PNC Financial Services Group Inc (PNC) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the PNC Financial Services Group third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I will now turn the call over to Director of Investor Relations, Mr. Bill Callihan.

Sir, please go ahead.

Thank you, and good morning.

Well, welcome to today's conference call for the PNC Financial Services Group.

Participating in this call will be PNC's Chairman and Chief Executive Officer, Jim Rohr; and Rick Johnson, the Company's Chief Financial Officer.

As a reminder, the following statements contain forward-looking information.

Actual results and future events could differ, possibly materially, due to a variety of factors, including those described in this call, today's earnings release and supplementary financial information and slides, and in our most recent Forms 10-K, 10-Q and other SEC reports.

These statements speak only of October 31, 2006 and PNC undertakes no obligation to update them.

In the following comments, we will sometimes refer to adjusted results for the third quarter of 2006 to help illustrate the impact of certain 2006 items due to the magnitude of the aggregate of these items.

These items include the BlackRock Merrill Lynch investment management transaction gain, integration costs, and the costs of securities and mortgage loan repositionings that we have disclosed to you earlier.

We provided the details of the adjustments in the Consolidated Financial Highlights section of today's earnings release, as well as in the appendix to the presentation slides for today's conference call.

While we have not provided adjusted amounts for other periods we may discuss today, this is not intended to imply that there could not have been similar types of adjustments for those periods.

But any such adjustments would not have had similar magnitudes in the amounts of the third quarter adjustments we've shown.

The following GAAP comments -- the following comments also include a discussion of non-GAAP financial measures, which to the extent no so qualified by the comments or in the slides, as qualified by the GAAP reconciliation included in today's earnings release, supplemental financial information and slides, Forms 10-K and 10-Q and other documents available on our Website at www.pnc.com in the About PNC, Investor Relations section.

Please note that a slide presentation accompanies our remarks today.

You can find this slide presentation, along with our third quarter 2006 earnings release and supplementary information on our Website.

And with that, I'd now like to turn it over to Jim Rohr, our Chairman and CEO

Thank you very much, Bill.

And good morning, everyone.

Thank you for joining us this morning.

The third quarter was truly a remarkable quarter for PNC, a great quarter.

And I think when we go through the highlights since our last earnings call, I think you'll see exactly why.

First, I'll touch on the BlackRock transaction.

BlackRock is a company, that you know, that we've nurtured over the last decade and they've done an extraordinarily good job and developed a great business.

In the third quarter -- at the end of the third quarter, they acquired the Merrill Lynch investment managers, which catapulted BlackRock into the ranks of trillion dollar assets managers, truly an extraordinary development.

And PNC recognized a $1.3 billion gain.

And an additional $300 million paid in capital as a result of that transaction.

This is the first time we've been able to realize any of our unrealized gain on BlackRock and we have quite a bit left.

One of the things that came out of that was some additional capital flexibility, which allowed us to announce on October 9 that we would acquire the Mercantile Bancshares Corporation, which is a high-performing commercial bank based in Baltimore.

The Mercantile positions us in a way no other acquisition could have.

It fits perfectly between our powerful Philadelphia franchise.

And in between Delaware where we rank number two and our position in Washington, D.C. where we've had such great success since the Riggs acquisition.

This really makes us a mid-Atlantic powerhouse, if you will.

It makes us number two in Maryland, which no other acquisition could.

But just as important, we had a very strong quarter on an adjusted financial basis.

With year-over-year and linked quarter increases in net interest income.

We also had high-quality client-driven fee income and we managed our expenses well, as One PNC continues.

Additionally, our asset quality remained excellent.

Nonperforming assets actually went down from a low level by 17%.

And the ratio of NPA's to loans, loans held for sale and foreclosed assets also declined.

Now additionally, in the quarter, as the Fed paused, we took that opportunity to reposition our balance sheet, to help us optimize our total return performance over the long-term in our securities and our mortgage loan portfolio.

And that will certainly benefit us now and in the future.

Now, let me turn our attention to the businesses that produce these great results.

First, for the retail bank.

The retail business is having a great year.

Positive operating leverage drove a 17% improvement in earnings over last year's third quarter.

On the revenue side, much of the improvement can be attributed to the intensive research that we've completed.

That resulted in customer friendly changes that we've piloted in greater Washington, D.C.

We've taken those and turned them into a compelling argument for PNC's brand promise of ease confidence and achievement across our footprint.

Now, once we've acquired Mercantile, we'll be able to roll out thos changes to their customers, as well.

Now, these changes include free ATM's worldwide.

We're one of the first banks to make that offer to our customers.

We've extended our branch hours and reduced the number of customer checking accounts offered, from than 12, to three.

The initial results are promising.

I'll tell you, that since the ATM offer and the checking account simplification, we are beginning to see the lift in expected -- we expected an average balances per new checking account.

At September, we also launched a new PNC credit card as a way to capture a greater share of customer payment activity.

That program is exceeding our expectations while maintaining our risk parameters.

The response to the credit card solicitation was three times the industry average for direct mail.

And we met 40% of our year-end cardholders target in just four weeks.

Now, best of all, perhaps, are these changes are being greeted enthusiastically by our sales force and our front line employees.

And that is the key to PNC value chain.

Highly satisfied employees drive satisfied customers, which drive growth.

Now, to serve new and continuing customers, we've also invested in our distribution system by adding new branches and refurbishing others.

We're making great progress with a program we call "rolling thunder," to refurbish our old branches and to provide a differentiated client experience.

We expect 36% of "rolling thunder" to be complete by the end of the year.

A CitiGroup mystery shopper report on Washington, D.C. area branches, recently cited our branches for the unique layout and our vast product lineup.

And we've also invested in the training.

The mystery shopper said that our CSR's are among the most knowledgeable that he found.

We're also gaining traction with our new customer service model for the emerging affluent clients I told you about last quarter.

The results continue to be promising and we're seeing greater interaction with these clients that's translating into more business.

And obviously, that's why the retail bank is up 17%.

Moving on to corporate and institutional.

While the profits in this group are essentially unchanged for the past few quarters, I'm very pleased with our ability to attract and retain value-added clients in an environment that is increasingly characterized by weaker structures and lower spreads for the risk taken.

Make no mistake, we could have all the loans that we want and drive higher net income, but based on the current returns, we don't think that's a good long-term trade.

So, corporate and institutional continues to be an innovator.

We've been looking for ways to leverage our lending to achieve greater cross-sell of fee services.

That's our strategy and it's working.

According to a recent survey, PNC increased its percentage of middle market lead relationships last year at a time when several of our competitors saw theirs declining.

Our product penetration for middle market in our footprint is higher than any of our competitors in nearly every product category.

That includes being first in treasury management, business checking accounts, capital markets, short-term investments, and more.

And you can see that in the growth in the fee income and the corporate and institutional area.

Our capital markets penetration is particularly significant because PNC just last year took a big step further into investment banking.

This month marks the one year anniversary of the Harris Williams acquisition.

Harris Williams is our highly successful middle market M&A business.

This is a product that puts us on the radar screen with middle market clients and businesses far beyond the base in the mid-Atlantic.

And we've expanded it by adding two offices in the past year in Philadelphia and Minneapolis.

And business has been really good.

We have many deals in the pipeline and about 10% of those are out of the PNC base.

Now, let me move to BlackRock.

They had a terrific quarter.

It's truly amazing what their team has been able too accomplish in a short period of time.

I know you saw yesterday's news, the BlackRock is reporting assets under management of about $1.1 trillion.

And that imposing number positions them well among the field's leading competitors.

And under their management and the superb team they've assembled, we're very optimistic about their future.

Now, moving on to PFPC.

PFPC's new business sales continue to be very strong.

And the revenues from the major client win we announced in the first quarter should be more visible.

The will mitigate the entire -- the intense price competition and the loss of a major client, which took place, which was realized in the second quarter of this year, which has pressured current revenue growth.

Now, we responded by making the Company more efficient, which has driven our operating margin to a high of 24%.

And as such, I believe we are approaching another positive inflection point in this business.

PFPC continues to expand where the growth opportunities are greatest.

Especially in Europe, where we have committed capital for growth.

We are the top service provider for Irish-domiciled alternative investments.

And we've expanded our presence in Ireland twice in the last six months.

We now have locations in Dublin, Wexford and Navan.

And together, with our Luxembourg office, they service $79 billion in assets, up 18% from a year ago.

Now, another area of growth for PFPC is the manage to [cash] business, revenues from serving those accounts jumped 30% year over year.

Thanks largely to our adviser board platform.

Now, let me move on to the Mercantile acquisition.

We have set the stage for future growth by agreeing to acquire Mercantile, an outstanding commercial bank.

Mercantile fills out our footprint in the mid-Atlantic.

And with it, we enter Baltimore and add more of Washington's prosperous suburbs.

The acquisition of Mercantile, which has great penetration in the commercial market but a smaller proportion of personal account holders, gives us new opportunities to expand our retail banking and our wealth management business.

Now, it's very early in the integration process, but we're off to a good start.

We have a good working relationship with the Mercantile team, they are focused where they should be in running their franchise and retaining their top-flight, client-facing staff.

The goal there is to be -- to minimize any disruption for Mercantile's clients.

We're in the process of establishing achievable integration goals to meet our expectations for cost saves and to grow the franchise.

And I can tell you that both sides are excited by the opportunities we see for the combined organization.

From our perspective, Mercantile's third quarter results were just as expected.

Good loan and deposit growth, strong asset quality, and some softness in fee income related to their exposure in the energy markets.

We're very comfortable with performance of their core business and looking forward to that acquisition, actually more than ever.

Now, Rick will discuss our financial results in more detail.

Rick?

Thanks, Jim and good morning, everyone.

This was an extraordinary quarter for PNC but also a rather complex one.

We reported record earnings of $5.01 per share, and adjusted earnings per share of $1.28.

The adjustments are disclosed in the highlights section.

And since we've already filed 8-K's on these, I'm not going to go through a discussion on these items.

The key takeaways, however from our third quarter results are that we are focused on the fundamentals, sticking to our strategy of growing value added client relationships, maintaining a moderate risk profile and controlling costs.

And we're winning.

Third quarter results were driven by growth in net interest income, a stable margin, strong client revenues, well-controlled expenses, and continued improvements in asset quality, supplemented with more reasonable levels of market-related revenues, such as private equity gains, BlackRock performance and trading gains.

All in all, a high quality performance.

This slide shows that net interest income is up in both the year-over-year and linked quarter comparisons, which is a win when you consider the interest rate environment in which we operate.

The shape of the yield curve does not help anybody.

So, we've been able to keep a relatively stable margin in the linked quarter comparison, as the decline in interest rate spread has essentially offset the increase in value of our noninterest bearing deposits.

The improvement in net interest income results from balance sheet growth, particularly noninterest bearing deposit growth.

And let me remind you that there is minimal impact in the third quarter from our balance sheet repositioning.

As previously reported, we've repositioned our securities and mortgage loan portfolios in response to the change in the Fed's monetary policy.

Both of these activities positions us for a steeper yield curve.

And we did all this with minimal impact on our duration of equity, which stood at approximately one year positive at quarter end.

As such, we continue to have significant capacity to invest if and when the markets provide the opportunity.

Moving forward, we are cautiously optimistic about the margin.

We expect to see an initial improvement in the margin due to the balance sheet repositioning actions we've taken, which will be partially offset by balance sheet investments and the cost of financing share repurchases.

If the shape of the forward curve holds, the net interest margin should stabilize thereafter.

Further on, we expect net interest income will continue to grow in 2007 due to continued growth in loans and deposits, our balance sheet flexibility, and in part due to the benefits of the balance sheet repositioning we executed in the third quarter.

Let us talk about noninterest income for the quarter, which was up $1.8 billion to $2.9 billion year-over-year on a reported basis, as a result of the BlackRock transaction, partially offset by the balance sheet repositioning activities.

Taking that out, noninterest income was $1.1 billion, which includes a $20 million loss associated with our accounting for trust preferred security hedges.

Second quarter 2006 reported results were approximately $1.2 billion, which benefited from the strong gains in market related activities, such as our private equity business, BlackRock performance fees and trading.

As I've said before, you can expect private equity gains to average $15 to $20 million per quarter and trading results to average $40 to $45 million, which would be consistent with the current quarter performance.

Noninterest income of $1.1 billion in the prior year quarter appears flat to the current quarter.

However when you dig underneath, you see the growth in client related fee income in corporate services of $36 million and retail bank noninterest income growth of 9%, offset a decline in market related private equity revenues, trading revenues and gains on commercial mortgage sales.

So, year-over-year, you see better quality earnings.

Our efforts to build a cost conscious culture continues to add value.

We reported $1.178 billion in noninterest expense in the third quarter.

But that included $72 million related to the BlackRock/MLIM transaction.

So adjusted expenses were $1.106 billion.

Noninterest expense was $1.159 billion in the third quarter of 2005.

And $1.149 billion in the linked quarter.

And the bank efficiency ratio, adjusted for these items, is now 56%.

One PNC, which clearly was undertook at the right time, continues to be a major contributor to cost control and remains on track.

This quarter, we captured $65 million in value and expect to reach our goal of $100 million per quarter by mid of next year.

In the fourth quarter, there should be an acceleration of benefit as we take out more costs and benefit from revenue increases.

The completion of One PNC will not mean the end of efficiency improvement at PNC.

As we've said before, we're working to augment its success through an ongoing continuous improvement program.

We as a management team clearly understand that we are in a cost game.

We constantly evaluate the allocation of resources and deploy them to the highest risk to adjusted return activities.

Now, moving on to credit quality.

The provision for credit losses was $16 million.

This is lower than last quarter because we're taking action to improve asset quality.

That's best evidenced by a 17% reduction in nonperforming assets on a linked quarter basis.

Net chargeoffs are up $17 million on a linked quarter basis, largely as a result of a single overdraft fraud in the second quarter, which remains in litigation.

But from a balance sheet perspective, we have completely charged it off.

Nevertheless, at 0.37%, the ratio of chargeoffs to loans remains extremely low and credit quality is strong.

The effective tax rate was 36.1%.

That was higher than normal, primarily due to the tax effects of the BlackRock/MLIM transaction, which was partially offset by a $14 million benefit on the reversal of deferred taxes related to PFPC's foreign operations.

Over the longer term, we would expect an effective tax rate of approximately 32%, as we report BlackRock on the equity method of accounting.

As you expected, the quarter was complex.

However on an adjusted basis, the firm's performance reflected a higher quality earnings stream, driven more by cost growth and client revenues and less on market sensitive revenue.

Now, let's take a turn on the balance sheet.

Assets have increased $5.2 billion year-over-year.

And $1.8 of that resulted from the BlackRock Merrill Lynch investment management transaction, as we recorded our $3.8 billion investment in BlackRock and deconsolidated BlackRock from our balance sheet.

The remaining growth resulted from the loan and securities portfolio.

Credit our employees for much of that success.

They execute on the strategy every day.

Leveraging customer relationship and our strong product set to drive loan and deposit growth.

Average loans grew $888 million or 2% year-over-year.

But the growth since September 30, 2005 will be $2.1 billion higher if you exclude the impact of our commercial paper conduit, which we deconsolidated in October, 2005.

That would make year-over-year loan growth better than 6%.

Could we grow loans faster, as Jim said?

Sure we could.

On the commercial side, there's demand in the HTL space.

And if our risk return appetite was different, we would add that risk to our balance sheet.

But our goal isn't to increase asset classes with this risk profile.

Therefore, you can expect loan growth to be in this mid-single digit range for the next few quarters.

As we remain, on the margin, more of a seller than a buyer of credit.

Average securities grew as we continued to invest through the interest rate cycle.

On the deposit side, we're seeing good growth.

Year-over-year deposits are close to $5 billion or better than 8%.

In the noninterest category, much of the growth in noninterest bearing deposits this quarter is coming from the escrow and reserve deposits associated with servicing portfolio at Midland loan services and at larger deposits within the corporate institutional bank.

As you would expect on the consumer side, interest bearing deposits are growing faster than noninterest, as clients are seeking higher returns.

The faster growing deposit categories are CD's and money markets.

The entire industry is feeling this pressure, so the competition in this space is stiff.

This is where our relationship based strategy is paying us huge dividends, especially in conjunction with the powerful technology of PNC's sales platform.

The platform links our distribution channels, so we get a clearer picture of return on every client relationship.

By arming front line employees with that knowledge and giving them some flexibility to adjust deposit pricing, we're able to give our best clients our best pricing.

As a result, we're not chasing off hot money at high prices that make it difficult to earn good spreads.

Because of this and our low loan to deposit ratio, we can remain disciplined in managing this space.

On the capital front, we repurchase 1 million shares during the quarter.

And the BlackRock Merrill Lynch investment management transaction added $1.6 billion to our capital base and clearly strengthened our position with a tangible common equity ratio of 7.5%.

Based on our current estimates, we expect our tangible common equity ratio to be approximately 5.7% after our anticipated first quarter close of the Mercantile transaction.

As we look at the remainder of this year and into 2007, we believe that we will generate up to $900 million in excess capital beyond our dividend requirements.

Clearly, we evaluate many capital deployment alternatives but at today's prices, buying our stock back represents a very attractive return to the shareholders.

And you should expect, all else being equal, that we will be actively engaged in share repurchase during those periods when we are not blacked out due to the Mercantile transaction.

So in summary, it was an exceptional quarter.

Closing the BlackRock transaction, the balance sheet restructurings, and staying focused on the business.

We grew clients, as best demonstrated by loan deposit and fee income growth.

And we remained focused on expenses and managed asset quality.

We delivered strong adjusted returns and I believe we have positioned the firm to generate quality results in this challenging interest rate environment.

While we're in the early stages our 2007 planning process from an operating point of view, aside from the Mercantile transaction, we're positioned for another good year.

We expect moderate loan and deposit growth.

We expect net interest income to be up, even beyond the benefit of the balance sheet repositioning and we expect the margin to be stable.

As in the past, we expect to continue to see good fee income growth.

We will continue to focus on creating positive operating leverage, with a goal of non-BlackRock expense growth slightly higher than the growth we saw in 2006.

On the flip side, we do expect that at some point, we will have a higher provision as asset quality improvements will no longer fund loan growth.

As we complete our 2007 plan, we'll have more details for you on our fourth quarter call.

With that, I'll hand it back to Jim.

Thank you, Rick.

I just want to tell you that I agree.

We expect to end 2006 strong and we expect another great year in 2007.

Just to recap the quarter.

This has been an important quarter for us, BlackRock has been an engine of growth for PNC.

It is an investment that will continue to contribute substantially to PNC's earnings and we look forward to our continuing relationship with this fine company.

The acquisition of Mercantile will make us a more meaningful player in the rapidly expanding middle Atlantic market, further improving our competitive outlook.

And we've positioned the Company differently through our balance sheet strategy, our products and our mix and technology, so that we can grow.

And most importantly, our bank is performing exceedingly well.

We're able to grow net interest income in a very difficult environment.

We're driving high qualify customer driven fee income growth and we expect asset quality to remain strong.

So just to finish, we're expecting a good fourth quarter and we have a good outlook for '07, as well.

With that, Rick and I will be pleased to take any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Nancy Bush with NAB Research LLC.

Good morning, guys.

If you can just give us -- dig a little bit further into your expectations for the margin, I'd appreciate it very much.

Just where the variances are coming from.

You said you're, I think, reasonably optimistic about it.

If you could just give the reasons for the optimism?

Since you seem to be the only one in the industry who is optimistic.

Understood.

I think, Nancy, when you look at the lift in the margin we're going to get from the portfolio restructuring, that's going to give us an initial increase.

Some of that will be -- obviously we'll use up as further invest through the cycle in terms of buying securities, extending our duration and so on.

As well as the fact that some of that will be used up in buying back shares.

So, I think overall, I think, net effect of all of that you might see a 5 to 10 basis increase in the margin.

And then going forward, clearly we benefit more as rates start to come down.

And clearly, as rates aren't going to go up, we don't believe, any further.

And the yield curve stays where it is, we think we're okay protected in terms of where the margins stay stable now.

And clearly if rates come down, the margin improves.

Could you just speak briefly to sort of deposit price and competition.

The last time I was up in New Jersey it was pretty ferocious up there.

We've had a couple companies in the industry say there's been a little bit more sanity returning to the market.

Are you seeing that in the mid-Atlantic, as well?

I'd say there's some more sanity.

Obviously, you can't go up a yield curve.

So, you remember optimism is a relative term in a flat yield curve environment.

But I think there is some sanity returning to the marketplace.

That market share is not as important as it used to be.

Okay.

Thank you.

Your next question comes from Bob Hughes with KBW.

A couple questions.

I noticed that period end securities balances were down a bit.

Fed funds were up.

So, have you fully reinvested the proceeds from the sales of securities previously at this point?

No, actually we haven't.

We bought back about $2 billion worth of those securities.

But what you're seeing and it's not actually Fed funds, it's the resale balances, they're up about $2 billion.

One is part of the restructuring, we replaced some collateral that we had sold out related to some of the deposits muni. we hold.

We also have an increase in some of the collateral we need to cover some of our trading positions.

So, what you're saying there is really resales being up.

Okay.

And when you look at the impact of the combined restructurings of the securities portfolio and single family portfolio, was there much benefit to the third quarter results?

No, minimal.

Very small.

Okay.

You'll see the full quarter impact will come through in the fourth quarter.

Another question, Rick.

With respect to the demand deposits, what can you tell us about the sustainability of those noninterest bearing balances that really come through the Midland loan servicing?

We feel very good about it.

What we see there is a difference in our view between the cost of the servicing rights versus the value of the deposits.

And from that we're able to get a pretty spread on the investments we're making in those servicing rights.

We think that's a sustainable --- maybe not at the growth rate you've seen right now, but we can continue to grow that deposit base.

And then finally in light of the growth in that servicing assets, should we be looking for a little bit better revenue out of PFPC beginning in the fourth quarter?

What should the timing be on the insulations?

The new, very large customer comes on in the first quarter.

This is a strange business, you lose a customer and about two years later they go off of your system and then if you win a customer about a 1.5 year later and it comes out.

So we lost one as a result of a consolidation of the industry that actually came off in the second quarter.

So, we were fully impacted in the third from a revenue point of view, but then we won a really big customer 1.5 year ago that comes on in the January timeframe.

Okay.

All right, thanks, guys.

Next question, please?

Your next question comes from Mike Mayo with Prudential Equity Group.

Hi, it's actually Hunter [Merchison] on for Mike.

How are you doing?

Very well.

We had a question about Mercantile.

It appears that they missed consensus this quarter and had a few basis points of margin compression.

So, our question is do these results sort of change the way you're thinking about the balance sheet restructuring?

And more importantly, your assumptions for Mercantile's cash flow growth?

No, that's really not in the lease.

When you go through the Mercantile numbers, loans and deposits were up.

Net interest income was up.

So, the basic banking business was up.

Part of the fee income market-related stuff on the venture and the hedge fund side was off $0.02.

But we had understood that going into the transaction, so we're very comfortable with that.

All right.

Great, that's all I was wondering.

Thank you.

Next question, please.

Your next question comes from Ed Najarian with Merrill Lynch.

A couple quick questions here.

First question, is there an income statement published anywhere that shows BlackRock on a deconsolidated basis?

Or I should say it different.

Shows PNC's third quarters with BlackRock deconsolidated?

Is that available anywhere?

Yes, and I believe that is pages 16 and 17 of the release.

Okay, we'll check that out, thank you.

Okay.

and then could you go back -- I know this is sort of the question that Nancy touched on.

But when you announced the balance sheet repositioning really in two pieces, each time you announced an expected net interest income benefit to the restructuring.

Could you just remind us what sort of the dollar 4Q versus 3Q benefit should be in aggregate of sort of the two-piece balance sheet restructuring?

What we actually described was about $50 million lift on the one and $25 million lift on the other.

So a total of $75 million on a --.

That was on an annual --?

Yes, that was on an annual basis.

That equates, obviously, to about say $15 to $20 million on a quarterly basis.

Okay.

But then also you have in addition to that the share repurchasing.

So that will have -- obviously, we're going to be aggressive on that in the fourth quarter and there will be a cost associated with that, as well.

So we should expect some pretty big buybacks in 4Q?

Yes, as soon as we're allowed, absolutely.

And then the last question.

With respect to the nonperforming assets, good job there.

Were you guys able to sell some NPA's at not take much of a loss related to them?

Is that essentially what happened?

Well, a couple of things, one is you have the one overdraft fraud customer that was about a $15 million chargeoff there.

Okay.

So, that $15 million was previously recorded as an NPA?

That's correct.

And then you had a lot of efforts to try to exit some asset based lending.

With some customers, where we had nonperformings and to remove the exposure on that.

And then you had some improvement in credit quality, as well.

All right.

Thank you.

[OPERATOR INSTRUCTIONS] You have a question from Norman Jaffe with Sunova Capital.

Hello, Norman, how you?

Not bad.

Congratulations on a good quarter.

I've got a question.

In your press release on bullet -- on page two, under the fourth bullet point, you talk about the BlackRock Merrill Lynch transaction and then you talk about the gains and all that.

And then you say there's another $2.8 billion of value that's not recognized.

What are you using that to do?

Can you refresh my memory?

Yes, we can.

Basically, what we did was use a share price of $147 per share.

If you check today, I think they're trading well over $150.

But we took the $170 per share, we compared that to the $82 per share that we wrote our investment up to and multiplied that by our ownership of 44.2 million shares.

Is that just like a reserve account, like a contra asset account?

No, we're just simply not allowed to write up the book value until BlackRock writes up its equity account.

And what would cause BlackRock to write up their equity account?

If they were to issue new shares in another acquisition at some point.

And then that establishes a new market value?

Yes.

It would establish a new average book value, which we would share in.

So this is just basically -- this is unrealized gain that still is not recognized.

That's correct.

Okay.

And there's no time limit on there, is there?

It's helpful for us in terms of having our discussions with rating agencies and others to have them recognized.

We've got a lot of extra capital out there that we haven't put into our numbers yet.

Okay, thank you, guys, good quarter.

There are no further questions at this time.

I would like to turn the conference call back over to management.

Well, thank you very much for joining us this morning.

Bill or Rick, do you have any other further comments?

Yes, one comment.

I had mentioned before the fact that we'd want to, obviously, get in and do as much share buyback as possible.

There's some limitations, of course, because of the blackout periods, just so you're aware of that, as it relates to, obviously, now we're through earnings.

But also until the Mercantile deal is completed, there's some limitations on the size of the buying we can do until the actually -- we get done filing the S-4 and have the actual shareholder votes and all that.

Okay.

It was a terrific quarter and thank you very much for joining us this morning.

We really appreciate your support.

Thank you.

Thank you for participating in today's PNC Financial Services Group earnings conference call.

You may now disconnect.