PNC Financial Services Group Inc (PNC) 2010 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning.

  • My name is Janice, and I will be your conference operator today.

  • At this time I would like to welcome everyone to the PNC Financial Services Group first quarter earnings conference call.

  • All lines have been placed on mute to prevent any background noise.

  • After the speakers remarks, there will be a question and answers session.

  • (Operator Instructions).

  • Thank you.

  • Mr.

  • Callihan, you may begin your conference.

  • William Callihan - SVP - IR

  • Thank you, and good morning RNGS everyone.

  • Welcome to today's conference call for the PNC Services Group.

  • Participating on our call will be PNC's Chairman and Chief Executive Officer, Jim Rohr and Rick Johnson, Executive Vice President and Chief Financial Officer.

  • The FLG statements contain forward-looking information, actual results and future events could differ possibly materially from those we anticipate in our statement and from our historical performance due to a variety of factors.

  • Those factors include items described in today's conference call, press release and related materials, and in our most recent 10K and various other SEC filings available on our corporate website.

  • These statements speak only as of April 22, 2010, and PNC undertakes no obligation to update them.

  • We will also provide details of reconciliations to GAAP and nonGAAP financial measures we may discuss.

  • These details may be found in today's conference call, press release and financial supplement in our presentation slides and appendix, and in various SEC reports and other documents.

  • These are all available on our corporate website, PNC.com, in the investigate store relations section.

  • I'd now like to turn the call over to Jim Rohr.

  • Jim Rohr - Chairman and CEO

  • Thank you, Bill.

  • Good morning, everyone.

  • Thank you for joining us.

  • First of all I'd like to just say how pleased we are with the quarter.

  • The financials speak for themselves, and I think they're relatively straight-forward, but the quarter was actually even better than that.

  • A year ago at this time, I said that our goals were to successfully integrate National City and achieve our cost-savings goal, build our capital positions and repay TARP, transition our balance sheet to reflect a more moderate risk profile, have our credit costs normalized in line with the economy, and to deliver a return on assets of greater than 1.3%.

  • Our first quarter performance reflects the tremendous progress we've made against all of these strategic objectives.

  • We've posted well-diversified revenue, reduced expenses, and improved credit costs.

  • In addition, we had several major accomplishments.

  • First, this quarter we were deemed our TARP preferred stock and issued common equity.

  • Second, we announced plans to sell global investment servicing at an attractive multiple, which will allow us to focus our capital more on our banking businesses, and, third, the conversion of National City is now 3/4 complete with more than 1,000 branches in more than 4 million National City business and consumer customers now on to PNC's technology platform .

  • The final branch conversion wave is slated for early June.

  • On our next quarterly call, I expect to tell you that we've successfully completed the branch conversion process almost six months ahead of our original schedule.

  • And at the same time we remain confident that we will exceed our annualized run rate acquisition costs savings goal of $1.5 billion well ahead of plan.

  • This is truly a result of the great work of our 56,000 employees, and they also produce strong first quarter earnings of $671 million or $0.66 per diluted common share.

  • And financially the quarter was even better than that.

  • The early redemption of our TARP preferred shares resulted in a $0.50 reduction in earnings per share.

  • Excluding that at integration costs of $0.15 per diluted common share, first quarter earnings per diluted common share would have been $1.31, an increase of 46% on a link quarter basis and up 18% compared to the same period last year.

  • And that is after adjusting those quarters as well for integration costs and the fourth quarter gain, of course, from the BlackRock PGI transaction.

  • Page 16 of the press release summarizes these few adjustments.

  • Now our $1.31 in diluted earnings per common share this quarter reflected a final TARP dividend payment of $89 million or $0.18 per diluted common share.

  • Now, these results were driven by a larger dis distribution platform which helped us deliver $3.8 billion in first quarter revenue.

  • Our first quarter net interest income reflects our continued success in repricing our dopes while maintaining the yield on our earnings assets.

  • Our balance sheet is highly liquid and well positioned to support an increased demand for credit as the economy recovers.

  • In noninterest income, improvements in the equity markets drove higher first quarter asset management fees.

  • We also saw year-over-year growth in corporate fees reflecting success with our cross-selling efforts.

  • Consumer fees were down linked quarter, primarily due to seasonally lower credit card fees and lower brokerage fees.

  • Now, these trends show us that as the economy recovers, there are greater opportunities for growth in client-related fee-based income.

  • Now, with regards to credit costs, our first quarter provision was $751 million, down 28% on a link quarter basis.

  • Assuming a moderate growth in the economy, it appears that our provision may have peaked in the fourth quarter of 2009.

  • And when we turn to our business segments, they performed well for our customers.

  • Retail banking remains focused on winning in the payment space.

  • We saw strong relationship deposits growth as average transaction deposits were up $1.4 billion linked quarter.

  • Further, we grew cord checking account relationships this quarter with Legacy markets, and we expect similar growth with Legacy National City as we apply our business model to those newly-converted markets.

  • Our business bankers are actively prospecting customers.

  • We recently added dedicated business development officers to support growth in our newly integrated National City markets.

  • Approval rates are up 20% from a year ago, and we're seeing increased customer growth in merchant services, especially in our new markets.

  • Our asset management group had a strong quarter driven by improvements in the equity markets and client growth.

  • Strong revenue reflected increased assets under management and continued new business generation.

  • Expenses continue to be well managed, and the business pipeline remains strong.

  • And in February AMG successfully completed its first and largest of the National City Trust system conversions, and its institutional clients will be converted this weekend.

  • On the residential mortgage front, business posted good first quarter results, largely as a result of increased loan servicing and loan sales revenue over the linked quarter.

  • The business continued to make great progress in transitioning its operations.

  • We piloted a new mortgage origination system in the first quarter and expect to implement it by mid year.

  • This system will provide enhanced experience for customers and better data to manage our originations pipeline.

  • The corporate and institutional bank had a very good quarter.

  • On the loan side, the decline in utilization levels among middle market and large corporate clients has slowed, and that's good news.

  • Business credit revenues exceeded the same period last year by 14% and is well positioned to post strong second quarter results.

  • The corporate bank also saw a 55% increase in new clients compared to the same period last year.

  • We're deepening our selling efforts as capital market sales were up 31% year over year.

  • Now, additionally, we added more new client names to our portfolio in the first quarter than any quarter before.

  • While the majority came from Legacy markets, we're seeing a steady increase in clients from new markets as brand awareness begins to take hold.

  • Regarding our distressed asset portfolio, we continue to make progress in reducing our foreclosed assets.

  • The portfolio is now $18 billion, down $500 million from December 31st primarily as a result of paydowns.

  • Now, we're focused on maximizing the value of our distressed loans and have evidence that the marks that we've take taken on these assets overall continue to be a appropriate.

  • We're also beginning to see more activity in the distressed market, which could help us reduce these assets even faster.

  • Turn to BlackRock, as you know, they will release their earnings on Monday, and based on public comments, we expect BlackRock to report continued good progress and its integration of Barclays Global Investors.

  • Overall, we achieved an excellent strategic and financial results in the first quarter.

  • Now I'd like to spend a few minutes talking in more detail about our well-positioned balance sheet.

  • Turning to slide four, we believe our balance sheet differentiates us.

  • It remains highly liquid and well positioned for the current environment.

  • On the asset side, we continue to invest some of our available liquidity in short duration, agency and government securities.

  • Total loans were flat in the first quarter.

  • Now, this is as a result of bringing credit card securitizations and market street funding onto the balance sheet effective January 1st.

  • However, we do see some positive signs.

  • In a recession loan demand typically picks up about 12 months after GDP turns positive.

  • So while loan utilization remains soft across the country, primarily in commercial and residential real estate, we saw signs of stabilization and loan balances and increased M&A activity in the first quarter, and those two items of key items of future long growth.

  • We remain committed to responsible lend to go support economic growth.

  • We recognize the vital importance of credit to our country's economic growth, and we continue to work closely with main street businesses and consumers during these financially difficult times.

  • We originated and renewed approximately $32 billion in loans and commitments in the first quarter, and we're committed to working with homeowners to help them avoid foreclosure where appropriate.

  • As of March 31st we completed $600 million in refinancing under the Home Affordable Refinance Program, and we also set out approximately 22,000 workout packages to troubled borrowers under the Home Affordable Modification Program.

  • Now, on the deposit side, we continue to benefit from repricing.

  • Retail CDs are expected to continue to decline throughout 2010, as higher rate CDs run off, but at a slower pace than 2009.

  • Transaction deposits were flat compared to the link quarter, which we see as positive.

  • The declines we typically see due to seasonal payments were offset by gains in our retail segment, and, importantly, we're not seeing any shifts in client behavior at this time.

  • We have a strong deposit franchise, and we remain core funded with a loan deposit ratio of 86%, we're.

  • well positioned from any uptake in loan demand from our customers.

  • Now, on the balance sheet in general as of March 31st we continue to be asset sensitive with an estimated duration of equity of negative 1.7 years.

  • That positions us very well for either a rising or a steeping yield curve.

  • Overall our first quarter performance was very strong and reflects our ability to successfully execute our business model.

  • And we have the capacity to support clients as the economy gains momentum.

  • Now Rick will provide you with more detail with our first quarter results beginning with our ability to deliver

  • Rick Johnson - CFO

  • Thank you, Jim.

  • Good morning, everyone.

  • Today I'm going to focus on three key messages.

  • First, our strong performance and the key drivers in our pretax, preprovision earnings, second, the stabilization of our credit quality and the add adequacy of our reserve levels, and third, the improvements we have made in the quality of our capital structure.

  • Now, as an aside, based on this improved capital structure and our progress to date on the National City acquisition, three of our four rating agencies recently reaffirmed our ratings, and two of them rated their outlook on PNC.

  • These positive changes were among the first for large cap banks.

  • In the first three months of the year, our ability to produce well-diversified revenue and effective manage expenses continue to deliver pretax, preprovision earnings that more than doubled our credit costs.

  • As you can see on slide six, we delivered $3.8 billion revenue, and $1.7 billion in pretax, preprovision earnings compared to our provision of $751 million.

  • Now, let's begin with the components of revenue.

  • That interest income of $2.4 billion was higher than we expected primarily as a result of better loan and deposit repricing, and better-than-expected payoffs and gains on sales of impaired commercial loans.

  • A decrease in our cost of funds of 14 basis points and an increase in asset yields of 10 basis points resulted in a net interest margin of 4.25% in the first quarter, an increase of 19 basis points linked quarter.

  • Now, the key driver on the funding side is the repricing of our deposit base.

  • Our cost of deposit is 81 basis points, this is down 12 basis points linked quarter and down 63 basis points year over year.

  • We also have approximately $19 billion of relationship-based CDs with an average rate of 2.4 % that are scheduled to mature during the remainder of this year.

  • Now, assuming rates stay low, I believe we will continue to reprice these deposits and lower our funding costs even further.

  • We expect to retain more than 80% of our relationship-based CDs in 2010, which is comparable to our year-to-date results.

  • Noninterest income for the quarter of $1.4 billion.

  • The sources of our noninterest income remain high quality, well diversified.

  • Asset management group grew 18% on link quarter basis due to improvement in the markets and client flows along with the impact of BlackRock's earnings.

  • Corporate service fees were up 3% link quarter or 12% on an annualized basis primarily due to special servicing revenue from commercial real estate loans service by Midland, which is one of the largest providers of commercial real estate loan servicing in the US.

  • We expect Midland to provide us with a counter cyclical fee income source through the course of the year.

  • As residential mortgage fees were up 37% link quarter, mainly due to lower payoff volume, and lower additions to recourse reserves.

  • As expected, consumer service fees and service charges on deposits were down primarily due to seasonality.

  • Now, while trading and private equity fees were within our expectation, fees and other were down on a link quarter basis primarily due to lower gains on loan sales.

  • I would expect other noninterest income to trend in this range going forward.

  • Turning to credit costs our first quarter provision was $751 million, which was down almost $300 million from the fourth quarter driven primarily by economic factors that are beginning to stabilize.

  • As Jim said, we believe our provision may have peaked in the fourth quarter of 2009.

  • Future provision levels will depend on the level of not performing loans and our related coverage ratios.

  • As I will discuss further in a moment, we continue to do a great job managing our expenses.

  • Clearly our ability to deliver well did diversified revenues and manage our expenses and credit costs continues to derive positive operating leverage and increase common capital.

  • Now, let me take a moment to talk about our focus on expense management .

  • As we have said before, achieving our cost savings target is an important element of this year's plan.

  • Our first quarter non noninterest expenses were down $2.1 billion were down 2% year over year and down 4% link quarter.

  • As you can see on slide seven, we captured some $800 million in integration-related cost savings in 2009, and our originally goal was 2010 was $1.3 billion.

  • We have already achieved a running rate of savings for 2010 of at least $1.4 billion, which is $600 million higher than the prior year.

  • This is $100 million increase to year over year savings versus our last update.

  • And by the end of 2010 we expect our running rate on expense savings to exceed $1.5 billion.

  • This is $300 million higher and six months earlier than we originally planned.

  • This reflects our commitment to continuous improvement and the ability we have as an enterprise to manage expenses effectively.

  • Now let's take a look at our credit quality trends on slide eight.

  • Overall delinquencies and nonperforming loans continue to show signs of stabilization as both were essentially flat linked quarter.

  • And as we have discussed before, our moderate risk philosophy calls for keeping our loan portfolio very granular.

  • For example, none of our nonperforming lobes were greater than $32 million as of March 31.

  • Net charges were down 17% link quarter and are at 1.77% of our average loans, which is one of the lowest ratios among our peers.

  • Our provision for credit costs this quarter exceeded net charge offs by $60 million.

  • This, along with additional allowance of $141 million, related to the credit card securitizations which were consolidated resulting in an increase in the allowance for loan losses to $5.3 billion or 3.38% of loans.

  • Given net charge offs in the first quarter, we have reserved coverage of nearly two years, which is one of the highest coverage levels in the industry.

  • We continue to be comfortable with the marks on our pair book as the link quarter estimates of cash flows continue to perform better than expected.

  • Now, we also contributed to strengthen our capital structure in the first quarter.

  • As shown on slide nine, our tier one common ratio at the end of the first quarter of 2010, is estimated to be 7.6% as a result of first quarter earnings and our common issuance.

  • Our tier one common ratio increased by 270 basis points since the first quarter of 2009, and by 160 basis points since year end.

  • The pro forma ratio of 8.3% reflects the pending sale of Global Investment Servicing, which is expected to improve our capital by approximately $1.6 billion.

  • We believe that transaction will be completed in the third quarter.

  • A tier one risk based capital ratio declined to an estimated 9.9% at the end of the first quarter as a result of redeeming the TARP preferred shares.

  • On a pro forma basis, reflecting the pending GIS sale, it should be back up in an estimated 10.6%.

  • We now have higher quality capital base with 77% of our tier one risk based capital in common equity.

  • This is up from 49% a year ago.

  • Our capital position provides us with flexibility for future growth while investing in innovative products and services.

  • At PNC, we have a disciplined approach to capital management which we believe serves us well during these uncertain times.

  • Finally, let me provide some guidance around the sustainability of our performance.

  • Our forecast reflects our assumptions regarding a moderate economic recovery and manageable regular regulatory reform.

  • First, we're feeling more confident in our ability to keep revenue performance stable year over year given the strength of our net interest income performance and diversification of noninterest income revenue stream.

  • This expectation excludes the impact of last year's gain on the BlackRock PGI transaction, and the expected gain from the sale of GIS this year.

  • Second, we continue to feel comfortable the credit costs will year will be below those of last year.

  • This quarter clearly gets us off to a great start .

  • And, third, we're already on pace to exceed our cost savings plan for 2010 by $100 million bringing our total year over year cost savings improvement to $600 million.

  • And we are even more confident that we will exceed our $1.5 billion goal in 2010 than our original expectation of $1.2 million in 2011.

  • As a result, we continue to believe our pretax, preprovision earnings will continue to substantially exceed credit costs.

  • And with that I'll hand

  • Jim Rohr - Chairman and CEO

  • Thank you, Rick.

  • Turning to slide ten, this slide is a score card that we use to measure or progress in building our Company.

  • I'm very pleased with the progress we've made against these objectives in the first quarter.

  • With the conversion of National City 3/4 complete, we're in an enhanced position to deepen the cross-selling of fee-based products throughout the larger franchise.

  • We expect to increase the increase of the percentage of non noninterest income to total revenue over time.

  • Our return on average assets for the first quarter was 1.02%, that's a 15 basis point increase in ROA for the year 2009 or a 40 basis point increase after adjusting for the BlackRock BGI transaction, which makes the achievement even more impressive.

  • This shows the great progress we've made against our goal of a return of average assets of 1.3% or greater.

  • Clearly we remain confident in our ability to achieve these strategic financial objectives over time.

  • In summary, we continue to execute on our business model, and we had an excellent first quarter.

  • Rick provided you with our full year guidance.

  • And assuming a moderate economic recovery and manageable regulatory reform, we believe we're off to a strong start for 2010.

  • We have a strong team, and we are focused on excellent execution.

  • Clearly we believe our enterprise will create tremendous opportunities for shareholder value as we continue to build a great Company.

  • After that, we will be pleased to take your questions.

  • Operator

  • (Operator Instructions).

  • We'll pause for a moment.

  • Your first question comes from Mike Mayo of CLSA

  • Mike Mayo - Analyst

  • Good morning.

  • Jim Rohr - Chairman and CEO

  • Good morning, Mike.

  • Mike Mayo - Analyst

  • Well, you're far long on the expense savings.

  • Are you going to increase the target more?

  • What do you have left there?

  • And how confident are you to still have positive operating leverage like you just had link quarter?

  • Rick Johnson - CFO

  • Mike, we'll update the number again probably after the conversion is completed in June , so with the second quarter release we'll probably have a clearer picture as to whether we can increase the number from

  • Mike Mayo - Analyst

  • Okay.

  • And one question that comes up relates to the accretable yield.

  • I think there's a lot of misunderstanding.

  • Can you talk about the deposit retention at National City and the impact that has on accretable yield, whether that is sustainable or not?

  • Rick Johnson - CFO

  • Well, actually, yes, it is, Mike.

  • We are retaining about 80% of our relationship-based CDs as we reprice them.

  • And we've had an ability -- we have about $19 billion still to reprice this year, and that's on our books at an average contract rate of about 2.4%.

  • And right now we're repricing them down to about 80 or 90 basis points.

  • And if you recall the marks on those deposits were about 190.

  • So they're around 2% I should say.

  • And so I'm still very comfortable we're going to be able to bring down the overall cost of deposits for at least the next quarter or two.

  • I think after that it's going to start to slow down towards the end of the year.

  • Mike Mayo - Analyst

  • What you lose in accretable yield you should retain through the lower funding costs and retain National City deposits?

  • Did I say that correctly?

  • Rick Johnson - CFO

  • Yes.

  • We will far exceed the amount of accretable yield on the deposit base, to the point where we'll probably cover most of the accretable yield that we are getting through loans and deposits.

  • Mike Mayo - Analyst

  • And then the last follow up, Midland services, I don't quite understand why that's so counter cyclical, what's fueling that?

  • Rick Johnson - CFO

  • Well, we do special servicing with them.

  • We have about $10 billion to $12 billion of assets there where we're doing special servicing.

  • And when those assets work through, the margins are a lot higher.

  • And when you settle the transaction, you get a pretty sizeable payoff fee on that.

  • So that's a good business for us.

  • Mike Mayo - Analyst

  • When you say "work through," do you mean actually sell or -- what do you mean by work through?

  • Jim Rohr - Chairman and CEO

  • Midland was originally set up back in the early '90s as an RTC servicer.

  • So they were a special servicer for troubled loans, and then became the second largest commercial mortgage servicer in the country.

  • Their special servicing diminished obviously over time, and they simply became a commercial mortgage servicer.

  • Now, frankly, with the troubled assets going up over a two-year period of time effectively their special servicing has gone from zero to $12 billion, and they get paid very, very nice fees for working through those troubled assets for a whole myriad of customers across the country who don't have that capability.

  • Mike Mayo - Analyst

  • All right.

  • Thank you

  • William Callihan - SVP - IR

  • Next question, please?

  • Operator

  • Your next question comes from the line of Paul Miller of FBR Capital Markets.

  • William Wallace - Analyst

  • Good morning, Paul Hey, guys, it's actually William Wallace for Paul

  • Jim Rohr - Chairman and CEO

  • Nice to see you, William.

  • William Wallace - Analyst

  • Thanks for the color on the deposit accretion and how you can retain that price down.

  • I wanted to dig in a little bit more into some of the other accretion questions.

  • One of them is related to the margin contribution, and versus the guidance for I think it was mid three sevens or so versus expansion up to 425.

  • What surprised you in the quarter versus your guidance?

  • Rick Johnson - CFO

  • I think two -- three things happened.

  • One is deposit repricing just continues to outperform.

  • The group's doing a great job working on the asset and liability group managing liquidity for the Company and doing the right thing for the customers.

  • So that is actually done better.

  • I think if you look on slide -- or page seven of our supplement, you'll see that we made $75 million on paydowns and sales of impaired loans.

  • We weren't anticipating further amounts related to that.

  • So that was increased.

  • And, also, one of the other ends on the margin is you'll notice our balance with the Fed is down about $4 billion as we fuse that liquidity elsewhere, and that has an upward lift in the margin as well.

  • Jim Rohr - Chairman and CEO

  • If you go back to the middle of last year our deposits with the Fed were around $10 billion to $11 billion.

  • So that -- if you think about getting paid an 0.08% on that asset, it's almost a non nonperforming asset.

  • So that's been reduced dramatically and helps the margin

  • William Wallace - Analyst

  • Okay.

  • And then specific to the $75 million in cash recoveries, what are your expectations moving forward?

  • And, also, what are your expectations on I guess you could think of it as sort of the normal purchase accounting accretion?

  • Rick Johnson - CFO

  • Well, let me take the scheduled accretion.

  • I would say in the second quarter we're estimating that number to $340 in total.

  • That includes deposits, loans, everything, impaired loans.

  • So I think that is easily achievable through a lot of the deposit repricing will do.

  • So I don't see that going away at all.

  • In terms of the payoffs and the sales, that's a very difficult number to predict.

  • I think if you go back on page seven you'll see we broke that out for the last quarter.

  • It was about $150 million.

  • We anticipated this quarter to be down around $25 million.

  • It came in at $75 million.

  • So we did a lot better.

  • So that's a difficult number to put a mark on.

  • So I'm going to stay conservative and assume that will be about $25 million a quarter going forward, but we could always outperform that.

  • William Wallace - Analyst

  • What do you -- is it mostly repayments or mostly line sales or is it a fairly even mix?

  • Rick Johnson - CFO

  • It's a mix.

  • It's a mix between the two.

  • And obviously we're aggressively looking for opportunities to reduce our exposure in the distress portfolio.

  • And where we see an opportunity to do that, we're doing that.

  • And, by the way, it's entirely in the commercial book because where we have a loan sale in the consumer book, that will go back into the pool and show up in accretable yield over time.

  • Jim Rohr - Chairman and CEO

  • Most it was has come so far by -- through payments, but the market has picked up a bit in terms of being able to sell loans.

  • And we're fairly confident we're feeling better and better about the marks that we've put in our portfolio.

  • William Wallace - Analyst

  • Do you think you'll start to adjust the non-accretable difference down and put that into accretable yield more aggressively moving forward?

  • Rick Johnson - CFO

  • Every time I think we're going to adjust the accretable yield down, we get the valuations on the portfolio, and it goes up.

  • So we end up increasing it.

  • So I know everyone thinks that's something we can't repeat.

  • I would say that it seems every quarter we say that, we turn around and price our deposits in a way that ends up covering any reduction in that amount.

  • William Wallace - Analyst

  • Thanks, guys.

  • Very helpful.

  • Rick Johnson - CFO

  • Thank you

  • Jim Rohr - Chairman and CEO

  • Thanks.

  • William Callihan - SVP - IR

  • Next question, please?

  • Operator

  • The next question comes from the line of John McDonald of Stanford Bernstein.

  • John McDonald - Analyst

  • Hey, guys.

  • Rick, one more thing on the purchase accounting, just looking for the full spoon feed here.

  • If the schedule accretable goes down at 340 and the cash recoveries are at $25 million, as you expect, does that imply that the NIM stays flattish in this 424 range you had in the fourth quarter?

  • Rick Johnson - CFO

  • we're pretty comfortable that the net interest margin is flat to maybe a little pressure towards the end of the year.

  • But we're pretty comfortable it will stay flat, at least through the 2nd quarter.

  • Again, the deposit repricing continuing to add benefit to the margin.

  • But, there could be pressure on this at the end of the year I think because deposit pricing has to slow down, and then maybe some of the loan and security repricing will catch up to it.

  • But that's going to depend on loan volume.

  • John McDonald - Analyst

  • Okay.

  • And I assume your outlook on earning asset growth is still pretty sluggish to down a little bit?

  • Rick Johnson - CFO

  • Yes.

  • I think, I think it's probably -- maybe it goes down another quarter, but we're hoping to get it back up into low single digits?

  • John McDonald - Analyst

  • Okay.

  • Did you say earlier how low are your line utilizations now?

  • Did you quantify that at all just relative to kind of a longer term average?

  • Rick Johnson - CFO

  • Every business we have has a different expectation around utilization.

  • But if I were to do an average, I'd say we probably operated in the low 50s traditionally.

  • We're down to 38% now

  • John McDonald - Analyst

  • Okay.

  • Rick Johnson - CFO

  • Just to give you an idea of the movement and obviously the opportunity when the economy recovers.

  • John McDonald - Analyst

  • Okay.

  • And then on credit, are you near the end of reserve build if charge offs continue to come down, which seems like your outlook, and the loans aren't growing.

  • Is it fair to assume you're done building and maybe towards the end of the year about releasing some reserves if the loans aren't growing?

  • Jim Rohr - Chairman and CEO

  • The idea -- or the issue for us is we've seen a dramatic slowdown in the nonperforming assets.

  • We're very pleased about that.

  • Delinquencies are stable to down, charge offs are are down.

  • I think the statement about I think the provision in assuming a reasonable economy, the provision will peak in the fourth quarter of last year.

  • And those trends continue.

  • I think the provision could continue to float down.

  • And the other part is is that we're pretty comfortable with our marks on our impaired assets now.

  • As time goes by, those marks are proving out to be more and more accurate.

  • So I think in terms of credit quality I would hope that we would see continued improvement in credit quality.

  • John McDonald - Analyst

  • Okay.

  • Thanks, guys.

  • Jim Rohr - Chairman and CEO

  • Thank you, John.

  • William Callihan - SVP - IR

  • Next question, please?

  • Operator

  • Your next question comes from the line of Matthew O'Connor of Deutsche Bank

  • Jim Rohr - Chairman and CEO

  • Good morning, Matt

  • Matthew O'Connor - Analyst

  • Just a strategic question here.

  • As you think out over the next one to two years, I'm just wondering where some of the opportunities are.

  • There's obviously a recovery underway, capital is strong now.

  • It builds very quickly.

  • So just as you think about maybe new businesses or new products or new markets where key deploy some of the capital?

  • Where might some of the opportunities be?

  • Jim Rohr - Chairman and CEO

  • Well, first of all, the -- hopefully our customers are going to do some borrowing.

  • And to the extent we get utilization rates that go from 38% to 50%, as they did historically, that would be a wonderful thing for the balance sheet for our net interest income.

  • The other thing, as I mentioned that we have a negative duration of equity of 1.7 years.

  • To the extent that we get a higher or a steeper yield curve, we can invest the liquidity that we have with an 86% loan-to-deposit ratio into a higher yielding assets.

  • Because we're so short, we could simply roll them into higher assets.

  • And that's a terrific opportunity as well.

  • So I think those two items just from a balance sheet point of view are very powerful.

  • If you take the franchises that we've purchased through National City, I mean, there's a number of products that we get through conversion that we can cross-sell to National City customers.

  • It's just starting to, just started to take off with treasury management capital markets, university banking, workplace banking.

  • And as the conversions have taken place, as we mentioned, they'll be over in the end of the second quarter, I think there's tremendous opportunity for customer growth.

  • So I think the franchise that we have there's just a lot of opportunity within the franchises we have.

  • Matthew O'Connor - Analyst

  • And is the National City deal going better than expected?

  • It sounds like the conversions and cost savings will be realized sooner.

  • Do you have an appetite for additional deals, whether it's to pick up some products or to pick up new markets or fill in existing markets?

  • Jim Rohr - Chairman and CEO

  • Well, I think banks are sold, not bought.

  • I think what we've learned over time is it's all about price and fit and timing and we just have to -- as we go down the road, we just have to look at what might come available.

  • But right now we're focused on executing the opportunities we have before us.

  • Matthew O'Connor - Analyst

  • Okay.

  • Thank you very much.

  • Jim Rohr - Chairman and CEO

  • Thank you.

  • William Callihan - SVP - IR

  • The next question, please?

  • Operator

  • Your next question comes from the line of Ed Najarian of ISI group

  • Jim Rohr - Chairman and CEO

  • Good morning, Ed

  • Ed Najarian - Analyst

  • Good morning, guys.

  • How are you?

  • I was going to ask about the margin, but that's been beaten to death, so I think I'll leave that one alone.

  • Rick Johnson - CFO

  • Thank you

  • Ed Najarian - Analyst

  • But I have two more quick questions I guess.

  • The first one is kind of nuance.

  • It has to do with just looking at your early stage delinquencies, and pretty good stability.

  • In fact, a lot of categories improved.

  • But we did see a pretty good sized pickup in commercial real estate early stage delinquencies.

  • Any concern there or just what are your thoughts in terms of that increase over the last three months?

  • That's the first question.

  • Jim Rohr - Chairman and CEO

  • Not particularly concerned about it, Ed.

  • As you know, commercial real estate assets are smaller for us than our peers at only 8% of our total assets, so that's a good thing.

  • Secondly, I think the commercial real estate portfolio as an industry will be a problem for the next two or three years.

  • But for us it will be smaller.

  • And in this case it's not a big number.

  • And I think you'll see volatility in those numbers going up and down.

  • And I think with the markets appear to be reopening, I think there might be an opportunity to do a little for refinance than might have been the case certainly even six months ago.

  • So I think you'll see volatility in those delinquency numbers, but I don't think it will have any dramatic impact in our ability to perform.

  • Ed Najarian - Analyst

  • As those migrate through and potentially become 90 days, you start to reserve for them after 90 days delinquent; is that correct?

  • Jim Rohr - Chairman and CEO

  • Well, we might reserve for them before they're 90 days delinquent.

  • It depends upon -- the interesting thing about commercial real estate is that it each property is its own animal, and you don't know who the guarantors are, you don't know when leasing takes place, releasing takes place.

  • So, additional capital is added, and all of those things come into play with each commercial real estate property, as you know.

  • So it's hard to really generalize about how, about how and when you reserve, because sometimes you may reserve just based upon the appraisal even before it goes delinquent because you're so concerned.

  • So each one is rated independently on a continuous basis over time.

  • Ed Najarian - Analyst

  • Okay.

  • Thanks.

  • And the second question is once the global servicing business gets sold in the third quarter, obviously you'll have a very strong tier one common ratio.

  • Any thoughts sort of subsequent to that time frame you may be able to be -- to start returning capital to shareholders either via a dividend increase or buybacks or what have you?

  • Sort of -- so I guess the question would be what are your thoughts as a management team regarding that once you get to that high tier one common ratio, and have you had any discussions or even hints from your regulators as if that would be something that you would be able to do towards the end of this year?

  • Jim Rohr - Chairman and CEO

  • Well, first of all, we haven't had any discussions with the regulators about that.

  • The -- our commitment to the regulators included the capital increase through the sale of GIS, which takes place in the third quarter.

  • So I think we need to continue executing on that.

  • Now, the other thing is we still have almost a 10% unemployment rate in the country.

  • We've got some regulatory change in the wind clearly.

  • So both of those things I think we're going to have to take a good look at, our Board will have to take a good look at before they'd consider a dividend increase.

  • I think, frankly, what we need to do is we need to show consistent increase and consistent ability to generate significant capital..

  • And I think with the TARP charge in the first quarter, that capital build wasn't as strong as, perhaps the earnings of the quarter.

  • So we'll get that behind us.

  • And if we are able to continue to deliver a couple more quarters of solid capital generation, we complete the GIS, we get some sense of what the regulatory environment is about, the economy continues to improve, I think then those are the kinds of things wed like to check off before we start talking about how we might return capital to the shareholders.

  • But, as you know, we would love to return capital to the shareholders, as we have in the past.

  • I just think there's some variables right now that we'd like to check off.

  • Ed Najarian - Analyst

  • Okay.

  • Thank you.

  • William Callihan - SVP - IR

  • Next question?

  • Operator

  • Your next question comes from the line of Matt Moyer of Wells Fargo.

  • Matt Moyer - Analyst

  • Good morning, guys.

  • Just a couple of questions.

  • Most of my questions have already been asked.

  • But in terms of loan sales, there were a couple of comments during your prepared remarks that the markets for loan sales appears to be opening up a little bit.

  • Can you give a little more detail as to what products or what geographies are benefiting from that?

  • Jim Rohr - Chairman and CEO

  • It all depends on price.

  • [Laughter].

  • Yes, there's a -- I mean, clearly certain markets -- and, strangely enough, the markets in the middle of the country, where real estate appears to have stabilized have had the opportunity to generate loan sales.

  • There's a number of people out there who are asset hungry.

  • And so the --we're starting to go see bids on that.

  • We're moving forward real estate I think we've moved almost 1,000 properties, around 900 properties in the first quarter, 871 to be exact, but there's a -- and those come from all across the country.

  • We're getting bids at every market.

  • The good news is we've marked our assets, which appear to be appropriate.

  • So we're able to move these assets as the markets kind of open up.

  • So I think it's a national event.

  • I mean, a year ago you couldn't get a other than a gold bull I don't know, you couldn't get a bid.

  • Now there's a lot of bidders for properties all across the country

  • Rick Johnson - CFO

  • We're actually getting book value in terms of the value, the appraised value, so we're not losing any further money on those marks.

  • Matt Moyer - Analyst

  • Great.

  • And in terms of mortgage or purchase reserve costs, you mentioned that as a part of the mortgage business.

  • What -- can you give us an update on the trends in those purchase reserves or the losses that you're taking on those requests?

  • Rick Johnson - CFO

  • We -- if you recall at the end of the year, we booked about $50 million in the mortgage company.

  • We added another $25 million to that this quarter.

  • We were pretty comfortable that we had the reserve right.

  • We saw a little bit more activity there.

  • So we topped off the reserve.

  • All in all it's all of the losses related to this is coming from the underwritings we had in 2007.

  • Obviously prior to changing all of the underwriting practices in 2008.

  • And we're seeing about a 1.2% net putback of loans to the company with loss given to fault and the range of about 45 to 50 basis points.

  • So total expected loss is about 75 BIPS on that activity, and we're fully reserved for that today.

  • Jim Rohr - Chairman and CEO

  • The good news is that National City stopped buying broker loans in early 2008, which is a real plus.

  • Rick Johnson - CFO

  • Yes.

  • Matt Moyer - Analyst

  • Great.

  • And then sorry to beat a dead horse on net interest, but I won't ask about accretion at least.

  • In terms of net interest margin going into 2011, assuming rates rise and you get some loan growth in 2011, can you maintain the margin at current levels or relatively near current levels or might we actually see some benefit given the repricing environment for loans?

  • Jim Rohr - Chairman and CEO

  • Well, there's a lot of, there's a lot of assumptions in there.

  • If as long as demand comes back and rates rise, we could see a nice lift in net interest income next year.

  • Matt Moyer - Analyst

  • Thanks very much

  • William Callihan - SVP - IR

  • Next Question, please?

  • Operator

  • Your next question comes from the line of Ken Usdin, Bank of America, Merrill Lynch

  • Jim Rohr - Chairman and CEO

  • Good morning, Ken.

  • Ken Usdin - Analyst

  • Good morning, everyone.

  • Two quick questions.

  • First of all, with regard to continuing to be comfortable with the valuation marks on Nat.

  • City, can you break down the portfolio and give us some color of either side is better or worse than expectations?

  • Is it on average that it's okay?

  • Rick Johnson - CFO

  • Yes.

  • Our commercial book has been doing very, very well.

  • We've added some additional reserves, but you've seen the amount of money we've made on payoffs and sales of loans and so on.

  • So we're very comfortable there.

  • On the consumer side it's primarily mortgages where we've seen stress, added additional reserves on that side of the book.

  • Most of the other portfolios are continuing to perform well.

  • And you're seeing that because we keep up in the yield.

  • If you look at page seven, one of the things that I keep trying to point out is the fact that while we've added $600 million of reserves on all of these impaired loans at additional allowance since the marks, we've also added almost $2 billion to the accretable yield going forward.

  • So you kind of upfront the cost to credit, and then you recognize the cost of NII over time.

  • So all in all these folks are performing better than we had anticipated.

  • Ken Usdin - Analyst

  • Okay.

  • Great.

  • My second is just on the home he equity portfolio you continue to see very stable trends in the terms of delinquencies and a little improvement.

  • I'm just wondering your own -- your views from the broader picture of home equity potential reform and impact on first and second, so to speak, if we do get changes to the rules.

  • Jim Rohr - Chairman and CEO

  • Well, two things about that.

  • One is that a lot of our, a lot of our home equity book is in our footprint, and our footprint didn't see the dramatic increase in price, real estate prices that were shared by the south -- California, Arizona and Florida.

  • But the other part is in speculating on how regulatory reform might come out is pretty hard to do these days.

  • I mean, it's a -- I have no feel for what might come out of the regulatory reform around mortgages.

  • I think we just have to look at, look at our customers, and they simply continue to pay, which is the -- what they're supposed to do.

  • Ken Usdin - Analyst

  • Okay.

  • Thanks, guys.

  • Rick Johnson - CFO

  • Thanks.

  • Take care.

  • William Callihan - SVP - IR

  • Next question, please?

  • Operator

  • Your next question comes from the line of Heather Wolf of UBS.

  • Jim Rohr - Chairman and CEO

  • Good morning, Heather

  • Heather Wolf - Analyst

  • Hi.

  • Good morning.

  • Just two quick questions.

  • First, did the consolidation of off balance sheet vehicles impact your margin at all?

  • Rick Johnson - CFO

  • Not really.

  • We picked up some benefit from the consolidation of the credit card fees, but when we consolidated market street, we gave it right back.

  • So it was a net nothing in effect.

  • And that impact on our balance sheet was only about $4 billion, so it's not big enough to have impact.

  • Heather Wolf - Analyst

  • Got it.

  • Just a second question.

  • I know you gave us some foot notes on your nonaccruing PDRs.

  • Can you give us some color on the dollar value of your accruing PDRs this quarter versus last quarter?

  • Rick Johnson - CFO

  • Yes.

  • That's actually about $217 million.

  • I think you'll see that in the notoriety after the one you looked at.

  • Note C on that page lays out for you the accruing PDRs

  • Heather Wolf - Analyst

  • So the 217 move from nonaccruing to accruing, those are the only accruing PDRs you have?

  • Rick Johnson - CFO

  • That's correct.

  • Heather Wolf - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Jim Rohr - Chairman and CEO

  • Thanks, Heather.

  • William Callihan - SVP - IR

  • Next question, please?

  • Operator

  • Your next question comes from the line of Meredith Whitney of Meredith Whitney Advisory Group

  • Meredith Whitney - Analyst

  • Morning.

  • I have a few questions.

  • I'll try to be quick about it.

  • So you moved a bunch of loans into foreclosure.

  • Can you talk -- that would be suggestive of the foreclosure environment accelerating or is it long overdue?

  • Can you give some color on what your experience is in the foreclosure market are - - are states if facilitating greater pace of foreclosures in then I have two follow ups.

  • Rick Johnson - CFO

  • The main effect in the first quarter the pace of what's moving into foreclosure is not accelerating at the moment.

  • But what happened was we didn't have -- there wasn't a lot of sale activity in January and February given the wet winter months.

  • So that's why you're seeing a little bit of an uptake in the balance.

  • But the sales we had in the month of March were over 600 units.

  • So we had a very strong March , and we think that's the level of which will continue to sell

  • Meredith Whitney - Analyst

  • Okay.

  • And then on the commercial real estate market, you guys have given a great picture in the past about your outlook on that.

  • Could you talk to -- what I'm hearing in the industry is you've got a bifurcated market.

  • So the A properties are doing well, they're very resilient, but the B properties are still lagging.

  • Is that what you're seeing?

  • And from a pricing movement, is there bifurcation between both markets?

  • What are you seeing on the lower end?

  • And how is your portfolio exposed?

  • Jim Rohr - Chairman and CEO

  • I think A, B, and C is exactly the way we think about it as well.

  • The A properties are doing well and probably are doing better than anybody might mark them.

  • So actually we're not in the business of selling those, even though we might have taken a mark on them when we took them in, those properties tend to come back with the economy, and that's the right thing to do.

  • The C properties you just sell.

  • C properties rarely come back.

  • And so you take very strong marks on those right up front, and you just sell them because they always have -- they have trouble recovering at all.

  • So we've been actively doing that, and we're comfortable with their marks.

  • The B properties obviously the majority of the portfolio, but those are the ones you mark down and you have to manage one by one.

  • One of the advantages we have is that Midland was originally in commercial mortgages across the country to securities.

  • And so they have -- we have staff in markets all around the country.

  • And when we mark the National City portfolio, it gave us a great advantage because we had people, experienced people actually going in and testing in the market and actually giving us real numbers.

  • In some cases actually bidding on the properties to find what somebody might accept.

  • And so that's a plus.

  • And I think the commercial real estate business over time if a property loses a tenant, clearly that property has less value, as you know, Meredith.

  • But then I go resign somebody else at a lower lease rate, so the property is worth less, but it's not like it falls off the planet.

  • There is still cash flow.

  • I think those B properties I think will work their way through for the most part.

  • The big issue two, three years from now is liquidity.

  • There's a lot of those commercial mortgages.

  • They're typically seven years minimum, that are coming due.

  • And if you look back a year ago, there was no ability to -- I mean, the scary part was there was no refinance opportunity.

  • In today's environment there is some refinance opportunity because the capital markets are just barely coming back.

  • But on the other hand assets, and we're looking at Midland.

  • I mean, Midland with their commercial servicing capability, they know the cash flows asset by asset, and they know the maturity date.

  • And so nobody wants to refinance too quickly because the price of the credit is going to go up pretty significantly.

  • But I think we'll be aggressive in pursuing commercial real estate, high quality commercial real estate loans as they come due in the next one to three years

  • Meredith Whitney - Analyst

  • Got it.

  • So just one followup, which is a point of clarification.

  • I remember a year ago having conversations with private equity firms looking to buy distressed assets from banks.

  • And maybe it's over a year.

  • And a year later the activity is coming -- now you're starting to see Bank of America, they had an announcement this morning, you're starting to see more activity actually transact.

  • What was the delay?

  • So they were hanging around the rim.

  • Are their prices coming up or are they -- do they not have their act together until now?

  • Jim Rohr - Chairman and CEO

  • Well, I think the folks -- I can't speak for the private equity case, but when you're buying distressed assets, the best time to buy them is when you see the market turn.

  • And there's no sense, there's no sense trying to catch the falling knife because the sellers are going to be sellers even after the turn.

  • So to the extent that you can come in at the bottom or just after the turn is a lot safer or better investment to make than while the prices are still falling.

  • So I think if you look at what's happening in a lot of markets, clearly prices are stabilized, and that's the time that you would see distressed buyers come in.

  • Meredith Whitney - Analyst

  • Okay.

  • Thanks very much

  • Jim Rohr - Chairman and CEO

  • Same thing that happened in the early '90s

  • Rick Johnson - CFO

  • Meredith, to your point of overall exposure, we're about 8% commercial real estate assets to total's sets.

  • And we've got about 3.5%t allowance on that.

  • And when you add the mark we have on the impaired side, it goes up over 6% so we've got some good could leverage to our own risk

  • Meredith Whitney - Analyst

  • The exposure in terms of blue buckets, and Jim explained that very well, other than commercial exposure, where were you exposed?

  • But I've got it

  • Jim Rohr - Chairman and CEO

  • A lot of questions asked I think last quarter was the decline of -- how might the distressed portfolio work out?

  • Do you think you extrapolate d over time, but what really happened in the early '90s was it went down for a while, and then it really plummeted as distressed buyers came in and bought in bulk.

  • Meredith Whitney - Analyst

  • All right.

  • Do you think actually when the buyers come in prices go down still further?

  • Jim Rohr - Chairman and CEO

  • I think prices will rise

  • Meredith Whitney - Analyst

  • Oh, I'm sorry.

  • I misunderstood you then.

  • I thought you said --

  • Jim Rohr - Chairman and CEO

  • The balances, the balances go down because --

  • Meredith Whitney - Analyst

  • Of course, of course

  • Jim Rohr - Chairman and CEO

  • Because of the bulk.

  • Meredith Whitney - Analyst

  • All right.

  • Thanks so much

  • William Callihan - SVP - IR

  • Next question, please?

  • Operator

  • Your final question comes from the line of Rick Weiss of Janney.

  • Rick Weiss - Analyst

  • Good morning.

  • I wanted to clarify -- it's not very good for credit, but I'm still wondering why the nonperforming assets actually went up a little bit this quarter.

  • Were they up higher midway through the quarter and are starting to come down now or --

  • Rick Johnson - CFO

  • Yes, that was driven primarily by the OREO assets going up $150 million, and that was because we didn't have sales in January and February .

  • There's much lower sale volume in January and February .

  • So the balance ticked up $150 million.

  • The actual nonperforming loans I think were flat, they were up 60 or 70, it

  • Rick Weiss - Analyst

  • Overall though you would expect that number to start declining I guess that's what I'm hearing on this call?

  • Any way.

  • Jim Rohr - Chairman and CEO

  • If you look at the trends and flow of non nonperforming assets going back to is first and second quarter of last year, the flow, the flow has dropped precipitously.

  • So if that trend continues I think we would expect that.

  • Rick Weiss - Analyst

  • Okay.

  • So it is, like, just stable now is my, like, we're all happy about stable I think is good, but decline is not yet occurring would be a fair statement?

  • Rick Johnson - CFO

  • That's correct

  • Rick Weiss - Analyst

  • Okay.

  • And second, actually, question I have is I'm wondering if you could help us out with the taxes?

  • What kind of tax rate is used going forward?

  • And, also, did you see any benefit, like a tax carry-forward, as a result of the Nat.

  • City acquisition?

  • Rick Johnson - CFO

  • The tax rate you can anticipate going forward, it's about 27%.

  • That's what I would expect.

  • The only reason why the fourth quarter last year was higher is we had the gain on the PGI deal, so that drove the rate up.

  • But, no, we didn't have any carry-forward.

  • We did do some carry-back on Nat City.

  • We did get benefit from that and got the cash flow related to that, only the two-year period, we didn't do the five-year because we were under TARP.

  • We got some of that, but not a big carry forward benefit

  • Rick Weiss - Analyst

  • Okay.

  • Thank you very much

  • William Callihan - SVP - IR

  • All right.

  • Jim, do you have any closing remarks?

  • Jim Rohr - Chairman and CEO

  • No, I think it was a very fine quarter for us.

  • We not only, we not only did well financially, but also strategically and accomplished a lot of the goals that we had set out for the shareholders a year ago.

  • And our plan is to just continue to execute.

  • And I think there's a lot of shareholder value we can create thank you very much, everyone, for joining us this morning

  • Operator

  • This concludes today's conference.

  • You may now disconnect.