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PNC Financial Services (NYSE:PNC)
Q1 2021 Earnings Call
Apr 16, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Frank 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. [Operator instructions] After the speakers' remarks, there will be a question-and-answer session.

[Operator instructions] As a reminder, this call is being recorded. I will now turn the call over to the director of investor relations, Mr. Bryan Gill. Please go ahead, sir.

Bryan Gill -- Director of Investor Relations

Well, thank you and good morning, everybody. 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 CEO -- CFO. Today's presentation contains forward-looking information.

Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials, as well as our SEC filings and other investor materials. These materials are all available on our corporate website, pnc.com, under investor relations. These statements speak only as of April 16, 2021, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Thanks, Bryan, and good morning, everybody. As you saw, we had a solid start to the year as we grew revenue and controlled our expenses to generate positive operating leverage in the linked quarter comparison. Our first-quarter results also benefited from our provision recapture, driven largely by an improving economic outlook. Despite this recapture, our reserves remain at over 2% of loans as we continue to work through the COVID fallout and work to understand potential secular changes on certain asset classes.

Our capital on liquidity levels also remain at record highs. With the rise in term yields, we've been deploying some of this excess liquidity and increased our investment securities by $9 billion at period-end. You'll notice they didn't change much on an average basis as we bought later in the quarter. We also actually added another $9 billion in TBAs that are going to settle early in the second quarter here.

And well -- and finally, we've -- we've continued our purchase activity into the second quarter and we continue to operate notwithstanding this at very high levels of cash at the Fed that can be deployed over time in loans or securities based on market opportunities. While not a surprise, the quarter was impacted by continued weak loan demand in the face of strong markup -- strong bond market issuance levels, pay downs, and competition resulting in historically low utilization levels. Based on the strength of the U.S. economy, we would expect to see loan demand improve and ultimately drive utilization rates higher over time.

We continue to execute well against our strategic priorities, including our national expansion, which will significantly accelerate through our pending acquisition of BBVA USA. We're making good progress on BBVA integration planning and are on track for a midyear close pending regulatory approval. We haven't found any significant surprises regarding the quality or nature of BBVA's business and our employees are working effectively with their BBVA counterparts on everything, including the technology conversion. For the quality of BBVA markets, especially in their largest market in Texas, excuse me, and the quality of their largest markets, especially in Texas, and it's proving to be everything we hoped it would be.

As we plan for the integration of BBVA USA, we continue to invest in and leverage our own technology so that we can better serve our customers. Earlier this week, PNC launched Low Cash Mode, which fundamentally changes the banking experience for our Virtual Wallet customers by -- by allowing them to avoid overdraft fees through unprecedented account transparency and control. Low Cash Mode represents a shift away from the industry's widely used overdraft approach, which drives customer dissatisfaction and which we believe is unsustainable. We firmly believe this differentiated approach will drive significant growth in new and existing customer relationships over time as we execute our national expansion strategy.

Low Cash Mode allows our Virtual Wallet customers to see and control what's happening in their checking accounts in real-time. If the customer's balance is negative or about to go negative, they have at least 24 hours to cure their negative balance by determining whether certain payments are processed that otherwise might result in overdrafts. This payment control is a significant differentiator that we believe will help customers avoid overdraft fees of approximately $125 million to $150 million annually. PNC's full '21 -- full-year '21 revenue outlook anticipated this fee reduction, as did our estimate of BBVA's PPNR contribution to PNC, as a result -- and as a result, is not impacted by this change.

I'd like to close by thanking our employees who continue to support our clients and communities through the various COVID challenges by executing on our value-added relationship-based models. And with that, I'll turn it over to Rob for a closer look at results, and then we'll take your questions.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Thanks, Bill, and good morning, everyone. As you've seen, we reported first-quarter net income of $1.8 billion or $4.10 per diluted common share. Our balance sheet is on Slide 3 and is presented on an average basis. During the quarter, loans declined by $8 billion, or 3%, due to lower utilization and continued soft loan demand.

Investment securities grew approximately $700 million, or 1%, linked quarter. However, on a spot ba -- basis, balances increased $9 billion, or 11%, as we accelerated our purchase activity near the end of the quarter due to the steepening yield curve. Our average cash balances at the Federal Reserve grew to $85 billion in the first quarter, driven by continued deposit growth and lower loan balances. On the liability side, deposit balances averaged $365 billion and were up $6 billion or 2% linked quarter.

Borrowed funds decreased $3 billion compared to the fourth quarter due to the runoff and redemption of debt obligations. Our tangible book value was $96.57 per common share as of March 31, a decrease on a linked quarter basis primarily due to a decline in AOCI. Year-over-year tangible book value increased 14%. And as of March -- and as of March 31, 2021, our CET1 ratio was estimated to be 12.6%.

Regarding capital return, our board recently approved a quarterly cash dividend on common stock of $1.15 per share or approximately $500 million. And as you know, we continue to suspend our share repurchases during the first quarter as we await regulatory approval for our pending BBVA USA acquisition. Assuming a midyear close, we exec -- we expect to resume share repurchases in the second half of the year. Slide 4 shows our average loans and deposits in more detail.

Average loan balances of $238 billion in the first quarter were down $8 billion or, 3%, compared to the fourth quarter. Commercial loan balances declined $5.4 billion, or 3%, as overall utilization rates declined to historically low levels. Beyond that, Paycheck Protection Program balances remained flat as originations were offset by loans forgiven. And within our commercial real estate business, multi-family warehouse lending declined seasonally by two mil -- $2 billion.

Consumer loans were down $2.3 billion with lower balances across all consumer categories as loan demand continued to soften due to higher consumer cash levels. The yield on loan balances was 3.38%, a 3-basis-point increase compared to the fourth quarter. However, the increase reflected elevated commercial real estate prepayment fees and higher PPP loan forgiveness during the quarter. The rate paid on our interest-bearing deposits is now 6 basis points, a 2-basis-point decline linked quarter.

Average deposits increased $6 billion, or 2%, driven by enhanced consumer liquidity primarily related to government stimulus payments. In the year-over-year comparison, total average loans decreased 2%, or $5 billion, primarily due to the elevated drawdowns that occurred during the first quarter of 2020. Deposits increased $76 billion, or 26%, and, again, we're driven by the high cash balances of our customers. As a point of context, consumer checking account balances are on average roughly 40% higher than this time a year ago.

As a result, our period-end loan to deposit ratio has declined to hit a historic low of 63% at the end of the first quarter, compared to 87% in the same period in 2020. Slide 5 details of a change in our average securities and Federal Reserve balances over the past year. Security balances of $86 billion in the first quarter increased $2 billion, or 2%, compared to the same period a year ago. Over the same time, our Fed balances have increased nearly fivefold driven by significant government stimulus, as well as the proceeds from the sale of our equity investment in BlackRock.

As most of you know, during 2020, we were patient in deploying this excess liquidity while interest rates remained at historically low levels. However, with the recent yield curve steepening, we accelerated our rate of purchasing, increasing our spot balances by $9 billion with another $9 billion of forward settling securities as of March 31. Average security balances now represent approximately 20% of interest-earning assets, and our expectation is to build these balances to approximately 25% to 30% by year-end. As you can see on Slide 6, net income of $1.8 billion grew 25% compared to the fourth quarter, reflecting strong pre-tax pre-provisioned earnings and a substantial provision recapture.

First-quarter revenue was $4.2 billion, up slightly compared with the fourth quarter, driven by higher noninterest income, which was 44% of total revenue in the first quarter. Expenses declined $134 million, or 5%, and remained well-controlled. The provision recapture of $551 million reflected improved forecasted economic conditions and lower loan balances. Now, let's discuss the key drivers of this performance in more detail.

Turning to Slide 7. This chart illustrates our diversified business mix. Total revenue increased $12 million compared to the fourth quarter of 2020. Net interest income of $2.3 billion was down $76 million, or 3%, primarily due to lower loan balances and two fewer days.

Net interest margin of 2.27% declined 5 basis points, reflecting the impact of higher Fed cash balances. Importantly, we think NIM has bottomed this quarter and expected to slowly rise through -- throughout 2021. Noninterest income grew $88 million compared with the fourth quarter. Fee income of $1.4 billion decreased $102 million or 7%.

Most of the decline was driven by lower corporate service fees related to elevated fourth-quarter merger and acquisition advisory activity. Additionally, consumer services and service charges on deposits were down slightly, reflecting seasonally lower activity and higher consumer cash balances, and growth in both asset management fees and residential mortgage revenue partially offset some of the decline. Other non-interest income of $483 million grew $190 million and included higher revenue from both private equity and underwriting. Linked quarter growth also reflected the impact of the $173 million negative visa derivative adjustment in the fourth quarter.

Compared to the same period a year ago, total revenue declined $116 million as the decrease in net interest income from lower interest rates and volumes was partially offset by growth in our broad-based fee businesses. Turning to Slide 8, expenses were down by $134 million or 5% linked quarter across all categories, primarily due to disciplined expense management and seasonality. Year-over-year expenses increased $31 million or 1% and remained well-controlled. During the first quarter, we generated 5% linked-quarter positive operating leverage.

And as a result, our efficiency ratio for the first quarter was 61%. We remain delivered around our expense management. And as we've previously stated, we have a goal to reduce costs by $300 million in 2021 through our continuous improvement program, and we're confident we'll achieve our full-year target. As you know, this program funds a significant portion of our ongoing business and technology investments.

Our credit metrics are presented on Slide 9 and reflect improvement in all these three major categories. Non-performing loans decreased $148 million or 6% compared to December 31. Commercial non-performing loans declined by $174 million or 19%, which reflected portfolio activity as well as improved credit performance. Consumer non-performing loans increased $26 million related to residential real estate and home equity loan as a result of borrowers exiting forbearance.

Total delinquencies of $1.1 billion at March 31 decreased $217 million or 16%. Consumer loan delinquencies declined $203 million, primarily due to lower auto and residential real estate. And commercial loan delinquencies decreased by $14 million. Net charge-offs for loans and leases were $146 million, a decline of $83 million linked quarter.

Commercial net charge-offs of $51 million decreased by $58 million, driven by lower low -- lower gross charge-offs. And consumer net charge-offs of $95 million declined by $25 million, primarily in our auto and credit card portfolios. Annualized net charge-offs to total loans in the first quarter with 25 basis points, a decrease of 10 basis points compared to the same period last year. Slide 10 shows the $724 million reduction in our allowance for credit losses during the -- during the first quarter.

Portfolio changes represented $251 million of the decline, primarily driven by lower loan balances. $473 million of the release in reserves was related to economic and qualitative factors. Improvement or economic outlook was partially offset by increased reserves within our CRE portfolio, particularly in the areas directly impacted by COVID. In total, our quarter-end reserves were $5.2 billion, representing 2.2% of our loans.

Turning to Slide 11, I want to highlight the progress we've made toward completing the acquisition of BBVA USA. Notably, we filed all major regulatory applications and have completed a number of our key pre-close objectives. We're on track to close the acquisition mid-year and remain confident in our ability to achieve the financial objectives we laid out at the time that we announced the deal. In summary, PNC reported a strong first quarter.

In regard to our view of the overall economy, our current expectations are for GDP to surpass pre-recession level sometime during the third quarter and for the fed funds rate to remain near zero throughout 2021. Looking at the second quarter of 2021, compared -- compared to the first quarter of 2021, we expect total average loan balances to be stable. We expect NII to be up approximately 2%. We expect fee income to be up approximately 3% to 5%.

We expect other non-interest income to be between $300 million and $350 million, excluding net securities and visa activity. We expect total non-interest expense to be stable and we expect second-quarter net charge-offs to be between $150 million and $200 million. Looking at the full-year 2021 guidance, we expect PNC stand-alone to remain stable year over year in regard to both revenue and expenses. We do expect revenue benefits from the higher-rate environment and increased securities balances.

However, average loans will continue to be a drag through at least the first half of 2021. We acknowledge some upside exists in spot loan growth during the second half of the year, but that remains to be seen. And as a result, is not included in our guidance. Regarding the pending acquisition of BBVA USA, we're increasing our expectations for the full-year benefit to PNC's 2021 pre-provision net revenue from $600 million to $700 million, primarily driven by refinements to interest rate assumptions.

Consistent with last quarter, this expectation excludes integration costs and assumes a mid-year close. And with that, Bill and I are ready to take your questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Betsy Graseck with Morgan Stanley. Please proceed.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Hey, good morning.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Good morning, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. So, two questions. One on your NII guide, you mentioned, you know, up approximately 2% that's for the first quarter. You know, but then in the commentary around the second quarter, sorry.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah, right.

Betsy Graseck -- Morgan Stanley -- Analyst

Right. And then in the commentary around your securities book, you were highlighting that you're, you know, planning to raise securities book to what, 20% to 25%, 25% to 30% by year-end. So, I just wanted to, you know, kind of get your sense as you're building toward your goal by year-end, should we be anticipating that this rate of change of improvement in second-quarter NII is something that, you know, we should be expecting could persist if the forward curve sticks around where it is, you know, in 3Q and 4Q as well?

Rob Reilly -- Executive Vice President and Chief Financial Officer

The answer -- sure. So, yes, again, that was for the second quarter on NII guide. The -- now, when we take a look at the -- the full year, and this is part of our guidance in terms of revenue being stable for the full year. We do expect some more NII from our securities book as we increase the balances and that's going to be offset by a little bit less loan growth than what we were expecting at the beginning of the year.

So, that's where we come out in terms of stable. In regard to the building up of the securities book, I mean, it's -- it's three things really. One, we have put more money to work because the curve has steepened. Second, we're going to continue to do that in a measured way.

And then third, you know, for the foreseeable future, we'll be running as a percentage of our interest-earning assets, securities balances, you know, at a higher level. So, historically, we've been, you know, approximately in the 20% range. We're -- we're guiding toward more the 25% to 30% range.

Bill Demchak -- Chairman, President, and Chief Executive Officer

And Betsy, the only thing I would add is you -- you said it's kind of a goal. It's not really a goal, it's just our expectation --

Rob Reilly -- Executive Vice President and Chief Financial Officer

Expectation. That's right.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Given the carry right now and how much cash we're sitting on that -- that, you know, the reason we put that in there is that our security balances and frankly for the whole industry are likely to run higher as a percentage of our total assets than they have historically. And we'll keep adding to them throughout the year opportunistically as we've done. You know, that -- you see that in the actions we took late in the fourth quarter -- or sorry late in the first quarter. You know, if we were simply trying to drive NII, we could have front-loaded those purchases or lower yields and -- and had NII flat.

We didn't do that, we waited. Waiting that -- waiting turns out to have been the right thing.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah. OK.

Bill Demchak -- Chairman, President, and Chief Executive Officer

And you'll see us do that -- you've seen us do that, but you'll see us continue to do that through the course of the year.

Betsy Graseck -- Morgan Stanley -- Analyst

I totally get it. It's such an unusual environment here with the loan-to-deposit ratio so low and -- and, you know, what's going on with the liquidity in your book, so that -- that makes a lot of sense. And the -- and the revenue being stable for the full year with the loan commentary you just made, I mean, part of that is a function of the PPP roll-off that's expected. Is that -- is that fair?

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah. In part. Yeah, that's all part. That's all built-in.

Betsy Graseck -- Morgan Stanley -- Analyst

And then on your -- yeah, go ahead.

Bill Demchak -- Chairman, President, and Chief Executive Officer

I just want to say look, the -- the biggest unknown, you know, on loan growth specifically is -- is, you know, when the inventory start -- inventory build starts for our corporate customers. Utilization is running, you know, as much as 11 points below the peak, you know, maybe five points below sort of historic averages. And even though the economy is really kind of taken off here, for whatever reason, we haven't seen the typical inventory build and capex that you would see in this economy. You know, I guess just hesitancy waiting for more certainty on the -- on the pandemic.

But when that happens and it will happen, it almost mechanically has to happen, you're going to see pretty appreciable loan growth. We just don't know when that's going to be.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Particularly as it relates to 2021.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah.

Betsy Graseck -- Morgan Stanley -- Analyst

Got it. All right. And then just separately on the BBVA USA projected PPNR that $700 million up $100 million from your prior guide. What's driving that delta?

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah. As I said in my comments, Betsy, this is Rob. It's -- it's largely refinements in our assumptions around interest rates and some general true-ups, you know, relative to the assumptions that we had at the time that we announced the deal.

Betsy Graseck -- Morgan Stanley -- Analyst

But just based on our prior conversation, is it more that you're expecting they have more asset sensitivity in their book than you thought now, or --

Rob Reilly -- Executive Vice President and Chief Financial Officer

No, not necessarily. No. No.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Now, we had -- there's so many little things, you know, rates moved in our favor. You know, we're doing really well on -- on expense opportunities. You know, a whole variety of things and they ended up, you know --

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah, that's right. True-ups from assumptions that we made last November and, you know, the environment's changed a lot.

Bill Demchak -- Chairman, President, and Chief Executive Officer

In our knowledge.

Rob Reilly -- Executive Vice President and Chief Financial Officer

In our knowledge, that's right. That's right.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. All right. Got it. All right, thanks.

Bill and Rob, thanks a lot. Appreciate it.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Oh, sure, Betsy.

Operator

Our next question comes from John McDonald with Autonomous Research. Please proceed.

John McDonald -- Autonomous Research -- Analyst

Hey. Bill, I wanted to follow up on the loan growth thoughts and, you know, we're all just kind of, you know, thinking out loud here. But could we see the inventory, you know, and the capex pick up but, you know, it's still not kind of see loan demand because corporates have a lot of cash and other alternatives in supply. You know, how much is that a factor to do you think going on right now?

Bill Demchak -- Chairman, President, and Chief Executive Officer

That will obviously impact our large corporate book, which, I think, at the moment, has its lowest utilization rate ever. But the bulk of our book, remember, some 90-plus-percent of our clients are private companies. And so our middle market and commercial book really doesn't have access to the public markets and that cash build that you're seeing in large corporate. So I do think you'll see utilization there increase.

By the way, we've seen utilization increases in our asset-based lending book, but they're small. That's kind of the first place you would expect to see it, so that's encouraging.

John McDonald -- Autonomous Research -- Analyst

Got it. And, Rob, did you say that you're not building in a second-half pickup too much into your expectations?

Rob Reilly -- Executive Vice President and Chief Financial Officer

We're not. Yeah.

John McDonald -- Autonomous Research -- Analyst

OK.

Rob Reilly -- Executive Vice President and Chief Financial Officer

That is what I said, John, yeah, because, at this point, it's, you know, conjecture.

John McDonald -- Autonomous Research -- Analyst

Yep. And, Rob, a follow-up for you. Obviously, your capital ratios have gone quite high. Is it fair? And I know you don't want to get into deal assumptions and all that, but is it fair to us -- for us to think that you'll end -- close the deal with higher capital than the 9.3% pro forma just given where you're starting from now? And could you remind us to just what CET1 ratio feels appropriate as a target for you guys longer term?

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah, sure. Sure. Now, on the BBVA, I would say on everything, we'll have a whole bunch of numbers for you once we close the deal. But for today's purposes, we're tracking at or above all of our assumptions, including the CET1 ratio.

So, yeah, my estimations are that it will be higher than that 9.3%. But we'll get into that detail once we own the bank. In regard to our targets, we've always said around 8.5%. That's been sort of the level that we felt comfortable with.

Obviously, we've been a lot higher than that, so the relevance of that number isn't as strong as it was a few years ago.

John McDonald -- Autonomous Research -- Analyst

OK. Thanks.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Sure.

Bill Demchak -- Chairman, President, and Chief Executive Officer

John, you're asking the question, are we going to have excess capital that could be deployed in share buybacks and other things, and the answer is yes.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah. That's right.

John McDonald -- Autonomous Research -- Analyst

Yeah. And the deal doesn't change or how you think about the right capital level for the company.

Rob Reilly -- Executive Vice President and Chief Financial Officer

No. No.

Bill Demchak -- Chairman, President, and Chief Executive Officer

No.

John McDonald -- Autonomous Research -- Analyst

Got it.

Operator

Our next question comes from Scott Siefers with Piper Sandler. Please proceed.

Scott Siefers -- Piper Sandler -- Analyst

Good morning, guys. Hey, thank you for taking my question. And maybe to revisit the loan growth thing, so -- I mean, you guys are seeing same trends as everybody else, but you guys are a bit unique in terms of how much of the country you see. Are there any geographic differences on utilization or sort of hesitancy on inventory build? I mean, certain parts of the country just didn't necessarily shut down.

They reopened earlier, more quickly, etc. I guess I'm just curious if there's any differences either geographically or anywhere.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Not particularly. No. We haven't seen geographic differences. Utilization is low across the board.

Bill Demchak -- Chairman, President, and Chief Executive Officer

You know, I think one of the issues is supply chains have been so disrupted that people actually can't build inventory.

Scott Siefers -- Piper Sandler -- Analyst

Yeah.

Bill Demchak -- Chairman, President, and Chief Executive Officer

And we're strangely being held back by demand and production capacity.

Scott Siefers -- Piper Sandler -- Analyst

Yeah. That definitely makes sense. It's just such an unusual phenomenon, but I appreciate the thoughts there. And then maybe just more of a ticky-tack one.

The other fee expectation, so it was a very, very strong quarter this quarter. I think the guide is a bit higher than is typical in the second quarter. Just maybe sort of the nuance, Rob, on just sort of how you're thinking about that line going forward.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah. You know, that's -- we get some volatility on that quarter to quarter because there's a lot of elements there. But the guidance of $300 million to $350 million is what we expect to occur in the second quarter.

Scott Siefers -- Piper Sandler -- Analyst

Yeah. OK. All right. Perfect.

Thank you.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Sure.

Operator

Our next question comes from Erika Najarian with Bank of America. Please proceed.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Hi. Good morning. During this earnings season, we've asked a lot of questions as analysts of when loan growth is going to recover from a cyclical standpoint. But I'm wondering, given the deal expected to close in midyear and as we think about how this could potentially help, maybe, Bill, talk through how these newer markets could potentially give you an even better opportunity to capture loan growth recovery once that come.

Bill Demchak -- Chairman, President, and Chief Executive Officer

I think that's going to be the case. But I think one of the things we've been careful to do in sort of framing our expectations for you guys around BBVA was we recognize that there were parts of their balance sheet that we would likely shrink, both because of concentrations across the combined firm but also because there are some sectors we don't want to be in, offset by our growth in these new markets. So in the out years, I get really bullish about our growth potential. But for the first year or so, we're going to -- and we've -- this is all in sort of the numbers we gave you.

There's going to be a little trade-off of we'll be growing the business we want as we shrink some of the business we won't. So the real acceleration is probably a couple of years down the road.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. And as you have made more progress on -- toward closing the deal, can you give us a sense of -- you still feel like there's not going to be a significant amount of investment that you have to put into the combined franchise in terms of technology and other things. So obviously, some investors are thinking about another deal that had closed prior, where there was a lot of investment spend that was a little bit of a surprise. That's the question.

Bill Demchak -- Chairman, President, and Chief Executive Officer

All right. But I won't talk about what other people are doing, but we pretty much have this nailed down. We know -- and it's all in the numbers we've given you. We are going to invest in certain capacity for their branches, for example, on connectivity, faster routers.

We're going to expand some of the compute capacity we have in our cloud. But all that, we've given you, and it's not a big deal. It was all on the deal assumptions, and all those things are proving to be correct.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah. Sure.

Operator

Our next question comes from Ken Usdin with Jefferies. Please proceed.

Ken Usdin -- Jefferies -- Analyst

Hey, good morning, guys. I just wanted to follow up on the fee side, 3% to 5% growth in the second half. It was pretty good numbers to begin in the first. Just wondering if you could help us understand just where your expected growth is coming from and what do you think is going to lead that forward.

Thanks.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Sure, Ken. Yeah. I would say on the fees, as we look forward to the second quarter relative to the guide, corporate services, and consumer services will be up, we'd expect, in sort of that mid-single-digit range. And then the other fee categories, asset management, mortgage, and service charges on deposits, probably low single digits.

So that's sort of how we get to that range.

Ken Usdin -- Jefferies -- Analyst

OK. Great. And then just as a follow-up on mortgage, obviously, not a bigger line for you guys. But just given some – the changes in the business you guys have been making and the relatively new platform, just do you see share gain opportunities? And is the fight just against gain-on-sale margins in terms of just how resi can continue to build over time?

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah. I mean, we're -- mortgage isn't as big of a percentage of our business as others, but we're very excited about what we've built and the opportunities that we have, particularly -- the market will do what the market will do but particularly around building out the purchase side in terms of our consumer customers, which will be expanded with the BBVA acquisition.

Ken Usdin -- Jefferies -- Analyst

OK. Lastly, I'll follow up. Just, Rob, I know you guys don't really give us a number on just premium inside the bond book. But can you just help us understand, has it been a drag? Is it -- you're buying a lot of bonds.

You're probably still buying some premium bonds, too. Just how should we just think about that big picture? Thanks.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah. It's come down a little bit, and we'd expect it to continue to come down a bit.

Ken Usdin -- Jefferies -- Analyst

Even with purchases? Like –

Rob Reilly -- Executive Vice President and Chief Financial Officer

And it is in the numbers. Yeah, even with the purchases.

Ken Usdin -- Jefferies -- Analyst

OK. Got it. All right. Thank you.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Sure.

Operator

Our next question comes from Mike Mayo with Wells Fargo Securities. Please proceed.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi. In terms of the guidance for the acquisition, so from $600 million to $700 million, look, the bank index is up 40% since November 15th, when you announced the deal. So I guess it seems logical that your benefits are going to be greater, especially with the fixed price. So what does that mean for 2022 and the ultimate savings? I mean, mathematically, if you look at the industry and you look at BBVA, of course, it should be higher at this point.

It was good timing. Can you say what it means for the next kind of couple of years?

Bill Demchak -- Chairman, President, and Chief Executive Officer

I'm trying to figure out where you're going with that, Mike. I mean, we're going to -- once we close the deal, we'll give you some updates on numbers and so forth. I guess what I would say to you is we remain -- I remain and also even, to a greater extent, really excited by the out-year growth potential of this deal. We tend -- when you do a deal, you give kind of a year and a half worth of guidance when all the marvels are thrown up in the air, and you're working on cost saves and integration.

The potential of the franchise in these markets is phenomenal. The potential for cross-sell and for growth of new clients is phenomenal. And we're really excited by that.

Mike Mayo -- Wells Fargo Securities -- Analyst

I guess I'll just wait until you close it and get more information for 2022 guidance.

Rob Reilly -- Executive Vice President and Chief Financial Officer

There you go.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah.

Rob Reilly -- Executive Vice President and Chief Financial Officer

And we'll have it.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah.

Mike Mayo -- Wells Fargo Securities -- Analyst

OK. Well, let me just – let me get some concrete numbers from you. I love what you're saying about the loan data. I just -- I love data.

So when you say you're 11 points below peak utilization and 5 points below average, what are those numbers? And you also say corporate lending utilization is the lowest ever. What's that percentage? If I could have those, that would be great.

Bill Demchak -- Chairman, President, and Chief Executive Officer

So the only one I can think of right off the top of my head is our corporate finance utilization is 57% of the peak number.

So the only one I -- I can think of right off the top of my head is our corporate finance utilization is 57% of the peak number. And I think on --

Mike Mayo -- Wells Fargo Securities -- Analyst

Yeah.

Bill Demchak -- Chairman, President, and Chief Executive Officer

I -- I saw some strange table.

Mike Mayo -- Wells Fargo Securities -- Analyst

Yeah. That set it all-time low. It's lower there.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah. You know, and that's a function of all the corporate cash. That -- the 11 point drop was off of the high utilization we saw, Mike, with all the draws during the first quarter of last year, which is why the average is, you know, maybe 5%. And it's -- it's hit in, you know, certain areas have been im -- impacted more than others.

Municipal utilization is way way down, as I said, corporate finance is way, way down Even our asset base business which typically runs fairly high utilization is really struggling, just given the -- the lack of ability to build inventory. So -- so I don't know if you remember the number, Rob, but we've messed around with that. If you kind of regress economic growth retail sales a whole bunch other different things against -- in inventory levels against loan utilization it's in our squared up over 80.

Rob Reilly -- Executive Vice President and Chief Financial Officer

That's right.

Bill Demchak -- Chairman, President, and Chief Executive Officer

And it should be growing today.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah.

Bill Demchak -- Chairman, President, and Chief Executive Officer

We just haven't seen it. I -- I can't give you an answer as to why.

Mike Mayo -- Wells Fargo Securities -- Analyst

And then the last one, you took private companies are over 90% of your -- your customers as a percentage of loan balances. How much would that be? Because you say --

Bill Demchak -- Chairman, President, and Chief Executive Officer

No, that's my number. So by loan balances, it's -- I'm going to say it's half.

Mike Mayo -- Wells Fargo Securities -- Analyst

Yeah, that's right. That's right. That's a better number.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Oh, OK.

Mike Mayo -- Wells Fargo Securities -- Analyst

And that's obviously on -- and that's obviously the institutional corporate side?

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah.

Mike Mayo -- Wells Fargo Securities -- Analyst

And -- and just -- just like -- I mean, I guess, you're just being conservative or what? Because you're saying it has to, quote, mechanically has to happen, it's in the process, you're starting to see asset-based lending but you're not building it in your expectation even for the fourth quarter of this year. So is that just being conservative? Or --

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah. No, it's us saying -- look, Mike, we could sit here and tell you, oh, I'm flat some of these calls so the back half of the year is going to be great. Everything will be wonderful. I hope they're right, and that's all right, we'll do really well.

But I -- I can't promise you that.

Mike Mayo -- Wells Fargo Securities -- Analyst

Or -- or specific timing.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah, what -- what we show you are the stuff we know. I know that mechanically our loan balances are going to grow as the economy improves and they build inventories. I can't tell you the timing of that. By the way, nobody else can either.

Mike Mayo -- Wells Fargo Securities -- Analyst

All right thanks a lot.

Operator

[Operator instructions] Our next question comes from Gerard Cassidy with RBC. Please proceed.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, Bill. Good morning, Rob.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Hey, Gerard.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Can you guys talk about -- your deposit balances, of course, are up dramatically, you've given that to us. And, Bill, you've talked about the utilization, you know, of your customers with the liquidity. Is that the number one driver of possibly taking deposits down or some of your peers? You know, the custody bank is not necessarily your peer but the custody banks are hoping for higher rates to bring their balances down. How -- how much would rising short-term interest rates help you guys bring down your deposit balances to get the loan to deposit ratio in more of a historical, you know, relationship without having the loans having to grow dramatically?

Bill Demchak -- Chairman, President, and Chief Executive Officer

I -- I don't think rising short-term rates have any impact at all. I think, you know, as a practical matter, deposit balances in the industry are driven by the size of the Fed's balance sheet and fiscal transfers coupled with loan growth. Loan growth will actually drive more deposit balances once we see a pickup in that. And I think, excess liquidity in the system is here to stay for a long period of time because I don't think the Fed is going to shrink their balance sheet anytime -- anytime soon.

So I think we're gonna be in a -- there's a structural change in banking which is going to have more liquidity higher security balances for an extended period of time.

Rob Reilly -- Executive Vice President and Chief Financial Officer

In a foreseeable future.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. Which I would say, I agree with you guys on then as well. Shifting over to the allowance for credit losses in your slide, I think it was Slide 10, can you give us good color on the levels and what drives those with the portfolio changes and the economic qualitative factors recognizing BBVA is going to influence this number by the, you know, in the out years? But when you look at the reserves and you compare them to the day one reserves, back on January 1, 2020, which you guys show here, you still well above them.And if the economy over the next 12 to 18 months is even going to be better than what we all thought on January 1, 2020 pre-pandemic that would suggest reserves should come down. Do you think you get close to that day one level or is it just too low?

Rob Reilly -- Executive Vice President and Chief Financial Officer

Oh no, I think -- I think you can -- I think you can get there to that level it's just a question like that you pointed out in terms of timing. So you know, our reserves right now reflect our current forecast if subsequent forecasts are more bullish or more optimistic, you know, we'll -- we'll continue on that trend. But I -- the timing how fast we get there, Gerard, you know, in earlier comments difficult to be precise about.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Sure. All right, Rob. Thank you.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Sure.

Operator

Our next question comes from Matt O'Connor with Deutsche Bank. Please proceed.

Matt O'Connor -- Deutsche Bank -- Analyst

Good morning. Can you talk about your interest rate positioning post the actions you plan to take in the securities portfolio and then also after you fold in BBVA USA. I realize there are some moving pieces but what would your expectations be in terms of how asset sensitive you are factoring those -- those two things?

Bill Demchak -- Chairman, President, and Chief Executive Officer

We're going to still end up being asset-sensitive. I mean, largely because even with our suggested build, you know, that the deposits we're gonna have with the Fed are going to be quite large. I would tell you that our duration of equity and -- and measured asset sensitivity has decreased as a function of the rise in rates but that's less about what we're doing and more about the negative convexity in a bank's balance sheet.

Matt O'Connor -- Deutsche Bank -- Analyst

OK. Any ways to kind of just frame how meaningfully levered it will be to rates, I guess, both the short and long end?

Bill Demchak -- Chairman, President, and Chief Executive Officer

No, I mean --

Matt O'Connor -- Deutsche Bank -- Analyst

I guess, to put it another way like you have a lot of leverage to rising rates now but as you grow the securities book --

Rob Reilly -- Executive Vice President and Chief Financial Officer

We still will.

Bill Demchak -- Chairman, President, and Chief Executive Officer

We're hardly going to dent it. I mean the chart -- you see that chart we have in there -- when you see -- you see our cash balances versus security balances, put any loan growth you want in there, we're buying -- we're not buying the long end of the curve and we have a massive opportunity to deploy that. But you know, as we always do, we're going to increment our way in. And by the way, incrementing our way in is what gets us to that 25%.

Matt O'Connor -- Deutsche Bank -- Analyst

Yeah. OK. And then separately, I'm probably getting a little ahead of myself here. Do you think after the BBVA deal closes, you know, you've clearly shifted your view to wanting branches nationally and with the thought being to lead with organic growth or, you know, because you're basically folding them into your platform, would you be ready to do another deal maybe quicker than -- than normally?

Bill Demchak -- Chairman, President, and Chief Executive Officer

We certainly mechanically would be ready to do another deal. I think, you know, like all things, it's a function of -- of where you create value. If it's cheaper to go organically, which it was for a bunch of years then -- then we would choose that route. I -- I personally believe that we will see opportunities in smaller institutions, you know, simply because of the massive shift in technology and the costs of technology that we've seen to serve customers.

So it's -- I think low rates, not a lot of loan growth, big technology costs are going to give us opportunities to -- to continue to create scale.

Matt O'Connor -- Deutsche Bank -- Analyst

And we'll have those capabilities?

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah.

Matt O'Connor -- Deutsche Bank -- Analyst

OK. That's helpful. Thank you.

Operator

Our next question comes from Bill Carcache with Wolfe Research. Please proceed.

Bill Carcache -- Wolf Research -- Analyst

Thank you. Good morning.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Good morning.

Bill Carcache -- Wolf Research -- Analyst

Bill and Rob can you discuss how you guys are thinking about pent-up demand dynamics for your consumer versus commercial customers. You know, where is the greater gearing to the reopening at how to access savings and excess liquidity on both sides shape -- shape review?

Rob Reilly -- Executive Vice President and Chief Financial Officer

Well, sort of our outlook for consumer lending? Is that sort of what you're getting?

Bill Demchak -- Chairman, President, and Chief Executive Officer

I'm trying to find your question.

Bill Carcache -- Wolf Research -- Analyst

Yeah. Yeah. I guess, just thinking about it as we look to like, you know, sort of these pent-up demand dynamics and sort of like the reopening and like, you know, kind of animal spirits being unleashed as you look to the second half of the year and all that being positive, you know, for loan growth. Like how did that differ between the consumer and the commercial side? Like there's a lot of liquidity sitting around and, you know, commercial balance sheets, there's, you know, the consumer has a lot of savings.

Does that sort of delay like the rebound and balanced growth on each side? Or -- or are both sides going to be affected similarly or -- or differently? Because maybe there seems to be a perspective.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah. I know -- I see where you're going. I -- I think consumer lending is going to drag CNI increase.

Bill Carcache -- Wolf Research -- Analyst

Yeah. Right.

Bill Demchak -- Chairman, President, and Chief Executive Officer

I -- I think consumers are really flush with cash. You've seen retail sales, I think they continue to accelerate, by the way. But -- but what's happening is that people who don't borrow are buying and that people who would normally borrow are sitting on fiscal payments that they're going to have to burn through overtime before you see balanced growth. We're seeing massive transaction volume so we see it in our swipe fees in effect.

But I don't know that you're going to see balanced growth. I -- I think consumer will lag commercial and I get back to this place where, you know, inside of commercial the -- the smaller non-public companies and even some of the smaller public companies will continue to rely on bank balance sheets to fuel their growth.

Bill Carcache -- Wolf Research -- Analyst

Got it. That's very helpful. Bill, maybe I could circle back on a question that I asked you a while ago about sort of the -- the financial technology players like the times of the world and -- and maybe just specifically on any color that you can give on, perhaps, how active you are in discussions with regulators regarding sort of the uneven playing field with many of these players particularly some of these -- some of these players are benefiting from things like unregulated debit interchange, which was never intended for them. It was more like the small caps -- a smaller -- smaller bank exemption that was intended for, you know, during the -- and -- and -- and so, you know, I guess, is there any expectation of a leveling of the playing field, do you see in the future? Or is this sort of the competitive landscape that is sort of the new reality?

Bill Demchak -- Chairman, President, and Chief Executive Officer

So it is a topic of interest, both on the political and regulatory side, less about competition and more about safety, and soundness, and data protection, and fraud. And not -- I'm not referring to Chime specifically, but rather new entrants into the payment space, the exponential increase in fraud we've seen because of less robust, know your customer rules, and frankly, probably just because of the COVID environment. All of that has gathered the attention of politicians and regulators. The competition side, we're happy to compete.

You know, I'm somewhat shocked actually, nobody's asked me a question about the cash [Inaudible] that we've rolled out this -- yesterday and the day before. That product is a result of years of technology investment that allows us, I think, is the only institution in the world to have effectively real-time capability of what's going on in our customers' accounts. And therefore, showing them what's going on in their accounts and therefore, empowering them to choose what's going on in their accounts. No, fintech has that.

Go back to -- you know, because they rely on these small banks as their back office, which, in turn, are relying on 30-year-old cobalt-based, mainframe-based batch process, not very exciting core processors. Yeah, bring on the competition. At some point, they need to make money and, you know, to justify their existence. Our challenge is presenting, and we think we do this, a great proposition to our customers with ease of use and the very best products.

And I think we have the technology backbone to do that. So I'm less worried about competing with somebody. I'm more worried about safety and soundness to the system, and data, and disruption to our customers who don't understand where data is being shared and who has access to it.

Bill Carcache -- Wolf Research -- Analyst

That's very helpful. I was going to ask about the new service, which I saw you talk about it on CNBC, so I figured I'd save my question. If I could squeeze in maybe one last one. Treasury departments of any of your clients even remotely considering the idea of, you know, having some allocation to Bitcoin.

We've seen some businesses move in that direction. And with the Coinbase IPO, I guess, it sort of seems like, you know, it's a bit out of left field, but perhaps you could argue it's becoming more mainstream. And so just wondering, is that something that your treasury function is preparing for? And then, you know, maybe on the wealth side, are any wealth clients expressing interest in gaining exposure to crypto assets? Any thoughts on how you guys are, you know, sort of positioned for any potential emergence of crypto as a potential asset class, especially in the aftermath of the Coinbase?

Bill Demchak -- Chairman, President, and Chief Executive Officer

Well, we've been working on this long before Coinbase went public back. We've talked to Coinbase about partnership and custody for our wealth clients. You know, practically, we've had a work stream around this, both for our corporate clients and treasury, but also for our wealth clients. You know, the technology stretch isn't a big deal for us.

It's more of the compliance-based issues that you would expect. And then importantly, choosing the right partners that you would choose as a trading transfer platform and importantly, the custody platform. So that's an open and continuing dialogue here.

Rob Reilly -- Executive Vice President and Chief Financial Officer

And suitability in fiduciary, yeah. Thank you.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah. You can imagine that for wealth clients, there'd be a lot of disclosure around [Inaudible] at your own risk.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Yeah, right. Right. Right.

Bill Carcache -- Wolf Research -- Analyst

Thanks, Bill and Rob. Appreciate you taking my questions.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yes, sure.

Operator

We have a follow-up from Mike Mayo with Wells Fargo Securities. Please proceed.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi. The fintech comment, it's not me, to ask another question. If you think about some of the players, the banks in the industry, they're starting to set up bilateral relationships, even multilateral relationships with some big tech. And that's an option versus going directly for the consumer especially with you going national now.

Are you looking to continue permanently with getting customers directly? Or are you looking to partner more to lower your customer acquisition cost and go more broadly, kind of like banking as a service as a plan B?

Bill Demchak -- Chairman, President, and Chief Executive Officer

We're going to get them directly. Look like, I think when you effectively offer your products as the low-cost provider to somebody else who owns the relationship, you've sold your soul to the devil. It's the beginning of the end of your franchise in whatever space you're playing. We need to own the customer relationship, and we need to deserve to own the customer relationship through an offering that doesn't need that fintech platform on the front end.

It's the alternative to that, right? And this is -- you've heard Jamie talk about this, as well. If tech gets into the space and owns client relationships, then we become a commodity provider industry with 5,000 participants. It's a disaster. You can't default to that end game.

You have to own the customer.

Mike Mayo -- Wells Fargo Securities -- Analyst

And when you think about the risk with data, to the extent customers, you know, open banking and if customers opt in to share their data with other providers, does that force your hand more? Or how do you defend against that?

Bill Demchak -- Chairman, President, and Chief Executive Officer

I think there's a lot of appropriate focus on data. The CFPB, I know, is working on this as our, you know, various politicians, and other regulators. We need safety and soundness around data, that is the biggest systemic risk at the moment, in my view. You know, people talk about cyber, but what they're really talking about is data, and disruption of account flows, payment flows because data is corrupted.

You know, the consumer -- that, by the way, is solved, ultimately through tokenized, API-based, you know, authorization at the bank for what the consumer wants to share, not through screen scraping. And, you know, we're working our way toward that. I think that's the ultimate end game. But the consumer has to be empowered to share data, but the data they want and to share it when they want.

Not all the time and not everything, and not to places that are otherwise, in my view, not regulated in terms of their controls around data.

Rob Reilly -- Executive Vice President and Chief Financial Officer

And looking to monetize that data in some way.

Bill Demchak -- Chairman, President, and Chief Executive Officer

Yeah.

Mike Mayo -- Wells Fargo Securities -- Analyst

Got it. Thank you.

Operator

There are no further questions at this time.

Bryan Gill -- Director of Investor Relations

OK. Well, thanks, Frank. Bill, would you like to make any closing comments?

Bill Demchak -- Chairman, President, and Chief Executive Officer

Thank you, everybody. Look forward to talking to you. at the end of the second quarter. Stay safe.

Looking forward to summer here. I hope you're doing the same.

Rob Reilly -- Executive Vice President and Chief Financial Officer

Take care.

Bryan Gill -- Director of Investor Relations

OK. Thank you.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Bryan Gill -- Director of Investor Relations

Bill Demchak -- Chairman, President, and Chief Executive Officer

Rob Reilly -- Executive Vice President and Chief Financial Officer

Betsy Graseck -- Morgan Stanley -- Analyst

John McDonald -- Autonomous Research -- Analyst

Scott Siefers -- Piper Sandler -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Ken Usdin -- Jefferies -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

Bill Carcache -- Wolf Research -- Analyst

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