believe our momentum is going to continue to accelerate as we Previously, we're following the same game plan that we've used in previous acquisitions and we know what to do.

Speaker 2

We just have to execute on it. With respect to our Q3 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 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.

Speaker 2

That said, total PNC legacy loans, if we back out the PPP runoff, actually grew almost $5,000,000,000 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 expanded customer base while making strategic investments in our technology and businesses. Another exciting development this quarter was the announcement of our integration With Acoya Data Access Network.

Speaker 2

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 3rd party applications. Similar to Locashmo, 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.

Speaker 2

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 questions.

Speaker 3

Thanks, Bill, and good morning, everyone. As Bill just mentioned and notable during the Q3, 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 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.

Speaker 3

Due to the June 1 closing of the acquisition, our average balance sheet financial results. Growth for the Q3 reflected the full quarter impact of the acquisition as loans grew $36,000,000,000 securities increased $12,000,000,000 and deposits grew $53,000,000,000 For comparative purposes to the 2nd 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 $4,500,000,000 or 2% linked quarter. Excluding the impact of PPP forgiveness, loans grew and I'll cover the drivers in more detail over Next few slides.

Speaker 3

Investment securities declined approximately $900,000,000 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 3rd quarter at $75,000,000,000 On the liability side, deposit balances were $449,000,000,000 at September 30 and declined $4,000,000,000 reflecting the repositioning of certain BBVA USA portfolios. We ended the quarter with a tangible book value of 94.82 pro form a levels we anticipated at the time of the deal announcement. During the quarter, we returned capital to shareholders with common dividends of 537,000,000 And share repurchases of $393,000,000 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.

Speaker 3

Average loans increased $36,000,000,000 linked quarter to $291,000,000,000 reflecting the full quarter impact of the acquisition. Taking a closer look at the linked quarter change in our spot balances, total loans declined $4,500,000,000 The PNC legacy portfolio excluding PPP loans grew by $4,700,000,000 or 2% with growth in both commercial and consumer loans. PNC legacy commercial loans grew $3,700,000,000 driven by growth within Corporate Banking and Asset Based Lending. This growth in balances has been aided by a slight uptick in spot utilization And while still near historic lows, utilization did reach its highest level since December 2020. Growth in PNC's legacy consumer loans linked quarter was driven by higher residential real estate balances.

Speaker 3

Within the BBVA USA portfolio loans declined $4,400,000,000 primarily due to intentional runoff relating to the overlapping exposures and non strategic loans. Looking ahead, we have approximately $5,000,000,000 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 $4,800,000,000 due to forgiveness activity and as of September 30, $6,800,000,000 of PPP loans remain on our balance sheet. Moving to Slide 5. Average deposits of $454,000,000,000 increased $53,000,000,000 compared to the 2nd quarter, driven by the acquisition.

Speaker 3

On the right, you can see total period end deposits were $449,000,000,000 at September 30, a decline of $4,000,000,000 or 1% linked quarter. Inside of this, PNC legacy deposits increased $5,400,000,000 as deposits continue to grow reflecting the strong liquidity position of our customers. BBVA USA Deposits declined approximately $9,400,000,000 during the Q3, which was anticipated quarterly dividend payment as we rationalize the rate paid on certain acquired commercial deposit portfolios and exited several non core deposit related businesses. Overall, our rate paid on interest bearing deposits is now 4 basis points, a 1 basis point decline linked quarter. Slide 6 details the change in our period end securities and Federal Reserve balances.

Speaker 3

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've resumed our increased levels of purchasing, including $5,400,000,000 of forward settling securities, which will be reflected in the 4th 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.

Speaker 3

As you can see on Slide 7, our 3rd quarter income statement includes the full quarter impact of the acquisition. Reported EPS was $3.30 which included pretax integration costs of $243,000,000 Excluding integration costs, adjusted EPS was $3.75 3rd quarter revenue was up 11% compared with the Q2 reflecting the acquisition as well as strong organic fee growth. Expenses increased 537,000,000 Store 18 Percent Linked Quarter, Including $235,000,000 of integration expenses and 2 additional months of BBVA USA Operating Expenses. Legacy PNC expenses increased $76,000,000 or 2.7 percent, virtually all of which was driven by higher fee business activity. Pre tax pre provision earnings excluding integration costs were $1,900,000,000 an increase of $25,000,000 or 7%.

Speaker 3

The provision recapture of $203,000,000 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 $1,500,000,000 in the 3rd quarter. Now let's discuss the key drivers of this performance in more detail.

Speaker 3

Turning to slide 8. These charts illustrate our diversified business mix. In total, revenue of $5,200,000,000 increased $530,000,000 linked quarter. Net interest income of $2,900,000,000 was up $275,000,000 or 11%, Reflecting the full quarter benefit of the earning asset balances acquired from BBVA USA. Inside of that, interest income on loans increased $277,000,000 or 13%, while investment securities income declined $9,000,000 driven by elevated premium amortization on the acquired CVA USA portfolio.

Speaker 3

Net interest margin of 2.27 percent was down 2 basis points, driven primarily by lower security yields. Importantly, in the Q4, we expect premium amortization to decline meaningfully and the yield on securities portfolio to increase. 3rd quarter fee income of $1,900,000,000 increased $274,000,000 or 17% linked quarter. BBVA USA contributed fee income of $184,000,000 an increase of $122,000,000 linked quarter, driven by 2 additional months of operating results. Legacy PNC fees grew by $152,000,000 linked quarter or 10%, driven by higher corporate service fees related to record M and A advisory activity as well as growth in residential mortgage revenue.

Speaker 3

Other non interest income of $449,000,000 decreased $19,000,000 linked quarter as higher private equity revenue was more than offset by the impact of $169,000,000 negative Visa derivative adjustment. This adjustment relates to the extension of the expected timing of litigation resolution. Turning to Slide 9. Our 3rd quarter expenses were up by $537,000,000 or 18% linked quarter. The increase was primarily driven by the impact of higher BBVA USA's expenses of $327,000,000 and higher integration expenses of $134,000,000 PNC legacy expenses increased $76,000,000 or 2.7 percent Due to higher incentive compensation commensurate with a strong performance in our fee businesses, including a record quarter in M and A advisory fees.

Speaker 3

Our efficiency ratio adjusted for integration costs was 64%. Obviously, with the acquisition, our expense base is now higher, Nevertheless, we remain disciplined around our expense management. And as we stated previously, we have a goal to reduce PNC standalone expenses by $300,000,000 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 $900,000,000 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 $900,000,000 of savings to be completed by the end of 2021. We still expect to incur integration costs of approximately $980,000,000 related to the acquisition.

Speaker 3

Since the announcement of the acquisition, we've incurred approximately half of 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. Non performing loans of $2,500,000,000 decreased 2 $251,000,000 or 9% compared to June 30 and continue to represent less than 1% of total loans. Total delinquencies of $1,400,000,000 at September 30 increased $106,000,000 or 8%.

Speaker 3

However, this increase includes approximately $75,000,000 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 $31,000,000 or 2%. Net charge offs for loans and leases were $81,000,000 a decline of $225,000,000 linked quarter. The 2nd quarter included $248,000,000 of charge offs related to BBVA USA loans, Mostly the result of required purchase accounting and treatment for the acquisition.

Speaker 3

Our annualized net charge offs loans in the Q3 with 11 basis points. And during the Q3, our allowance for credit losses declined $374,000,000 primarily driven by improvement in credit quality as well as changes in portfolio composition. At quarter end, our reserves were $6,000,000,000 representing 2.07 Percent of Loans. In summary, PNC reported a strong 3rd 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.

Speaker 3

In regard to our view of the overall economy, after somewhat slower growth during the Q3 of 2021, Due in part to the delta variant and supply chain problems, we expect GDP to accelerate to above 6% annualized in the 4th quarter. We also expect the Fed funds rate to remain near 0 for the remainder of the year. Looking at the Q4 2021 compared to the recent Q3 results. We expect average loan balances excluding PPP to be up modestly. We expect NII to be up modestly.

Speaker 3

On a percentage basis, we expect fee income to be down between 3% 5%, mostly reflecting the elevated Q3 M and A activity. We expect other non interest income to be between 3.75 expense to be down between 3% 5%, excluding integration expense, which we approximate to be $450,000,000 during the 4th quarter. And we expect 4th quarter net charge offs to be between $100,000,000 $150,000,000 And with that, Bill and I are ready to take your questions.

Operator

Followed by the number 4 on your telephone keypad. Please hold while we compile the Q and A roster. Your first question comes from the line of Dave George with Baird. Please go ahead with your question.

Speaker 4

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

Speaker 3

good morning.

Speaker 4

Good morning, Rob. On loans, so you said On the BBVA, there's an additional $5,000,000,000 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.

Speaker 3

Sure. Yes, again, good morning, Dave. So of the $5,000,000,000 that we've identified going forward that we intend to run off, dollars 2,000,000,000 of that we expect to run off in the Q4 and that's part of our guidance. The remainder likely over the next couple of years. Great.

Speaker 4

Thanks for that. In terms of kind of the legacy PNC, C and I business, Obviously, it was encouraging to see a little bit of kind of organic growth in the Q3. Can you give us a sense and this may be difficult, but Clearly supply chain is weighing on working capital needs. And I'm curious if you can contrast the growth in commitments relative to the growth standings 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.

Speaker 2

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

Speaker 5

that's right.

Speaker 3

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

Speaker 4

Sounds good, guys. Thanks.

Speaker 3

Sure.

Operator

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

Speaker 6

Good morning.

Speaker 3

Good morning,

Speaker 6

John. On your on the loan growth topic, that tick up in utilization and then also So 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?

Speaker 2

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 there.

Speaker 2

Just a

Speaker 3

little bit, yes. Yes, so basically business credit or asset based lending group and corporate banking.

Speaker 7

Got

Speaker 6

it. Okay. And then on the expense side, just wanted to see

Speaker 7

if you could talk a

Speaker 6

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 costs or the $900,000,000 in net cost saves? Thanks.

Speaker 2

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 $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.

Speaker 2

But there's real pressure there and the only way through time to kind of offset that pressure is through increased automation and frankly control an overall headcount.

Speaker 6

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

Speaker 2

Too early to tell, right? We're on this so 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 Continue our pursuit on positive operating leverage.

Speaker 3

And offset what is real in terms of wage pressure.

Speaker 6

Yes, got it. All right. Thank you.

Operator

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

Speaker 7

Good morning, guys. Thanks for taking the question. Rob, I 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.

Speaker 7

And then can you maybe sort of size up how the $900,000,000 in BBVA related cost savings fit into Q4 guidance. In other words, how much starts to come next quarter or comes next quarter and then how much is into 2022 still?

Speaker 3

Sure. So that's a lot there, Scott. But the easy answer to that is that's all in the guidance for the Q4. So We to your point, fee businesses have been they were good in the Q3. They've been good all year, across the board, Asset Management, Consumer Services, Corporate Services, particularly in the Q3, as well as residential mortgage.

Speaker 3

And With the exception of the elevated levels of M and A activity in Corporate Services, we see all of that continuing into the Q4 and that's part of the guide. So There'll be expenses that are obviously associated with that. In terms of the $900,000,000 in savings, we are Savings, presently we got some in the Q3, we'll get some more in the Q4. That's part of the guide. But the bulk of the savings will be in 2022.

Speaker 3

Reaffirming the $900,000,000 in savings, a portion of which we'll recognize in 2021 and then of course, going forward into 2022, call in our guidance.

Speaker 7

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 securities portfolio yield. Can you just expand upon that a little please?

Speaker 2

Sure. It was In its 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 We marked them as premium securities and then got caught by the

Speaker 3

And it was a function of the timing of the acquisition, Setting up those securities as premium securities.

Speaker 2

In its simplest form, what we did if you think about it is it knocked down goodwill And the way when we marked the book because we had a higher valued asset. So it took in effect took in income upfront and And we paid for it a little bit this quarter. That's right. Yes. I mean, Rob, the securities yield, the guide on the like that book yielded 50 basis points or something.

Speaker 2

About

Speaker 3

half. Yes.

Speaker 2

Yes. And we expect going forward the total book to increase.

Speaker 3

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

Speaker 8

Yes. I'm glad to

Speaker 3

hear that. So I did hear that. It is acquisition related.

Speaker 2

It was paying

Speaker 8

back with Good.

Speaker 7

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

Operator

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

Speaker 9

Hey, good morning.

Speaker 3

Good morning, Betsy.

Speaker 9

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 at 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've 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?

Speaker 3

Well, 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.

Speaker 3

But we're just getting started. So what you see in that rate, we still have work to go.

Speaker 9

Okay. And then when I'm thinking about the pace of that expense save from here, part of it's a function of The conversion, the lift and shift obviously. Yes. But then can you talk us through what comes after the lift and shift In terms of expenses trajectory?

Speaker 2

I don't know what you want to talk about. I mean

Speaker 3

Why don't you talk about

Speaker 2

the activities? Line items? I mean, we have

Speaker 9

No, like branch closures and what it is really the question is, is the limited

Speaker 2

shift Some of it's branch closures, some of it will be systems and vendor contracts and all sorts of different things that will roll through depending on time, some of which we leave around for a bit As sort of backup for notwithstanding the fact we've converted, we'll leave some stuff up and running for a little bit of time just For the in case?

Speaker 10

I

Speaker 3

think that's right. And probably, at least in terms of the pickup in the 4th quarter activity, we will At the mix, we will pick up more vendor savings. We've already started that and we'll start to pick those up at an accelerated rate.

Speaker 9

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

Speaker 2

It gives That's the wrong way to think about it. The fact that we get that done at one point in time allows us To then aggressively move costs, right, because legacy system shutdown, legacy vendor shutdown, Related people who were supporting old applications, all of that stuff now starts rolling through the system.

Speaker 9

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.

Speaker 2

Yes. And look, at the end of the day, the guidance is the guidance, right? We're going to get some more in the Q4 and then we're going to get it all next year.

Speaker 4

Yes. And

Speaker 3

I just say it. If we're

Speaker 2

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

Speaker 3

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 started sooner rather than later Unrealizing those savings.

Speaker 9

Got it. All right. Thank you.

Operator

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

Speaker 11

Good morning, Bill. Good morning, Rob.

Speaker 3

Hey, Gerard.

Speaker 11

Can you guys share with us you've mentioned a few times within the corporate services numbers that the advisory business. I think you said in the press release it was at record levels, but Rob, in your guidance, you expect it to come down. Other than the 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 and A? Is it Just that there's just not as much as many companies that are left to do M and A going into 2022?

Speaker 2

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

Speaker 3

That is going

Speaker 2

to weaken from here. By the way, inside of that, we obviously we have Harris Williams, but we also had Breakout quarters for Solberry and Six Point and related advisors. Yes. And if the market 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.

Speaker 2

That's right.

Speaker 11

Got it. And what does it represent now of corporate services or what did it represent in the Q3?

Speaker 3

Well, yes, no, I know the let's say, I'll do the quick math in my head, 25%.

Speaker 2

Yes. Got it.

Speaker 11

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. We've looks like the Fed now is going How are you guys looking at and I know there's a lot of moving parts with loan growth and maybe some deposit shrinkage, but when you look out over the end of 2022 and into 23 BBVA is fully integrated. What do you think is an optimal loan to deposit ratio for you folks?

Speaker 11

And when do you think you could get there?

Speaker 2

There's too many variables.

Speaker 11

Yes. Okay.

Speaker 2

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.

Speaker 3

85%, yes, 85% to 90%.

Speaker 2

And that was kind of a liquidity safety function. So if you were short liquidity at that point, you'd raise wholesale liquidity to kind of keep Your ratio at that point. Today, we're so flush with reserves into the system, wholesale funding Is next to 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.

Speaker 2

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 think it's going to take years to play out.

Speaker 11

Very good. I appreciate the color. Thank you.

Speaker 2

Yes.

Operator

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

Speaker 3

Hi. Hi, Mike. No

Speaker 12

good deed goes unpunished. So since you from announcement to conversion, under 11 months, Probably a record. Why aren't you increasing your $900,000,000 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 lakes or something digital that you're doing that you think others Have advanced as far as you have.

Speaker 2

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 There's 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.

Speaker 2

So we just We put that into our guidance. We say, look, we'll get the 900,000,000 we'll talk to you about 2022 when we get closer, but we haven't lost focus on the primary objective here.

Speaker 3

Well, and the 900, 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. Yes.

Speaker 2

We did it on time. But that was a number that I don't know how to say this, visual till we can see it. We know the line items. It's very precise. The technology, Look, it worked.

Speaker 2

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. It's just phenomenal effort by our team and validates the investment we've made over the years. I don't know what people have or don't have in terms of their ability to do that. 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 Very easy.

Speaker 2

You move data and you onboard a new client. It's not much different than as if we just got A couple of 1000000 new clients overnight. That I make it sound very easy and all my technologists are ripping their hair off right now. 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 in technology.

Speaker 2

So technology at 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.

Speaker 12

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 time, what you added?

Speaker 2

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

Speaker 3

it was the last number I said.

Speaker 2

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

Speaker 12

And that was I was just wondering I have the numbers right. Was that out of 600 and you have 300 or something like that? And I mean you've talked about this much more.

Speaker 2

We went through that before I can't remember them off the top of my head, but they had twice the number that we have. That feels roughly They had 6 They had 600, and we run the whole bank on 300.

Speaker 1

A little more than 300.

Speaker 2

Yes. A little more.

Speaker 12

Yes. Why was that I mean, that's The number that stands out, they're so much smaller, yet they had twice as many apps. Just how do you get that state?

Speaker 2

Yes. I mean, I think once you start using API based programs. 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.

Speaker 2

So Let's say you had an application that just needs a checking account balance. Rather than you write a full application that goes and finds a checking account balance off your core ledger. We just have an API you drag in and produce it. I think that's a big part of it. It's also credit to the team way back when we did National City.

Speaker 2

We moved everything on to single applications, right? A lot of times that BBVA might have done this, you'll do an acquisition, you just keep too many applications because you don't want to choose between 1 or between the 2 of them.

Speaker 12

Got it. All right. Thank you.

Operator

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

Speaker 8

Hi, good morning, guys. 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 Q4 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.

Speaker 8

What happened to that going forward?

Speaker 3

Yes. In simple terms, John, I think you're right, it is confusing. But Simply put, we expect PPP to be down on average about $4,000,000,000 in the 4th quarter. In the 3rd quarter, net interest contribution from PPP was about $100,000,000 and we expect that to go down approximately 25 to 30 And that is in our guidance, our NII guidance.

Speaker 8

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 discussion that you had with Gerard about loan to deposits, but could that go higher over time if loan growth doesn't surface As much as we think.

Speaker 2

I think it could. I think that depends on 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 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

Speaker 8

Got it. Okay. Thanks, guys.

Speaker 3

Sure.

Operator

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

Speaker 5

Thank you. Good morning, Bill and Rob.

Speaker 12

Good morning.

Speaker 5

Following up on Gerrard's question As we look ahead to spend tapering and eventually rate hikes, how are you thinking about deposit betas relative to when we exited the last reserve cycle.

Speaker 2

I think they're going to be a lot lower simply because there's so much cash 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 in the margin, they've got

Speaker 3

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

Speaker 5

Yes. 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.

Speaker 5

Just trying to get a feel for how big that is and how much of an impact is having.

Speaker 2

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 And it depends what industry you're in. If you're dependent on chips for your manufacturer, it's a struggle. Other businesses We're not and could build immediately and maybe we're already seeing the benefit of that.

Speaker 5

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

Speaker 3

Hey, Bill, it's Rob. In terms of contrasting with RBC, just set that aside. In terms of The BBVA, we're very confident in terms of the numbers, as Bill mentioned, that we've laid out and the plans to get there. It's probably on the increment better than RBC just because it's bigger. We know what we do.

Speaker 3

It's very familiar to you. Of course, RBC was successful, but this is I mean This is Morif.

Speaker 2

Mike would say my clients 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. 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.

Speaker 2

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.

Speaker 3

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.

Speaker 5

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. First, is there a revenue opportunity for PNC As you've taken a poster look at it.

Speaker 5

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

Speaker 2

So what we talked about or what we are contemplating offering, we literally have built today, to our clients and look our clients are And it is an ability for them to trade crypto in a safe fashion through mobile app at PNC. I don't have to opine on whether I think that's a good investment or not a bad investment. We know with certainty that we have 10% 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 stablecoin, is a real threat.

Speaker 2

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 savings, get absorbed into a stablecoin 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.

Speaker 2

But that's independent of whether we let our clients trade Bitcoin. Right,

Speaker 10

right. Yes. But there is

Speaker 5

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

Speaker 2

Sure. I mean at the margin. Yes, at the margin. Don't say

Speaker 3

it is a big driver.

Speaker 5

Right, right. I got it. That's super helpful. Thank you again for taking my questions.

Speaker 6

Sure.

Operator

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

Speaker 13

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 1.4 5.4% securities yield, like what either the basis point impact was or if you even have the total dollars of premium M for the company and what do you expect that to look like going forward?

Speaker 3

Well, 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 2nd quarter levels.

Speaker 13

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 settlings and Just what you're seeing in the market today and where you can get your hands on.

Speaker 3

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

Speaker 2

The yields we're buying out today, but we expect the yield on the total book to increase pretty substantially next quarter largely because of a Decrease in the amortization costs. That's right.

Speaker 13

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 to

Speaker 3

de minimis in the 3rd end going into the 4th quarter, which is a good thing.

Speaker 13

Yes. Okay, great. Thanks.

Operator

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

Speaker 1

Thanks. Good morning. Bill, you mentioned at an industry event last month that California was an underperforming franchise, I believe at legacy BBVA US. What are your thoughts on turning that around? Is it build?

Speaker 1

Is it buy? Or is it just internally work to improve the franchise.

Speaker 2

It's building and 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.

Speaker 3

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

Speaker 10

Thanks. And then just as

Speaker 1

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 was it $125,000,000 to $150,000,000 the decline in overdraft fees, is that still the right

Speaker 2

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 transfer money before they get hit with a charge. It's people being able to choose the order at which Want to pay a bill and return items with no return fee.

Speaker 2

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 something.

Speaker 2

Yes.

Speaker 3

On overdraft even higher than that.

Speaker 2

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

Speaker 10

Great. Thank you.

Operator

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

Speaker 9

Good morning. It seems

Speaker 10

like the loan portfolio at BBVA USA will be mostly derisked or runoff by Again, this 4Q with just a couple of 1,000,000,000 left in the next few years. Is there an opportunity to kind of 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 1st legacy PNC or just some low hanging fruit to fill some of that loan runoff between this quarter and next?

Speaker 2

It's embedded in our guidance. I mean, you got to Appreciate it, Matt. We're not if loans are up or down by $1,000,000,000 in a quarter, 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.

Speaker 2

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.

Speaker 3

What 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, but that's obviously a big opportunity for us.

Speaker 10

Okay. Yes, and I wasn't so much looking for just the Q4. I guess, I was just thinking like the next few quarters, do you get outsized loan growth Given,

Speaker 8

the number of key citizen.

Speaker 2

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 It's all new customers and new markets and we fully expect that we're going to be able to do that in all of these new markets That we just developed. Admittedly, with some noise in the front because we're going to run off a little bit out of BBVA and outright loan growth as we've seen fairly tepid at the moment.

Speaker 10

Okay. Thank you.

Operator

Thank you. Followed by the 4 on your telephone keypad. Our next question is a follow-up from Gerard Cassidy from RBC. Please go ahead.

Speaker 11

Hi. Thank you for taking the follow-up question. Phil, 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 that 25% and 25% program.

Speaker 11

So the question is this, Can you share with us what it means for the people right above 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?

Speaker 2

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 it is to figure out in fact how you Move people up who are today at 18, but tomorrow if The $15 person went to $18, the $18 person goes to $20.50 or so. And I'm making up numbers

Speaker 4

here, but

Speaker 2

that's the majority cost. And by the way, it's a majority of the work set to get right.

Speaker 11

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

Speaker 2

Yes. Thank

Operator

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

Speaker 12

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 your commercial clients are 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 you think

Speaker 3

we get

Speaker 12

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?

Speaker 2

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 Q4 into next We're going to have really accelerated loan growth. If we bounce around where we are, then it's going to be somewhat muted.

Speaker 2

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

Speaker 12

Okay. Well, maybe just specific numbers in the utilization a little bit more. You tend to set 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?

Speaker 3

It's still what 15 points? Well, if you go, we're at 49 ish and we're at a 54, 55, sort of normalization. Yes. So we're

Speaker 2

at least 10 points off and we're probably 15 points, 20 points off the peak in March of last year. Great. All right. There's a lot of room here.

Operator

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

Speaker 2

All right. Well, thank you everybody. Look forward to talking to you in the Q4. Thanks. Thank you.

Operator

Conference call. You may now disconnect.

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