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PNC Financial Services Group, Inc. (NYSE: PNC)
Q2 2018 Earnings Call
Jul. 13, 2018, 1:30 pm ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Colin, and I will be your conference operator today. At this time, I would like to welcome everyone to the PNC Financial Services Group Earnings 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. If you'd like to ask a question during this time, simply press the No.1 followed by the No.4, on your telephone keypad.

If you would like to withdraw your question, please press one and then the No.3, on your telephone keypad. As a reminder, this call is being recorded. I will now turn the call over to the Director of Industrial Relations, Mr. Brian Gill. Sir, please go ahead.

Brian Gill -- Director of Industrial Relations -- PNC

Thank you, Colin. 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 financial measures are included in today's earnings release, related presentation materials, and SEC filings. These materials are all available on our corporate website pnc.com under Invest Relations. These statements speak only as of July 13th, 2018 and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill Demchak.

Bill Demchak -- Chief Executive Officer -- PNC

Thanks, Brian. Good morning, everybody. You've seen this morning that PNC reported second quarter net income of $1.4 billion or $2.72 per diluted common share. Overall, we thought it was a really good quarter highlighted by continued solid execution on our strategic priorities, with our key financial metrics all moving in the right direction. You would have seen we grew loans on both the corporate consumer side, and we also grew deposits this quarter.

We grew our net interest income and NIM, as we increased investment securities and reduced our cash position at the Fed. We grew fees and customers, and we manage expenses while achieving positive operating leverage and improving efficiency. Credit quality remained strong with non-performers declining and losses stable. We maintained our strong capital and liquidity positions in the quarter, and the Fed accepted our capital plan without objection.

The CCAR severely adverse scenario this year was definitely much tougher than it's ever been before, but as the results indicate, we would remain well above the post-stress minimums. In regard to our capital return plan, I would point out our focus this year was to deliver a solid increase in our dividend, which we did. On the share repurchase component with the benefit of high insight, we were obviously more conservative with our submission than we needed to be.

Importantly though, I want to emphasize that we continue to see buybacks as being attractive at current levels. Finally, we continue to invest in our businesses. These investments include: Our digital product and service offerings, new consumer and small business lending projects, healthcare payments processing, and the ongoing expansion of our middle market corporate banking franchise.

In fact, I'm happy to announce that on the back of the early success we've had in our previously announced expansion markets over the last 18 months or so, we're looking forward to further expanding the franchise into Boston and Phoenix in 2019. Halfway through the year, we feel good about our execution. Our relationship-based business model is working, and that is creating growth opportunities for us.

All that said, we have a lot of work to do in the back half of the year, including the launch of our national retail digital mall. Before handing it over to Rob, I just want to thank our employees for the continued hard work, as well as our clients for their trust in us. With that over to you, Rob.

Rob Reilly -- Executive Vice President and CFO -- PNC

Great. Thanks, Bill. Good morning, everyone. As you've seen by now, and Bill just mentioned, we reported net income of $1.4 billion or $2.72 per diluted common share. It was a good quarter by virtually all measures. Our balance sheet is on slide four, and is presented on an average basis.

Total loans grew by 1% linked-quarter and 3% compared to the same quarter a year ago. Investment securities increased 4% linked-quarter as we continue to deploy our liquidity and relatedly, our cash balances at the Federal Reserve were down linked-quarter and year-over-year. Deposits were relatively stable linked-quarter and up 2% year-over-year. As of June 30, 2018, our Basel III common equity Tier one ratio was estimated to be 9.5% down from 9.6% as of March 31, 2018, reflecting continued strong capital return to shareholders and a decline in accumulated other comprehensive income.

Importantly, we maintained strong capital ratios even as we returned $1.2 billion of capital to shareholders or 92% of second quarter net income. We repurchased $5.7 million common shares for $823 million and paid dividends of $354 million. Following the CCAR results last month, we announced a new plan to repurchase up to $2 billion shares over the next four quarters. Earlier this month, our board also approved the 27% in the quarterly dividend to an all-time high of $0.95 per share effective in August.

Our return on average assets for the second quarter was 1.45%, our return on average common equity was 12.13%, and our tangible book value was $72.25 per common share as of June 30, an increase of 5% compared to a year ago. Turning to slide five. Average rounds were up $1.6 billion or 1% linked-quarter and $6.3 billion or 3% compared same quarter last year. Commercial lending was up $1.5 billion compared to first quarter, the growth was broad-based across C and IB businesses led by corporate banking and business credit, and pipelines remain healthy.

Compared to the same quarter a year ago, commercial lending increased $5.5 billion, a strong growth was partially offset by declines in our real estate business. CRE remains a challenge, as we continue to see fewer deals that meet our risk appetite and payoffs continue at a steady rate. Consumer lending increased by approximately $100 million linked-quarter and $800 million year-over-year, reflecting growth in auto, residential mortgage and credit card loans.

This was partially offset by declines in home equity and education lending. Investment securities of $77.5 billion increased $2.8 billion or 4% linked-quarter, purchases were primarily agency, residential, mortgage-backed securities, and U.S. treasuries. Our cash balances at the Fed averaged $20.7 billion for the second quarter, down $4.7 billion linked-quarter and $1.4 billion year-over-year, as we continue to deploy our liquidity. Turning to slide six. Deposits increased approximately $300 million linked-quarter, driven by growth in consumer deposits partially offset by seasonally lower commercial deposits. Compared to the same period last year deposits increased by $4.6 billion or 2%.

As expected, deposit betas continued to increase in the second quarter, our cumulative beta since December 2015 was 26% up from 21% last quarter. While our current beta since March 2018, was 50%. Our expectation is that cumulative betas will continue to increase throughout the remainder of the year, particularly on the consumer side as they still lag stated levels. As you can see on slide seven, net income in the second quarter was $1.4 billion. It was a strong quarter and we delivered positive operating leverage both in the second quarter and year-to-date.

Revenue was up 5% linked-quarter driven by growth in both net interest income and non-interest income. Non-interest expense increased 2% compared to the first quarter, reflecting our continued focus on cost management. Provision for credit losses in the second quarter was $80 million, as overall credit quality remained strong. Our effective tax rate in second quarter was 18.3%, impacted by strong pre-tax earnings. For the full-year of 2018, we continue to expect the effective tax rate to be approximately 17%. Now let's discuss the key drivers of this performance in more details.

Turning to slide eight, net interest income increased $52 million or 2% linked quarter and $155 million or 7% compared the same period last year as growth in earning assets and higher yields were partially offset by higher funding calm.

The linked quarter comparison also benefited from an additional day in the second quarter. Net interest margin was 2.96%, an increase of five basis points compared to the first quarter. Non-interest income increased 9% linked quarter and 6% year-over-year as we remain focused on growing fee-based revenue. Importantly, fee income grew 5% linked quarter despite softness in residential mortgage.

The main drivers of the $72 million linked-quarter fees are as follows. Corporate services fees increased $58 million or 14% reflecting higher M&A advisory, treasury management than loan syndication fees as well as the benefit from commercial mortgage servicing rights. Consumer services fees increased $24 million or 7% largely due to seasonally higher customer activity in debit card, merchant services, and credit card.

The growth in these categories was partially offset by lower residential mortgage non-interest income, which declined $13 million. Servicing fees decreased as a result of higher payoff volumes. Loan sales revenue also declined despite higher originations. Increased competition and a shift in mix away from refinancing to purchases pressured our gain on sale margin.

Finally, other non-interest income of $334 million, increased $89 million compared to the first quarter and included a $27 million net benefit from VISA at their value adjustments. Additionally, we had higher revenue from private equity investments and commercial mortgage loans held-for-sale activity. Going forward, we continue to expect the quarterly run rate for other non-interest income to be in the range of $225 million to $275 million, excluding net security and VISA activity.

Turning to slide nine, second quarter expenses increased by $57 million or 2% linked quarter, reflecting seasonally higher business activities and marketing. Our efficiency ratio was 60% in the second quarter, down both linked quarter and year-over-year.

As you know, we have a goal to reduce costs through our continuous improvement program by $250 million in 2018 while we remain on track to achieve our full-year target. In 2018, these savings which are across all expense categories are helping to offset higher personnel expenses related to new initiatives as well as the increase in the minimum hourly wage commitments we made to our employees at the end of 2017.

Our credit quality metrics are presented on slide 10. In overall, we improved in every measure. Compared to the first quarter, total nonperforming loans were down $123 million or 7% and continue to represent less than 1% of total loans. Total delinquencies were down $28 million or 2% linked quarter, driven by a decline in consumer delinquencies past due 90 days or more.

Provision for credit losses of $80 million decreased by $12 million linked quarter, reflecting a lower provision for commercial loans. Net charge-offs declined $4 million linked quarter and were essentially unchanged year-over-year. In the second quarter, the annualized net charge-off ratio was 20 basis points down one basis points linked quarter.

So, in summary, PNC posted strong second quarter results. For the remainder of the year, we expect continued steady growth in GDP. We continue to expect one more 25 basis point increase in short-term interest rates this year, but we now expect it to occur in September rather than December.

Looking ahead to third quarter of 2018 compared to second quarter 2018 reported results, we expect modest loan growth. We expect total net interest income to be up low single digits. We expect fee income to be up low single digits. We expect other non-interest income to be in the $225 million to $275 million range. We expect expenses to be stable and we expect provision to be between $100 million and $150 million.

Taking into account our third quarter guidance, we would like to take this opportunity to refine our full-year outlook. In light of our view on interest rate increases that I just mentioned as well as the strong fee income performance we've seen in the first half of the year, which we expect to continue into the second half, we now expect full year total revenue to grow in the upper end of the mid single-digit range. Commensurate with our expectations for higher fee income, we now expect marginally higher full-year expenses resulting in lower mid single-digit growth.

Robert Reilly -- Executive VP & CFO -- PNC

So to be clear, our full year 2018 guidance compared to adjusted 2017 results is as follows: We expect mid-single digit loan growth; We expect upper mid-single digit revenue growth; We expect expense growth in the low-end of the mid-single digit range. And importantly, we remained positioned to deliver positive operating leverage in 2018. And with that, Bill and I are ready to take your questions.

Operator

Thank you. At this time, if you would like to ask a question please press the No.1 followed by the no.4 on your telephone keypad. Please hold while we compile the Q&A roster. Your first question comes from the line of John Pancari with Evercore Partners. Your line is open, please go ahead with your question.

John Pancari -- Analyst -- Evercore Partners

Morning.

Rob Reilly -- Executive Vice President and CFO -- PNC

Hey, John.

John Pancari -- Analyst -- Evercore Partners

On the revenue growth outlook that you just mentioned, your rationale on pushing it higher is I get the first part of the year so far and particularly the second quarter come in a little bit better, is the rest of it only the revision given your Fed outlook or is there still other strengthening in the back half of the year on the revenue front that you're factoring in now?

Robert Reilly -- Executive VP & CFO -- PNC

Hi, I'd say, John. This is Rob. Good morning. I'd say it's all of the above. I think the important takeaway is we are running a little higher to date than we expected and we expect that to continue for all the reasons that you mentioned.

John Pancari -- Analyst -- Evercore Partners

Okay. All right. Then, separately on the loan demand side, just want to see if you could talk a little bit about what you're seeing. I know you indicated that pay downs are still elevated in commercial real estate. I'm wondering what you're seeing in terms of demand on the commercial side? Do you expect any impact related to the trade wars and? I know your loan growth outlook was unchanged despite any maybe underlying improvement we're seeing in CapEx for example? Thanks.

Robert Reilly -- Executive VP & CFO -- PNC

Yes, I'd say that when we look at the second half of the year, as I mentioned, the pipelines for loan and C&IB growth is healthy. I think the big change and nothing due at this quarter, but the big change over the last couple of years has been the CRE component, which has been flat. But corporate banking, our middle-market the pipeline's healthy, our business credit's secured. Specially businesses all look pretty good. Large corporate, not as strong as it was and we think in part, that's due to some of the cash repatriation and some of the tax reform. But I'd say generally speaking, it looks healthy.

Bill Demchak -- Chief Executive Officer -- PNC

Not withstanding all the daily news trade, it doesn't seem to be showing up in the sales pipeline or loan demand or even in dialogue with clients. There's obviously a handful who are impacted or maybe more than that. But as a practical matter, when we look at our pipeline it doesn't seem to be playing into it at this point.

Robert Reilly -- Executive VP & CFO -- PNC

That's right.

Operator

Our next question comes from the line of John McDonald with Bernstein. Your line is open, please go ahead.

John Mcdonald -- Analyst -- Bernstein

Hi. Good morning guys. I wanted to ask a little bit about the rates and the curve. The bank stock has really been way down by the flattening 2 to 10 investors focused on that. In this quarter, we saw you benefit from higher short rates and you put cash to work, kind of in the mid to longer end. So, kind of wondering where is the curve relevant for you and where it's not relevant? Kind of how you think about this kind of curve debate that's happening relative to your fundamentals.

Bill Demchak -- Chief Executive Officer -- PNC

I don't know that it's debate. I mean, if the curve flattens it ultimately hurts us and we benefit from the floating-rate loans as LIBOR goes up, but our yield on invested securities to the extent that tenure keeps straight inside of three years suffers. We did increase securities this year, but I would tell you some amount of the duration from that was offsetting interest rate swaps that we unwound.

hich helps on that front as well. But at the end of the day, if we hang around some range bound around 3% on the tenure, we're going to see our securities portfolio attract them.

Operator

Our next question comes from the line of Erika Najarian with Bank of America. Please go ahead with your question.

Erika Najarian -- Analyst -- Bank of America

Hi, good morning.

Bill Demchak -- Chief Executive Officer -- PNC

Hi.

Erika Najarian -- Analyst -- Bank of America

The one question I've gotten in the most from your investors recently is on the buyback. I think everybody got the message, Bill and Rob that you wanted to focus on the dividend. But I guess we are wondering, would you be open to the de minimis option, where you could repurchase 25% of your Tier 1 capital without an additional ask in the CCAR cycle?

Bill Demchak -- Chief Executive Officer -- PNC

That's a new room. Twenty-five percent of your Tier 1 without an-

Erika Najarian -- Analyst -- Bank of America

Okay 25 basis points. So, not 25%, so just dialling that down.

Bill Demchak -- Chief Executive Officer -- PNC

Look, at this point, we just got done with the CCAR process, so we'll take a look at it. Of course, they also put in a commentary that you can resubmit if you want to. We'll watch that play out through the course of the year. The one thing I would say on the buybacks, the other question you guys have relayed to us is are we saving capital for some sort of acquisition? The answer to that is no.

So at the end of the day, whether we do a little bit more this year, we do extra next year, holding capital, and not doing anything stupid with it, but invest it in our business. It's a good thing and we have a lot of, as you've heard us talk about growth opportunities inside the company itself. So, we'll look at it as the year goes on as to whether we resubmit or use a de minimis and the other stuff, but in the meantime, we're not going to do anything silly with your capital.

Robert Reilly -- Executive VP & CFO -- PNC

And we do see the current share prices as attractive.

Bill Demchak -- Chief Executive Officer -- PNC

Yeah.

Operator

Our next question comes from the line of Scott Siefers, with Santer O'Neill and Partners. Please go ahead with your question.

Scott Siefers -- Analyst -- Santer O'Neill and Partners

Morning guys. I guess I was hoping you could touch a bit on the provision guidance and I guess we're sort of getting back into that phenomenon where even a $100 to $150 million range starts to look kind of conservative, just with how strong the trends are, so I was hoping you could just chat a little about what it would take to get you back into that range and just overall trends probably?

Bill Demchak -- Chief Executive Officer -- PNC

One of the things you have to keep in mind and the reason we kind of have it higher than we're printing, is it is so low now that single credits can impact it. So, we could have a blip on a few credits going a quarter and put us back in that range pretty easily. And even that range that we're guiding to right now, is below what you would expect. Sort of on average through this cycle. So, we're just at really low levels and maybe we're conservative in saying, we'll be a little higher and we keep surprising ourselves. It just takes a tiny blip to move.

Robert Reilly -- Executive VP & CFO -- PNC

Yeah, that's right Scott. This is Rob. We're just working off such low, absolute levels. Particularly, in the commercial portfolio, literally a deal or two moving in either direction can affect the range. So, that's a good thing and a good place to be, but it does make the guidance.

Bill Demchak -- Chief Executive Officer -- PNC

[inaudible] a low number.

Robert Reilly -- Executive VP & CFO -- PNC

That's right, that's right.

Operator

Our next question comes from the line of Betsy Graseck, with Morgan Stanley. Your line is open, please go ahead.

Betsy Graseck -- Analyst -- Morgan Stanley

Hey, good morning.

Bill Demchak -- Chief Executive Officer -- PNC

[inaudible] .

Betsy Graseck -- Analyst -- Morgan Stanley

Question on just as we're thinking about the amount within trajectory, I know we talked about the deposit Beta side and FPLs, et cetera, but could you give us a little color on how you're thinking about the non-deposit funding and is there any type of mix shift we could see you do there overtime? Is there any kind of restructuring that you might consider? Because those cost of funds came up quite a bit in the past couple of quarters and then maybe there's an opportunity there to restructure that and slow the uptick in cost of funds on that side of the balance sheet.

Bill Demchak -- Chief Executive Officer -- PNC

I'm not sure I follow. I mean, the cost of funds increase is just related to the increase in [inaudible] as much as anything else. As we swap effectively, our wholesale borrowing' back into floating. So, it hasn't gone up on a relative cost basis other than the impact on interest rates and, of course, net-net, we benefit from that increase in rates on our floating rate loan portfolio. So, no, I don't see any opportunity.

Rob Reilly -- Executive Vice President and CFO -- PNC

Or a need to shift, right?

Bill Demchak -- Chief Executive Officer -- PNC

Yeah.

Betsy Graseck -- Analyst -- Morgan Stanley

Okay, and just the mix between sub-debt or [inaudible] debt or FHLB or other borrowed, is there any mix up at all?

Bill Demchak -- Chief Executive Officer -- PNC

We're in a pretty good place.

Betsy Graseck -- Analyst -- Morgan Stanley

Okay. Just follow up on the digital banking strategy. I know you're rolling that out. Could you give us a sense as to where you're really pushing that more than others? Because it feels like as you roll that out, it's a marketing push and I'm just wondering, are you really doing it on a nationwide basis or is it specific MSAs that you're focused on first.

Bill Demchak -- Chief Executive Officer -- PNC

Well, it won't be enabled as a function of specific geographies and zip codes. Both the ability to find it and search and then, ultimately, to open an account and move money. We do that purposely so we don't, in effect, [inaudible] back with our existing markets. At launch, it will be basically available on a national basis in all markets where we currently don't have core branch presence. We will focus our marketing efforts on a few select markets which we'll announce sometime over the next month probably. That'll be obvious to you when we do it. So, it will be available basically on a national basis but we'll focus it on markets where we already have a presence, just not retail, and where we are actually building branches just at a very thin network relative to.

Rob Reilly -- Executive Vice President and CFO -- PNC

The company, the company.

Bill Demchak -- Chief Executive Officer -- PNC

Yeah.

Betsy Graseck -- Analyst -- Morgan Stanley

Got it. So, that would include Boston and Phoenix that you announced.

Bill Demchak -- Chief Executive Officer -- PNC

Eventually, they will be our early ones.

Betsy Graseck -- Analyst -- Morgan Stanley

Got it.

Bill Demchak -- Chief Executive Officer -- PNC

It'll be available there day one, it's just you won't see billboards and branches.

Rob Reilly -- Executive Vice President and CFO -- PNC

The physical.

Bill Demchak -- Chief Executive Officer -- PNC

Yeah.

Betsy Graseck -- Analyst -- Morgan Stanley

Then how do you measure success in those types of markets?

Bill Demchak -- Chief Executive Officer -- PNC

That's a fair question. I think at this point, I mean, you've heard me talk about this, what we're doing is chasing deposits with a low, in effect, marginal cost to them because we don't have a big physical plant cost associated where the deposits come in. So, it doesn't take much to offset the cost of what we'll deploy in marketing in the small branch build. I would think given the offering, we'll have out the simplicity of it, the linkage to the rest of the bank in our brand that we ought to be able to grow that deposit base at least as quickly as some of the other larger digital players that you see out there.

Betsy Graseck -- Analyst -- Morgan Stanley

Okay, and the pricing of the deposits?

Bill Demchak -- Chief Executive Officer -- PNC

It's going to be competitive.

Betsy Graseck -- Analyst -- Morgan Stanley

Okay.

Rob Reilly -- Executive Vice President and CFO -- PNC

And we're looking to learn.

Bill Demchak -- Chief Executive Officer -- PNC

I mean I think part of this is the trend is definitely moving toward digital account opening to digital deposits and the ability to pay higher rates with low cost base behind it. I don't think anybody knows the actual pace at which this is going to grow, and when and if you get a convergence between digital deposit pricing and what we pay in core accounts as we thin the rest of the network.

So we're going to kind of test and learn and by the way we'll do it somewhat differently in each market as it relates to the way we spend marketing dollars, and we'll see what happens and we'll report back as we learned.

Betsy Graseck -- Analyst -- Morgan Stanley

And the competitive is competitive versus online deposit gatherers?

Bill Demchak -- Chief Executive Officer -- PNC

Yes.

Betsy Graseck -- Analyst -- Morgan Stanley

Yeah. All right that's helpful, thanks.

Bill Demchak -- Chief Executive Officer -- PNC

Yes.

Operator

Our next question comes from the line of Gerard Cassidy with RBC Capital Markets, your line is open please go ahead.

Gerard Cassidy -- Analyst -- RBC Capital Markets

Good morning Bill, good morning Rob.

Bill Demchak -- Chief Executive Officer -- PNC

Good morning.

Rob Reilly -- Executive Vice President and CFO -- PNC

Hey Gerard.

Gerard Cassidy -- Analyst -- RBC Capital Markets

Can you guys give us a little more color in the other revenue category? You touched on the private equity gains in generating that revenue and the number was up nicely. Can you give us a little more detail on what's in there and what was private equity maybe onetime in nature?

Rob Reilly -- Executive Vice President and CFO -- PNC

Yeah, sure Gerard this is Rob. The other category includes a lot of various line items, but the three biggest drivers tend to be private equity, asset sales, and CVA. So in this quarter, as we mentioned, private equity had they had a very strong performance. And then on top of that, we had the visa valuation adjustments so those are really the two big drivers. We guide the 225 to 275 because that's where it tends to be on average but because of the clunkiness of that category, it can be higher in one quarter and lower in the next. In this quarter, it was just higher.

Gerard Cassidy -- Analyst -- RBC Capital Markets

I see. Thank you, and then the follow up on your conversation on digital, have you guys figured out or do you have a sense of we know a lot of folks go and purchase savings accounts or money market funds through the digital channel but opening up checking accounts seems to be maybe a little bit of more of a hurdle. Have you guys done any, I know you're not going to be rolled down to later this year, but what's your guys thinking of actually, new customers opening checking accounts online through the digital channel, what kind of success you might have this time next year?

Bill Demchak -- Chief Executive Officer -- PNC

That's the big unknown question. We have spent a lot of time on the design and simplicity by which you can first open a high-yield savings account and that ultimately converted to a virtual wallet account. We believe as evidenced by the Fed, we're going to go in and build this branch network that we will have some amount of success with that, but that's what we're going to have to figure out.

The research basically says that there is an excess of 60% of consumers who are comfortable with a largely digital relationship with their bank subject to sort of a thin presents. Giving them some amount of comfort that they can go into building stream on something, screening somebody if we get something wrong. But we're going to set it up to the best of our ability. We're going to test and learn and we'll see through time.

My own belief is that over time, we will see that exceed. I just don't know how long it's going to take and you're absolutely correct, that's far. People haven't been able to do that too much extent.

Gerard Cassidy -- Analyst -- RBC Capital Markets

Great, thank you very much.

Operator

Our next question comes from Ken Usdin with Jeffery's. Your line is open please go ahead.

Ken Usdin -- Analyst -- Jefferies

Thanks good morning guys. Rob, on the securities portfolio, noticed that obviously put a lot of liquidity to work. I wanted to ask you 291 average yield, what are you finding? What are your new money yields coming on at? How much more remixed into securities at a cash? Do you still have the ability to do especially with we're still quite attractive loan to deposit ratio? Thanks.

Rob Reilly -- Executive Vice President and CFO -- PNC

Sure Ken. In regard to the securities book in terms of what we're purchasing agency is residential agencies and treasuries. In total, new ads are higher than the 291 around 3% level, which is why you've seen some of that movement. We still have a lot of liquidity, the 20 billion, approximate 20 billion or so at the Federal, which could be moved into by definition, into high-quality level one security. So we still have a lot of flexibility and we'll continue to deploy more money on a tactical basis.

Ken Usdin -- Analyst -- Jefferies

Okay, great. Then one question on just the regulatory outworking though to create mobility and didn't have a lot to offer banks of your size, any incremental hopes of what might come down the pike that you might see some benefits from down the road or hopes that you might see?

Bill Demchak -- Chief Executive Officer -- PNC

Governor Quarles has made a lot of public comments separately in conversation with some of the industry groups. They, at some point, intend to put out what I think will be a more scaled approach to both LCR and some of the seen bucket items. So effectively, the things impacted by Basel two and the hardline at $250 billion. My hope would be to see that they would in effect rather than have, for example on LCR, a 70 and 100, they would instead sort of scale that number as a function of asset size and other measures of complexity rather than have a binary triggered a certain dollar amount and all the body language out of the fed suggests that they're going to do something like that.

Rob Reilly -- Executive Vice President and CFO -- PNC

Obviously, we're resented to that, the more the tailoring approach versus the simple asset side.

Brian Gill -- Director of Industrial Relations -- PNC

Next question please.

Operator

Our next question comes from Kevin Barker with Piper Jaffrey. Your line is open. Please go ahead.

Kevin Barker -- Analyst -- Piper Jaffrey

Good morning.

Bill Demchak -- Chief Executive Officer -- PNC

Hey, Kev.

Kevin Barker -- Analyst -- Piper Jaffrey

Rob you may have mentioned that the consumer, I mean deposit betas are expected to accelerate through the rest of this year even though they've accelerate quite a bit here in the second quarter from the first quarter up to 40%.

Rob Reilly -- Executive Vice President and CFO -- PNC

Yeah.

Kevin Barker -- Analyst -- Piper Jaffrey

Is that catch-up in the back half of the year and you expect it to go above 50% as we move through the second half?

Rob Reilly -- Executive Vice President and CFO -- PNC

I think a catch up is probably a good word and that's why we put that chart, we break that chart in between current datas and cumulative data. So what changed this quarter was across commercial and consumer, and as a result total, our current datas one above our stated datas. But you can see on the cumulative data we're still lagging. So I do see, I see some acceleration on the current data which by definition will pull up the cumulative data but the cummulative just moves a little slower.

Kevin Barker -- Analyst -- Piper Jaffrey

Okay, and then given the outlook for rates in the back half of this year and given your revenue guidance it implies that you probably have quite a bit of acceleration loan growth combined with a little bit expansion then. Are you assuming that deposit datas and borrowing funds continue to grow or at least move higher at the same rate that we saw in the first half of this year?

Rob Reilly -- Executive Vice President and CFO -- PNC

Well, what I'd say to make it easy is in terms of our guidance for the year that's all those thoughts are baked in there. A lot of moving parts there, but that's our best estimate.

Kevin Barker -- Analyst -- Piper Jaffrey

Thank you very much.

Bill Demchak -- Chief Executive Officer -- PNC

Sure.

Operator

Our next question comes from the line of Brian Klock with Keefe, Bruyette & Wood. Your line is open, please go ahead.

Brian Klock -- Analyst-- Keefe, Bruyette & Wood

Good morning guys.

Brian Gill -- Director of Industrial Relations -- PNC

Good morning. Hi Brian.

Brian Klock -- Analyst-- Keefe, Bruyette & Wood

I wanted to follow up a little bit on the deposit side, not the Beta question but just overall balances and looking at be end-to-period spot balances. It looks like the DDA balances have been declining since the third quarter of 16 roughly, and we were over 82 billion at the end of the third quarter 60, now at 79, and then down about 1% year-over-year. So, are you seeing commercial companies shifting into the try to get some rate?

My guess is there conversation with those customers about earnings, credit or some of those deposits actually going out of the system, and then being used.

Bill Demchak -- Chief Executive Officer -- PNC

I mean, I guess a couple of things like the net liquidity into the system from QE, has been gradually dropping but I don't think that's impacting us. What you're seeing is a shift, both on the consumer and the corporate side, to interest-bearing where they can get it. So, lazy money is moving and that's not really surprised anybody.

Brian Klock -- Analyst-- Keefe, Bruyette & Wood

Got you. Do you have the mix interest-bearing deposit growth help them move total deposit growth? Do you have the mix of how much of that's in the CDs versus the money market accounts.

Bill Demchak -- Chief Executive Officer -- PNC

It's still predominantly money market. I think just last quarter, Rob, started getting a little more aggressive on 18 months to 2-year CDs, but it's still small.

Rob Reilly -- Executive Vice President and CFO -- PNC

Still small, but active in contrast to what it's been the last handful.

Bill Demchak -- Chief Executive Officer -- PNC

Yeah

Brian Klock -- Analyst-- Keefe, Bruyette & Wood

Got it. Okay. Thanks. This is just a follow-up on the expense guide. It seemed like the fourth-quarter, guidance if I plug-in numbers maybe it's down $10 or $15 million from what you're guiding for the third quarter, and it seems like the FDIC surcharge. We took an estimated something in the neighborhood of 30% to 40% that could be benefiting your fourth-quarter. So, do you guys, are including the potential for that surcharge to go away in the fourth quarter, in your guidance? Or I guess, what are your thoughts if you are including or what are your thoughts on reinvesting that savings?

Rob Reilly -- Executive Vice President and CFO -- PNC

Well, in terms of our expense guidance for the balance of the year, we took it up a little bit commensurate with higher revenue activity that we saw. We estimated a handicap events that might occur including FDIC relief, which isn't assured. We blend that into our estimate.

Bill Demchak -- Chief Executive Officer -- PNC

You're giving us away too much credit for being exact. I think we have items, key different things [inaudible] try to give you out best shot.

Rob Reilly -- Executive Vice President and CFO -- PNC

A lot going on with an approximate $10 billion spend.

Brian Klock -- Analyst-- Keefe, Bruyette & Wood

That's a fair point. Thanks guys. Thanks for your time.

Operator

Our next question comes from the line of Matt O'Connor with Deutsche Bank. The line is open, please go ahead with your question.

Rob Placet -- Analyst -- Deutsche Bank

This is Rob from Matt's team. Treasury management seemed especially strong this quarter. I know this is a business you've been pretty positive on and have highlighted in prior presentations. Any color you can provide on the strength this quarter, and then maybe, just the outlook for that business going forward.

Bill Demchak -- Chief Executive Officer -- PNC

I mean nothing unusual, it's just working. If anything you're probably seeing an acceleration, as we cross-sell into the some of the newer clients we've gotten out of the southeast, and get a greater proportion of fees from relationships, than we started through credit relationship. But the offering is the offering, we continue to invest pretty heavily on technology-based solutions for our clients and it's working.

Rob Placet -- Analyst -- Deutsche Bank

Okay, and then separately your borrowing costs were up meaningfully again this quarter presumably on the widening 90-day LIBOR spread on an average basis. That said, that spread has come in a bit more recently. Given that, should we expect that to be benefit in 3Q or have you guys started to spot that out at all? I know you may have mentioned that on the last call.

Bill Demchak -- Chief Executive Officer -- PNC

I mean, the borrowing cost again are up largely because LIBOR broadly defined rates are up. We did in fact, hedge out a fair chunk of the basis between threes, ones over the course of the last four or five months, I guess. So I don't know they could see any impact going into the third quarter beyond whatever.

Robert Reilly -- Executive VP & CFO -- PNC

Yeah, that is right. I can jump in there too. So we pointed that out in the first earnings call. Mostly, just not because of its size relative to our total NII visit, but it was a bit of a surprise and we weren't sure at that time whether it was going to persist for the year so we wanted to identify. I think when we got into second quarter, that Bill mentioned, we were able to move upon tactical basis to some one-month index and then also to your point it did.

The gap narrowed and it narrowed in a good way with one-month LIBOR going up, three-month LIBOR staying relatively flat because we benefit from that from our loan book. That whole issue bottom line subsided substantially quarter-over-quarter.

Rob Placet -- Analyst -- Deutsche Bank

Got it. Thanks for the color.

Robert Reilly -- Executive VP & CFO -- PNC

Sure.

Operator

Our next question comes from the line of Chris Kotowski with Oppenheimer & Co. Your line is open, please go ahead.

Chris Kotowski -- Analyst -- Oppenheimer & Co.

Yes. Good morning. I guess looking at the trading action in your stock and most of the other banks, it seems to me everyone is concerned about the rising deposit Betas and the flattening yield curve, but I guess when I stand back and look at a big picture, I see 2.9% year-over-year loan growth and 6.9% net interest income growth.

So clearly, you're still getting a very significant benefit and then I assume most of that is coming from the free funds, demand, deposits, equity, and other float. I guess, what needs to- When does a further Fed rate increase not become a benefit? I mean, it just seems to me you'd have to have an extreme view of deposit Betas or curve in order for our further Fed hikes not to have a beneficial impacts for you.

Bill Demchak -- Chief Executive Officer -- PNC

I think that's right. I don't know. It's interesting to watch as people talk about Betas. Remember for deposit Betas, 50% make up a number here. This is beyond our stated Beta and the fed goes by another 25 basis points. We get 12.5 basis points every time. So on top of what we're carrying into it with accumulative beta of wherever we are at this point. So I don't particularly understand that logic.

Of course, Betas were going to accelerate this simple notion that you build a gap between what your paying and where the fed is, and then you gradually get to pace with where the fed is, maintaining that gap the whole time so it doesn't get worse. The other thing in our case, we're not an NII shop. We like it when rates go up, we make more money, but we continue to grow fees at a pace that has an opportunity, but at least as great as what we do in NII through time and it's less volatile and less dependent on the environment. The market will do what it will do, but-

Robert Reilly -- Executive VP & CFO -- PNC

We tend to agree with you, yes.

Bill Demchak -- Chief Executive Officer -- PNC

Yes.

Chris Kotowski -- Analyst -- Oppenheimer & Co.

It's still a benefit, right? It's all still and I mean, I guess, I think the thing is, it seems to me most bank kind of business models we're kind of calibrated in an environment wherein short rates were like between 3% and 6%. I mean, that was kind of historically the normal range and we're still below that. Would you say that-?

Bill Demchak -- Chief Executive Officer -- PNC

I was just going to say we have another for year that we could be out there just to what extent people have fixed rate assets that ultimately, because mortgage is quick prepaying and so forth that you just lose to carry on right? So the balance sheet ends up being constrained by legacy fixed-rate assets as they raise the fund in the curve, you can see margins contract. That isn't our case.

Chris Kotowski -- Analyst -- Oppenheimer & Co.

All righty. Thank you. That's it for me.

Bill Demchak -- Chief Executive Officer -- PNC

Sure.

Operator

Our next question comes from the line of Marty Mosby, with Vining Sparks. Your line is open, please go ahead.

Marty Mosby -- Analyst -- Vining Sparks

Thank you. I want to ask you about the loan growth. Given the competition that we're seeing in pricing, and maybe some underwriting loosening, are you really still kind of keeping the PNC legacy that in this part of the cycle, when you start to see that, growing half of what the market is growing, is probably the right position to be in?

Bill Demchak -- Chief Executive Officer -- PNC

We don't purposely throttle our growth one way or the other. We maintain the credit box that we always have. So, if a deal works for us, it works for us. We'll compete on price, and in fact, for the last several quarters we've seen spreads stay pretty constant while this quarter we saw them come in a couple of basis points on average.

So, we're not necessarily tightening credit, we're just not loosening credit to chase, and that means that all else equal, we win less deals and competition, which is why total growth slows down. But that's most apparent in CRE, where we, coming out of the crisis, we had quite strong growth and it's tapered off over time as that market, on our view, has gotten overheated.

Marty Mosby -- Analyst -- Vining Sparks

Then Rob, I got two questions for you. If you looked at the way the yield curve kind of lays out right now, the flatness between the 2 and 10, but yet still a big kind of cliff down to the short rates. That steepness of the curve, you get all the benefit from going from one day, or one month, to one or two years. They ought to take much duration and you get all the benefit, is that part of why you began to deploy some of that liquidity?

Because, really it almost becomes a no-brainer to create something with that much cash flow with that sort of duration and get that much benefit. Then lastly, when did mortgage fees start to work again? We've watched this whole cycle waiting on that business to kind of kick in and we just haven't gotten it yet.

Bill Demchak -- Chief Executive Officer -- PNC

I'll just comment on the rates, I mean, your comments. Exactly right, you go two stands to get an extra 20 basis points. You have to really buy into a big curve inversion with the 10-year rally from here, to want to do that. So, that's part of what we're doing.

Robert Reilly -- Executive VP & CFO -- PNC

That's right.

Bill Demchak -- Chief Executive Officer -- PNC

On mortgages, look, volumes down, or our purchase volume versus refi is going north is 60% to 70%.

Rob Reilly -- Executive Vice President and CFO -- PNC

Yeah. 30-70, yeah. Re-purchase.

Bill Demchak -- Chief Executive Officer -- PNC

So, with that much capacity in the market, your base grid line on purchase volume you're going to see margin squeezed.

Marty Mosby -- Analyst -- Vining Sparks

Any hope that the mortgage activity kind of kicks in as we get home formation picking up again?

Bill Demchak -- Chief Executive Officer -- PNC

There's always a hope. Beyond our- beyond a market overall, we would like to believe that given the changes we've made in our technology around mortgage, that we would do better on a share basis through time, independent of what the market itself does. But, we're in a fairly tough market for mortgages and you're seeing that in everybody's results.

Rob Reilly -- Executive Vice President and CFO -- PNC

In France market, right, yeah. Mortgage is obviously a smaller component. It's a strategic product need for us. We want to be able to do it for our customers. So, I think the refi wave is over for a while, still to this point. We just have to set ourselves up for further purchase volume.

Marty Mosby -- Analyst -- Vining Sparks

Thanks.

Rob Reilly -- Executive Vice President and CFO -- PNC

Sure.

Operator

Our next question comes from Mike Mayo with Wells Fargo Securities. Your line is open, please go ahead.

Mike Mayo -- Analyst -- Wells Fargo Securities

Hi, I had a follow-up on the national digital bank. So, did I hear you right? You're creating a national digital bank. You're going to really focus on a few select markets and in those few select markets you'll eventually be opening up bank branches?

Bill Demchak -- Chief Executive Officer -- PNC

Yeah, in fact pretty much concurrent with the launch.

We'll open a handful of branches. I mean there'll be a very, very thin network along the like of our traditional retail markets. But we think you have the potential for a much broader set of consumers to the extent you have physical presence and brand and the trust that comes with that as you launch digital.

Mike Mayo -- Analyst -- Wells Fargo Securities

I think this is the first time PNC has ever expanded retail DeNovo to new markets and I'm just wondering what gives you extra confidence at this stage of the corporate life cycle to do that. I'm also noticing your marketing spend was up one-third quarter-over-quarter. Does that increase the marketing spend related to the new expansion?

Bill Demchak -- Chief Executive Officer -- PNC

Somewhat related to the new expansion. Banking has changed. The ability to go DeNovo into a new market, you're right, I don't think we've ever done it. By the way, we've never really done it on the C&IB side either and that's going gangbusters, and then trailing that with a digital retail offering on the back of the brand presence that we'll get with a regional president model.

The local marketing, the local presence. We think it works. You now have the ability through digital marketing and social media to get brand awareness for a thin branch network in a way that you just didn't have 20 years ago. Yeah.

Mike Mayo -- Analyst -- Wells Fargo Securities

So, well, first, I guess you didn't identify the cities. I'm going to guess it might be Dallas, Kansas City, Minneapolis, Denver, Houston, Nashville? In other words, does it make sense?

Bill Demchak -- Chief Executive Officer -- PNC

If you were [inaudible] out, it sets where I name.

Mike Mayo -- Analyst -- Wells Fargo Securities

Okay. So, its kind of like Goldman Sachs Marcus, but with branches or?

Bill Demchak -- Chief Executive Officer -- PNC

Yeah. That's right. So, priority No.1, Mike, we want to be able to find a different channel to grow deposits because right now, we have national loan growth capability against regional funding. So, long, long term, we have an imbalance there. So, simply, the high-yield savings product is a good way for us to grow some stable deposits through time.

But beyond that, because we have such a powerful platform in our virtual wallet product and the brand, we think we have a shot at least as good as anybody in converting those high-yield savings accounts into full CMC relationships with these customers. We spend a lot of time building the technology that's going to make it very simple for somebody to convert those accounts.

The handful of branches that we might have in a market is kind of a tipping stone to give somebody comfort that they're not dealing with the person behind the curtain here. That there's actually a presence, where they can go in and talk to somebody if they need to.

Mike Mayo -- Analyst -- Wells Fargo Securities

Last follow-up. I can see why you'd have an advantage to say against some FinTech firm in Silicon Valley. I mean you have the expertise with consumer banking. On the other hand, I mean, going against an incumbent in their backyard, just like if someone were to come to Pittsburgh trying to get the consumers away from you, isn't that a tough challenge?

Bill Demchak -- Chief Executive Officer -- PNC

Yes and no. So, we're going to offer into that market, including the customers that convert to a full relationship, a full digital price, right? So, the yield that we offer on savings products in these markets will be as high as any of the online banks today. We will have with that, we'll augment that with a handful of branches. So, when they convert to virtual wallet, that savings product inside a virtual wallet, we'll offer this online rate. So, in a world where rates are no longer zero, that makes it a big difference to people.

Mike Mayo -- Analyst -- Wells Fargo Securities

All right. We'll keep close watch. Thank you.

Bill Demchak -- Chief Executive Officer -- PNC

So will we.

Operator

There are no further questions.

Brian Gill -- Director of Industrial Relations -- PNC

Okay, well thank you very much for participating on the call.

Bill Demchak -- Chief Executive Officer -- PNC

Thanks everybody.

Rob Reilly -- Executive Vice President and CFO -- PNC

Thank you.

Operator

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

Duration: 51 minutes

Call participants:

Brian Gill -- Director of Industrial Relations -- PNC

Bill Demchak -- Chief Executive Officer -- PNC

Rob Reilly -- Executive Vice President and CFO -- PNC

Robert Reilly -- Executive VP & CFO -- PNC

John Pancari -- Analyst -- Evercore Partners

John Mcdonald -- Analyst -- Bernstein

Erika Najarian -- Analyst -- Bank of America

Scott Siefers -- Analyst -- Santer O'Neill and Partners

Betsy Graseck -- Analyst -- Morgan Stanley

Gerard Cassidy -- Analyst -- RBC Capital Markets

Ken Usdin -- Analyst -- Jefferies

Kevin Barker -- Analyst -- Piper Jaffrey

Brian Klock -- Analyst-- Keefe, Bruyette & Wood

Rob Placet -- Analyst -- Deutsche Bank

Chris Kotowski -- Analyst -- Oppenheimer & Co.

Marty Mosby -- Analyst -- Vining Sparks

Mike Mayo -- Analyst -- Wells Fargo Securities

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