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PNC Financial Services, Inc. (NYSE:PNC)
Q3 2018 Earnings Conference Call
October 12, 2018, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Lynn 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 would like to ask a question during this time, simply press the number 1 followed by the number 4 on your telephone keypad. If you would 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. Bryan Gill. Sir, please go ahead.

Bryan Gill -- Senior Vice President, Investor Relations

Well, thank you and good morning, everyone. Welcome to today's conference call for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President, and CEO, Bill Demchak, and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information, cautionary statements about this information, as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings of our investor materials.

These materials are all available on our corporate website, pnc.com, under investor relations. These statements speak only as of October 12th, 2018 and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill Demchak.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Thanks, Bryan and good morning, everybody. This morning, you would have seen PNC reported third quarter net income of $1.4 billion or $2.82 per diluted common share. Overall, I thought we delivered another really solid quarter, highlighted by continued progress on our strategic priorities and our key financial metrics all moving in the right direction. We grew average loans and deposits and we continued to add new clients. Net interest income increased and then expanded and fee income grew. In fact, we hit a record high for fee income through nine months with increases in basically every category other than residential mortgage.

We continue to manage expenses well with a small increase this quarter reflecting higher business activity. Credit quality also remains strong with non-performers in net charge-offs down and our tangible book value per share grew again and we raised the quarterly dividend to $0.95 in August.

I do want to touch on loan growth for a second because I know it's something you are all watching closely. While we did see modest growth in the quarter consistent with industry data, our corporate loan growth came in below our own expectations. We attribute this shortfall to a combination of several factors, including elevated competition, meaningfully higher payoffs this quarter, and paydowns, and overall lower line utilization.

The higher payoffs and pay-downs appear to be driven by competition from non-bank lenders, excess corporate cash, and attractive opportunities for our clients in the bond markets. Interestingly, our secured lending businesses, excluding real estate, which collectively comprised roughly a third of our book and faced less competition, they grew at almost 3% this quarter.

Now, while we recognize these challenges, we can't impact all those directly. What we can and our doing is executing upon our main street model of providing value added solutions and world class service. We continue to add new customers and deepen relationships that meet our risk-adjusted returns.

On the consumer side, I was pleased to see loan growth again this quarter. While our outlook for fourth quarter loan growth is up modestly, as Rob's going to review with you a bit later, the economy is really strong. Consumers are in great financial shape and companies are optimistic and growing. In addition, recent market disruption may help to alleviate some of the challenges that I outlined a moment ago.

So, we expect to see continued opportunities for loan growth moving forward. To that end, we're experiencing success in our national initiative to expand our middle market corporate banking franchise and faster growing markets. We also recently launched our national retail digital strategy, leading with a high-yield savings account and offering our virtual wallet checking account, which will be supported by an ultra-thin retail network. In fact, we just opened our first out-of-footprint retail location in Kansas City earlier this week.

As we work to expand the reach of our brand, we're excited about how we're positioned to drive growth and efficiency through time. Before I hand it over to Rob, I just want to thank our employees for their continued hard work as well as our clients for their trust in us. With that, over to you, Rob.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Great. Thanks, Bill and good morning, everyone. As you've seen by now, we've reported net income of $1.4 billion or $2.82 per diluted common share. Our balance sheet is on slide four and it's presented on an average basis. Total loans grew approximately $700 million link quarter and $4.1 billion compared to the same quarter a year ago.

Investment securities of $80.8 billion increased $3.3 billion or 4% linked quarter. Purchases were primarily agency residential mortgage-backed securities and US treasuries. Our cash balances at the Fed averaged $18.8 billion for the third quarter, down $1.9 billion linked quarter and $4.6 billion year over year. Deposits were up 1% on both the linked quarter and year over year basis.

As of September 30th, 2018, our Basel III common equity tier one ratio was estimated to be 9.3%, down from 9.5% as of June 30th, 2018, reflecting continued capital return to shareholders and a decline in accumulated other comprehensive income. Importantly, we maintain strong capital ratios even as we returned $914 million of capital to shareholders. We repurchased 3.3 million common shares for $469 million and pay dividends of $445 million.

Our return on average assets for the third quarter was 1.47%. Our return on average common equity was 12.32%. Our return on tangible common equity was 15.75%. Our tangible book value was $73.11 per common share as of September 30th, an increase of 5% compared to a year ago.

Turning to slide five, average loans were up approximately $700 million linked quarter and $4.1 billion or 2% compared to the same quarter last year. Commercial lending balances increased approximately $200 million compared to the second quarter. As Bill mentioned, our pipelines were strong throughout much of the quarter, but payoffs and paydowns were substantial. Compared to the same quarter a year ago, total commercial lending increased $3 billion and growth was broad-based with the exception of real estate, which declined by $1 billion.

Importantly, we're seeing momentum in consumer lending, balances increased by approximately $500 million linked quarter and $1.1 billion year over year. We had growth in our auto, residential mortgage, credit card, and unsecured installment loan portfolios, while home equity and education lending continued to decline.

Deposits increased by $3 billion or 1% compared to the same period a year ago. On a linked quarter basis, deposits increased $1.5 billion, driven by seasonal growth in commercial deposits. During the quarter, consumer demand deposits decreased somewhat, reflecting seasonal consumer spending. However, our time deposits increased, reflecting higher rates.

As the slide shows, our overall cumulative deposit beta increased in the third quarter to 29%, driven by both commercial and consumer. Within that number, the cumulative commercial beta is near our stated level. However, our cumulative consumer beta is only 15% compared to a stated level of 37%. Increases in our overall betas, which we expect to continue, will primarily be driven by the consumer side going forward.

As you can see on slide six, net income in the third quarter was $1.4 billion. Revenue was up 1% lean quarter, driven by growth in both net interest income and fee income. Non-interest expense increased 1% compared to the second quarter, reflecting higher business activity. Provision for credit losses in the third quarter increased slightly to $88 million, as overall credit quality remained strong.

Our effective tax rate in the third quarter was 15.7%. This was the result of the timing of certain tax benefits that this year mostly occurred in the third quarter. You'll recall our tax rate in the second quarter was somewhat elevated at 18.3%. So, when combined and viewed on a year to date basis, our effective tax rate year to date was 17%, consistent with our guidance and expectations for full year 2018.

Now, let's discuss the key drivers of this performance in more detail. Turning to slide seven, total revenue grew 1% lean quarter and 6% year over year. Net interest income increased $53 million or 2% lean quarter and $121 million or 5% compared to the same period last year, as higher earning asset yields and balances were partially offset by higher funding costs. The link quarter comparison also benefited form an additional day in the third quarter.

Net interest margin was 2.99%, an increase of 3 basis points compared to the second quarter. Non-interest income decreased 1% lean quarter and increased 6% year over year. Importantly, fee income grew 1% link quarter and 8% compared to the same quarter last year. It's also worth noting that our fee income on a year to date basis was a record-setting $4.7 billion, with increases in every category except for residential mortgage.

The main drivers of the link quarter fee increases were asset management fees, which include our earnings from our equity investment in Blackrock, increased $30 million or 7%, reflecting higher average equity markets. Discretionary assets under management increased $10 billion in the quarter.

Service charges on deposits increased $17 million or 10%, reflecting a seasonal increase in consumer spending. Corporate services fees declined $22 million primarily due to a lower benefit from commercial mortgage services rights and lower loan syndication fees, partially offset by higher M&A advisory fees. Notably, Harris Williams had another record quarter.

Finally, other non-interest income of $301 million decreased $33 million link quarter. These derivative fair value adjustments were negative in the third quarter and positive in the second quarter, resulting in a change of $59 million. This was partially offset by higher private equity investments. Going forward, we continue to expect the quarterly run rate for other non-interest income to be in the range of $225 million and $275 million, excluding net securities and Visa activity.

Turning to slide eight, third quarter expenses increased by $24 million or 1% link quarter. Personnel expense increased $57 million link quarter, largely as a result of incentive compensation expenses related to business activities and an additional day in the quarter. Importantly, every other expense category declined quarter over quarter.

Compared to the same period a year ago, expenses increased $152 million. Personnel expense grew $127 million year over year, reflecting revenue growth, higher staffing levels to support business investments, and the increased in the minimum hourly wage commitments we made to our employees at the beginning of the year. Additionally, marketing expense increased to support business growth, including our digital expansion efforts.

Our efficiency ratio was 60% in the third quarter, unchanged on both the linked quarter and a year over year basis. As you know, we have a goal to reduce costs by $250 million in 2018 through our continuous improve program and we are confident we will fully achieve our full year target.

Our credit quality metrics are presented on slide nine and remain strong. Compared to the second quarter, total non-performing loans were down $25 million or 1%. Total delinquencies were up $67 million or 5% and included higher auto loan delinquencies in the 30 to 59-day bucket related to the impact of Hurricane Florence.

Provision for credit losses of $88 million increased by $8 million link quarter, reflecting a higher consumer provision, primarily due to credit card and auto loan growth. Net charge-offs decreased $18 million compared to the second quarter. In the third quarter, the annualized net charge-off ratio was 16 basis points, down 4 basis points linked quarter.

In summary, PNC posted soft to strong third quarter results. During the fourth quarter, we expect continued steady growth in GDP. We expect one more 25-basis point increase in short-term interest rates in December.

Looking ahead to fourth quarter 2018 compared to third quarter 2018 reported results, we expect loans to be up modestly. We expect both total net interest income and 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 up below single digits. We expect provision to be between $100 million and $150 million.

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

Questions and Answers:

Operator

Thank you. At this time, if you would like to ask a question, please press the number 1 followed by the number 4 on your telephone keypad. Please hold while we compile the Q&A roster.

Our first question on the phone line comes from the line of Scott Siefers with Sandler O'Neill. Please go ahead.

Scott Siefers -- Sandler O'Neill -- Analyst

Good morning, guys. First question just on loan growth, the guide for the fourth quarter is inconsistent with the guide to the third quarter. I'm just curious if you could give a sense for overall trajectory. Should we be expecting it to be same level, maybe a little better and why? Then Bill, just as you look at the numerous factors that seem to be impacting growth for you guys in the industry, given where we are in the cycle, what would it take for loan growth at banks like PNC to be able to reaccelerate toward something you would expect would be more normal given the effect of the economy?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

All good questions. So, our guidance for the fourth quarter, we're saying modestly, I would tell you our forecast as it sits today is up a little bit over the growth rate that we had in the third quarter. So, a little bit better. I would also say that we were surprised by the third quarter. Our actual production in new clients were pretty good.

Against that, we saw this broad-based utilization drop and we saw a lot of paydowns we hadn't expected. I don't know how to forecast for that. I look at some of this disruption and some of the value lost in corporate bond funds and I think maybe that will slow some of that down, but I don't know, which is why we put the forecast up that we did.

As I think forward and you say, "What should trigger growth here?" As we talk to companies, they are really bullish and they are investing. We see CapEx expenditures going up. So, you would think it would follow through in loan growth. Against that, we've seen a preponderance -- I've seen all these charts with just the volume of non-investment grade borrowing and even the volume of triple-B inside of investment grade and then the size of the corporate bond markets, all of which are playing against banks as the shadow banking system has taken a lot of volume.

So, I would like to think that it would change for the better, but we have some structural changes in the market, I think, that we saw play out in the third quarter that at least in the near-term are impacting us.

Scott Siefers -- Sandler O'Neill -- Analyst

Okay. All right. I appreciate that color. Then Rob, if I can switch for one second to the deposit side, total deposit growth, you're still fine, but a little bit of a mix shift as you would expect in a rising rate environment. I think in your prepared comments, you had made some note about demand deposits being down seasonally. What would be your best guess for how the mix of the overall deposit book projects here as we go forward?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

I would expect -- do you mean between the interest-bearing and non-interest-bearing?

Scott Siefers -- Sandler O'Neill -- Analyst

Yeah. Sorry. I thought your comment was on demand deposits, but I could be wrong.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

You tell me if this answers your question in terms of the consumer and the commercial side. On the consumer side, we're seeing a shift savings, which we've seen for some time and now the beginnings of time deposits, which is natural and what you would expect. Then on the commercial side, we are seeing somewhat of a shift from non-interest-bearing to interest-bearing. Again, all reflective of a higher rate environment.

Scott Siefers -- Sandler O'Neill -- Analyst

Yeah. Okay. That sounds good. I appreciate the color.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Sure.

Operator

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

John Pancari -- Evercore ISI Research -- Analyst

Good morning. On the expense side, given some of the pressures on balance sheet trends, particularly on the loan side that you just discussed, any thought as you're looking at the expense side of the equation to get more constructive on the CIP goals, particularly as you look through the rest of this year and more importantly into '19?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Hey, John. This is Rob. So, on expenses, in the quarter, in the link quarter, we did well. Virtually all the increase in the link quarter was in personnel and essentially incentive compensation related to the higher business activity levels. Every other category went down link quarter. Part of that reflects our CIP effort.

When you drop back and take us look at our expenses year to date, that tells sort of the broader story. If you look at our expenses year to date, we're up $382 million so far this year over '17. Of that $382 million, 80% of that or $300 million of that is in personnel. So, the other categories are good. Occupancy is down, equipment expense, all other are in line and marketing expense is up, part of our investments, but that's a smaller number.

Back to that personnel number, that $300 million, about half of that in a typical year is what you would expect to see. Half of that is merit and promotion as well as incentive compensation, which, as I pointed out earlier, is a little higher this year, which is a good thing.

The other half of that, that other $150 million really reflects investments that we've made. We make investments every year, but in 2018, they're particularly strong. They represent higher headcount to support our technology buildout, our physical geographic expansion in corporate banking and our digital expansion in consumer banking as well as the commitment we made to raise the minimum pay to $15.00 an hour.

So, that part, that $150 million of the $300 million reflects investments. Like all investments, we front end that and we expect to see return on that through time. Obviously, the technology investments we'll talk about a little bit more. On the raise to the $15.00 an hour, we're already seeing lower attrition rates that we would expect would continue. That's all deliberate and all factored in. Our expense discipline and our program is on track.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

The quick answer, John -- we focus on expenses every day and try to find ways to knock them down. At the same time, as you look at the changes that are happening in the banking industry as digital takes over and the need to produce product and serve clients in that space, it would be a real mistake in my view to slow down and stop our investments. I like the idea of self-funding, which we've largely been able to do. I don't want to cap off our growth rate because we see one quarter of slower loan growth. That's not the right answer.

John Pancari -- Evercore ISI Research -- Analyst

Thanks, Bill. Separately, on the capital side, you're sitting here at a combined payout ratio of about 75% and you've alluded to the potential to increase that, given you might have been a bit too conservative as we look to this past CCAR. Can you give us your updated thoughts there? Your peers are at about 150% combined payout. Where do you think you could go here as you look forward? Thanks.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Without getting specifically into payout, as I said at a recent conference, we did realize we went in a little bit light. There were a couple of reasons why it made sense for us to go back to the Fed and resubmit. We are in conversations with the Fed at this point. Beyond that, I don't have any more detail to give.

On a longer term, I like the idea of 100% payout. On our base case CCAR, we always tend to kind of get there. Then we tend to our-earn our CCAR case largely because of some of the assumptions you have to put in on loan loss provision and some other things. So, we always struggle with this notion that we try to get to 100. Maybe we have to budget for over 100 to solve back to 100. But we're not holding back from capital return at this point and our goal wouldn't be to.

John Pancari -- Evercore ISI Research -- Analyst

Got it. Thanks, Bill.

Operator

Thank you. Our next question comes from the line of John McDonald with Bernstein. Please go ahead.

John McDonald -- Bernstein -- Senior Research Analyst

Good morning. Rob, I was wondering based on some of the recent regulatory dialogue, it seems that you can potentially see a benefit from easier liquidity rules. If that happened, could you remind us how mechanically and easier LCL will allow you to do some things on the balance sheet you can't do now. Is there any way for us to think about the magnitude of that benefit?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Good morning, John. We've spoken about this all year. We are optimistic that something favorable will occur. I think the easiest way -- there are a lot of options -- the easiest way would be to take a look at the $19 billion that we have on deposit at the Fed. We would, in simple terms, be able to pay down debt or a liability. In other instances, we'd be able to redeploy in the higher yield securities. So, I think the conservative route would be to establish what level of liquidity you need and then just reduce the short-term debt accordingly.

John McDonald -- Bernstein -- Senior Research Analyst

Okay. I guess in this environment, you wish you had more things to do with your current liquidity. So, it would just kind of add, I guess, to more of that?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, that's right.

John McDonald -- Bernstein -- Senior Research Analyst

You guys have obviously talked about different ways you're taking PNC on the road into new markets. I wanted to ask the opposite question. When a big player like Bank of America comes into your hometown, how do you think about incremental competitive threats and ensuring you're maintaining your position in branding as market leader. With digital and mobile, are you able to compete a little more on non-price factors these days?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Well, that's the dynamic that's playing out. This is Rob. Bill might want to add some color. That's the dynamic that's playout out. We're excited about the initiative that we have going out of footprint on the digitally led offering, which we can talk a little bit more about. In regard to other providers coming in to our legacy markets, we fully expect that that will occur. We can't control that.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

We compete with them everywhere already, other than maybe Pittsburgh. I would tell you in our own experience, where we go into a market dominated by somebody else and we are the underdog, the growth rate always tends to surprise me, largely, I think, because there's some percentage of the population, for whatever reason that wants to try a different bank. I suspect if somebody comes into Pittsburgh, they'll pick up some amount of that. We have 60% market share or something in Pittsburgh. There's 40% left to go around without a major bank presence sitting there. So, I suspect they'll do fine.

John McDonald -- Bernstein -- Senior Research Analyst

Okay. Thanks.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

But not necessarily with our customers.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Yeah.

Operator

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

Betsy Graseck -- Morgan Stanley -- Managing Director

Hey, good morning. Two questions -- one, just one more on expense, up a little bit this quarter, partly a function of the marketing and the investments that you're doing. I think it's related to the digital banking. I'm just wondering how much of that persists from here because you've got the start-up costs and then you've got the ongoing marketing. Should we expect some of that fades as the start up is done or maybe you can talk through that a little bit?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

You're going to have some offsetting things. We didn't kick off the digital program until late in the third quarter. Having said that, the third quarter was probably the first full quarter we had the total impact of the $15.00 raise increase. So, there are a whole bunch of moving pieces in there between personnel and what we'll do in marketing. All of that is embedding in the Rob's guidance.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

And for the fourth quarter guidance, the most notable item is that our marketing expense will increase in the fourth quarter. Typically, that doesn't happen and that marketing is largely directed toward the digital initiatives.

Betsy Graseck -- Morgan Stanley -- Managing Director

And then could you talk a little bit about the branch rationalization that you're doing in your legacy markets? Is that run rate going to persist at current levels or is there more to do there or are you always done? Give us a sense on that side of the equation?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

We're pretty steady there, Betsy. On our plan for the year, we've been averaging about 100 consolidations a year. This year, we're on track to do a comparable number. That's the current path and I'd expect that to continue.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Part of the issue with accelerating that is the amount of time and effort we put into preparing customers for a branch to close. What's very important is that we've retained the balances and the customers as we consolidate a branch. We spend a lot of time on that. I'm not sure as a practical matter that we could actually do more or substantially more than the 100 a year we're currently doing. We'll continue to go at that run rate unless the market tells us based on client attrition that we need to slow down.

Betsy Graseck -- Morgan Stanley -- Managing Director

Got it. That's helpful. Then just lastly on the mortgage side, I know you did a lot on improving that platform over the last couple years -- could you just tell us strategically how you're positioned? Have you created some operating leverage for yourself as you build out into some of these new markets?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

We're finally seeing the costs come down in terms of duplicative personnel as we are running two systems. We're still on the last leg of bringing home equity origination onto that platform. With that, we will have, in effect, digital origination capability and closing capability with home equity in our out of footprint markets should we choose to offer that. I'm not exactly sure where we are on that yet.

That's a dramatic improvement from where we are today, where believe it or not, to close a home equity loan at PNC today, you've got to go into a branch. So, all of that system change sort of puts home equity mortgage on the same front end, same servicing platform, and independent of volumes, which we would hope would increase, you'll see costs continue to bleed out of that system.

Betsy Graseck -- Morgan Stanley -- Managing Director

Okay. Thanks so much.

Operator

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

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

Could I ask a little bit, Bill, about the tenor of competition from non-banks? I'm really most curious about more on the competition with regards to structure and what you're observing in terms of competition from private, direct, middle market lenders? As a follow-up to that, you mentioned structural changes in the market, which I agree with, but I wonder as the Fed continues to drain liquidity out of the system how much of the opportunity can go back to banks over time?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Again, all good questions. I guess what I would say is we continue to think that the leverage loan market is overheated. I continue to think that as rates rise, it's going to put real pressure on those credits that were originated in a lower rate environment and not necessarily hedged against LIBOR going up as much as it does. Eventually, that turns.

Now, as it relates to our near-term, we don't really play in the leveraged loan market, but that market being as open as it is has caused a number of our private middle market companies that we historically have banked to go to private equity. While we might keep them as a transaction client, we don't participate in the financing of that.

So, that M&A wave is kind of pulling loan demand off and out of the banking system by levering it and putting it into CLOs and so forth. I do think there will be a crack in that at some point as rates continue to rise. When that happens, you'll see more traditional flows back into the banks. I just don't know the timeline in that.

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

Great. Thank you.

Operator

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

Mike Mayo -- Wells Fargo Securities -- Managing Director

Thanks for your honesty, Bill, in terms of what's happening with your loan growth. It's tough to forecast. When you go back to your team at PNC, what kind of message do you want to send? You could send all sorts of messages. You could be angry. You could be sad, accept what's taken place, or you could pause. You could be angry because you say, "Hey, we're not executing as well as we need to. Do better." You could be happy and say, "You've seen these cycles before. You see the crazies out there. We're going to stick to what we do and that's fine."

Or you could accept what's taking place and say it's not going to get better and have a new expense program or something. Or you could pause and say, "This is just weird and we're going to see what happens over the next couple quarters." What message will you be sending to your team.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Mike, I don't really have to do any of the above in the following sense -- we have, since I've been at PNC, followed the same model, the same credit box, the same clients we want to bank are the ones that we bank. If the risk is outside of our box, we just don't do it. We can't control the market.

What was weird about the third quarter was we actually originated a lot of business. I'm actually pleased with the activity of our bankers and the number of new clients that we brought on board. I'm disappointed by the environment in the sense that utilization went down and we had paydowns, but there's nothing I can do about that.

As a practical matter, we will never be the bank -- and by the way, we could be very easy -- that simply says, "Go get loan growth." I could make loan growth whatever you want for the next six months or a year or until the cycle cracks and we just don't do that and we don't need to do it given our ability to grow fee income and our plan to just -- banking is three yards and a cloud of dust and you do it consistently forever and you produce a good franchise and that's what we're after.

Your question on expenses -- to get back to this, we're fighting every day to drop expenses, but having said that, again, we could choose to curtail investment in digital. We could choose to curtail investment in cyber. We could choose to not have active data centers in terms of resiliency of our client-facing applications.

In the near-term, that would make our expenses look great, and in the long-term, it would kill us. I think a lot of our competitors are choosing to do bad on expenses and choosing to do bad on loans. That's not who we are.

Mike Mayo -- Wells Fargo Securities -- Managing Director

Let me see if I have this straight. What I think I hear you're saying -- you're going to barrel through with your strategy that's worked for the last several years and the environment will eventually come your way since you're looking through an entire cycle. Is that paraphrasing it correctly?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

On credit, yes. So, you can't figure out who's lying or not with respect to loan growth until you have a credit crunch. You've heard me say forever that banks are the only industry in the world where you can lie about your cost of goods sold until there's downturn. I always want to be the bank that outperforms in that environment. If that means that we have to let the margins slow topline growth by not chasing deals that just don't hit our return metrics, so be it.

Mike Mayo -- Wells Fargo Securities -- Managing Director

All right. Then lastly, the line utilization, is that from some of the borrowers gong elsewhere?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

That one, you know what I think that is? Simply, corporates are flush. The lower tax rate has basically increased cashflow in companies. They're not spending the incremental difference in totality on CapEx and so, they're dropping their line utilization.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Hey, Mike. This is Rob. I can jump in on that. That's exactly right. Bill referenced this in his opening comments. If you take a look at our commercial loans, where the pressure that we're talking about is most pressing is in that general corporate book. The two headwinds are cash-flush borrowers, which is dropping utilization. That's a function of lower tax rates, repatriation, all the things you read about and these paydowns and payoffs. Those two items are the headwinds, to the extent that they abate, which we expect that they might at some point, that's the issue.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

By the way, Mike, our pipeline as it sits today in the forward months looks great. It looks stronger than it's looked in the last six months. So, our only hesitation on this stuff is we can get lots of deals that meet our risk criteria in this environment. What ends up happening is our existing book of business is borrowing less and/or disappearing through paydowns, either public market or paydowns because they were taken private.

Mike Mayo -- Wells Fargo Securities -- Managing Director

That's helpful.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Thanks, Mike.

Mike Mayo -- Wells Fargo Securities -- Managing Director

Thank you.

Operator

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

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Good morning, guys. Can you talk a little bit about the non-interest-bearing deposits? When you look at your levels, which represent about 31% of total interest-bearing liabilities, what do you think in a rising rate environment that's going to settle out at? When you think back at PNC maybe prior to the financial crisis where those levels were, do we have just a risk for everybody in a rising rate environment those deposits tend to fall?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, Gerard. I can answer that. Obviously, we watch it all the time. I would expect the continued shift that's occurring, that will occur. We haven't really handicapped where it's going to stop or where it's going to be because there are obviously a lot of variables involved there. We've managed this way before. It will be fine either way.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

I see. Okay. Then coming back to the competition on commercial lending that you've already addressed, have you sensed that other competitors with the lower tax rate are maybe competing away some of the lower tax rate? Is there any way of seeing if that's happening?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

For all the talk around that, we actually haven't seen it. There was some talk early on that we heard from some clients that competitors were maybe doing that at the margin, but practically, that isn't really what we're seeing. We're seeing competition on structure. We're seeing deals that should be ABL going cashflow, those kinds of things. I don't see people outright rebating tax reform.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

No.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

I see. Just finally -- in this whole commercial competitive area you've referenced, is it primarily in the legacy PNC footprint or are you also seeing it in your newer markets you've been expanding into?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

It's everywhere. By the way, it's intuitive. If what you're offering is a commodity, which is money, there's no special secured financing or technology, then you're offering a commodity. In this market, there's a lot of competition for that commodity.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

But Gerard, part of your question is in our expansion and growth markets, we do see better growth dynamics just because it's on a smaller base, even though those factors are in place there.

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Gotcha. Okay. Thank you.

Operator

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

Ken Usdin -- Jefferies & Company -- Managing Director

Thanks. Good morning, guys. Recently, there's been some talk talking about banks of your size and the potential, maybe helpers on the regulatory front from either capital liquidity. I know you've discussed this in the past. I'm just wondering where that conversation sits in your mind and what you're, at this point, hoping for directionally.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

I think in Governor Quarles' last testimony he spoke to this and talked about --

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Large non-G-SIBs.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Yeah, the large non-G-SIBs but having something out in the market before the end of the year. That's consistent with my own dialogue with the Fed. I'm not exactly sure what they're going to do. I think they're thinking about the notion and we would like to see the notion that you get rid of the step function of 250, not only as it relates to LCR, but frankly as it relates to some of the relief you see on capital to the groups below 250, the change in the sin bucket items --

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

ALCI.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

ALCI and some other things. We'll have to see. I think there is an inclination among the regulators to put more finesse on allowing regulation to fit the size and risk of the firm, as opposed to doing its step function off an asset value that they came up with 15 years ago.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Which they call tailoring.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Yeah.

Ken Usdin -- Jefferies & Company -- Managing Director

Okay. Got it. A wait and see on that. Just a follow-up on the choices that you have on the mix of the excess cash, what are you doing right now in terms of investment portfolio. Obviously, it was up at period end, but in terms of the types of new rates you're seeing versus what's rolling off of the back book in the securities book.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Just a couple of things -- the securities balances were up quarter to quarter, but our actual duration dollars were flat because we unwound or reduced received fixed loan positions. So, it looks like we put a lot of money to work in the third quarter and we didn't really. We just moved from synthetic to cash. That said, particularly with the rate environment where it's been the last couple of weeks, the yield we're seeing on income and securities that at this point are largely mortgage backs and treasuries are in excess of the portfolio that's running off. There's clear benefit from this going forward.

Ken Usdin -- Jefferies & Company -- Managing Director

Bill, one follow-up on that -- will continue to move that synthetic to cash at this point in the rate cycle? How do you balance where you stand on asset sensitivity versus starting to mortgage it a little bit?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

We're still asset sensitive. We're nowhere near done here. The move from synthetic to cash is simply a value trade. The swaps that we put them on offered a lot more value than they did, so we unwound those and went into securities. We'll do that opportunistically. We go back the other way and things change. That was just a value trade.

I think going forward, we will be investing into this market. You've heard us say forever we're not going to bet on red in one big swoop. But our patience thus far looks like it's going to pay dividends.

Ken Usdin -- Jefferies & Company -- Managing Director

Okay. Understood. Thank you.

Operator

Thank you. Our next question comes from the line of Kevin Barker with Piper Jaffray. Please go ahead.

Kevin Barker -- Piper Jaffray -- Analyst

Good morning. I just wanted to follow up on some of the deposit conversations and questions. We've seen the period end on interest-bearing deposit drop. You mentioned part of that was due to the business customers. Was there any shift also from the consumer side? Do you expect the rate of change between non-interest-bearing growth and interest-bearing deposit growth to remain the same going into the fourth and first quarters?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Hey, Kevin, it's Rob. To answer the first part of your question, virtually all the movement we saw was on the commercial side. So, not much in terms of the consumer side. If anything, on the consumer side, it's more a migration to savings and time deposits, but from our interest-bearing accounts. Going forward, we'll just have to monitor it. I don't see anything in terms of a radical step change.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

One thing that will happen over time as do accelerate our digital expansion is the bulk of those new monies will come in the form of interest-bearing.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

That's growth.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Yeah. It's growth and interest-bearing that would largely outpace -- we're not bringing in a proportional amount of non-interest-bearing at the same time. It could cause our mix to shift over time.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Over time, but not necessarily in the short-term.

Kevin Barker -- Piper Jaffray -- Analyst

Okay. So, when I think about the shift to digital, you already have plenty of liquidity, you're meeting your LCR ratio, your loan to deposit ratio is running in the mid-80s, much better than most of your peers. When I look at the digital offering, are you going to be a price leader here in the beginning just to show that you can grow the deposits and then slow it down?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

You have to compare it to the alternative and the alternative today is wholesale funding. So, it's a lot cheaper than what we pay on wholesale funding. Even with LCR if they make LCR changes, our ability to mix shift some of our more expensive wholesale funding into retail, which is beneficial to us. We'll continue to be competitive on our digital offering. We have no real cost structure other than advertising behind it. So, the margin to it is actually pretty good.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

And there's, as you know, there's a big qualitative element to it. This is an experiment in terms of the future of banking. So, it's largely that versus a need for the deposits.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

The one thing I would say and it's really early days in what we're doing in digital is we have been pleasantly surprised by the number of clients who choose to open the virtual wallet account, which is a full service account versus just open the high-yield savings account, which is obviously our dream scenario. We want full-service clients. We have a large percentage of the people out of the gate choosing to be that. My own assumption going in was that would take longer to convert these clients and that's a good thing.

Kevin Barker -- Piper Jaffray -- Analyst

Do you see that starting to generate higher loan growth on the consumer side, particularly in card and auto because of that shift?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

It's too early. It's something we're going to track and we're going to have to figure out the right metrics to show you guys, which we will.

Kevin Barker -- Piper Jaffray -- Analyst

Thank you for taking my question.

Operator

Thank you. Our next question comes from the line of Brian Klock with Keefe, Bruyette & Woods. Please go ahead.

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

Hey, good morning, gentlemen. Rob, I was wondering if you can follow-up a little bit -- I apologize if you answered this already -- but on the expense guidance for the fourth quarter. I think you did talk a little bit about having some of the seasonal marketing expenses that would be in that guidance for the fourth quarter, but are you assuming that the FDIC surcharge is still in that expense for the fourth quarter?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yes. In our guidance, we assume no change in the surcharge amount. So, there's the potential that we don't have that expense and if that's the case, that would be a good thing, but it's not part of our guidance.

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

If I understand correctly, even if it's still there for the fourth quarter, it's not going to be for 2019, right?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

That's the FDIC expectation. It's a matter of hitting their threshold on the DIF fund.

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

That's right. So, if anything, the fourth quarter guidance you're giving is not an expectation of a normalized expense level. I know you're not giving '19 guidance yet.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

The only thing I'd say, Brian, is the seasonal aspect of marketing, it's not that. Typically, in years' past, our marketing expense actually declined in the fourth quarter. This quarter, it's going up because of the digital investments that we're making. So, the investment component of that, it's not seasonal, it's delivered.

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

Okay. So, will that digital investment be something that stays into the expense base going forward? Is that what will be different?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Well, we'll get into 2019 when we get on later in the year.

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

Okay. That's helpful. Thank you.

Operator

Thank you. It appears there are no further questions on the phone line at this time.

Bryan Gill -- Senior Vice President, Investor Relations

Okay. Well, we'd like to thank all of you for joining us for this quarterly call.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Thanks, everybody.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.

Duration: 49 minutes

Call participants:

Bryan Gill -- Senior Vice President, Investor Relations

William Stanton Demchak -- Chairman, President, and Chief Executive Officer 

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Scott Siefers -- Sandler O'Neill -- Analyst

John Pancari -- Evercore ISI Research -- Analyst

John McDonald -- Bernstein -- Senior Research Analyst

Betsy Graseck -- Morgan Stanley -- Managing Director

Erika Najarian -- Bank of America Merrill Lynch -- Managing Director

Mike Mayo -- Wells Fargo Securities -- Managing Director

Gerard Cassidy -- RBC Capital Markets -- Managing Director

Ken Usdin -- Jefferies & Company -- Managing Director

Kevin Barker -- Piper Jaffray -- Analyst

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

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