PNC Financial Services Group Inc (PNC) 2011 Q1 法說會逐字稿

Good morning.

My name is Angel and I will be your conference operator today.

At this time I would like to welcome everyone to the PNC Financial Services Group investors conference call.

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

After the speakers remarks there will be a question and answer session.

(Operator Instructions).

Thank you.

Mr.

Bill Callihan you now may begin your conference.

Thank you.

Good morning, everyone, and welcome to today's conference call for the PNC Financial Services Group.

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

The following statements contain forward-looking information.

Actual results and future events could differ, possibly materially, from those that we anticipate in our statements and from our historical performance, due to a variety of factors.

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

These statements speak only as of April 21, 2011and PNC undertakes no obligation to update them.

We also provide details of reconciliations to GAAP of various non-GAAP financial measures we may discuss.

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

These are all available on our corporate website, www.pnc.com in the investor relations section.

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

Thank you, Bill.

Good morning and thank you for joining us.

In our presentation today, I will focus on PNC's first quarter strategic accomplishments and highlights for our businesses.

And then Rick will provide more detail on our first quarter financial results and our full-year outlook which remains positive.

Turning to the first quarter, PNC delivered exceptional performance in the first quarter of 2011.

We earned $832 million in net income or $1.57 per diluted common share.

Our first quarter profits represent a 24% increase over the same period last year.

We remain well positioned from a capital perspective.

Our estimated tier 1 common capital ratio of 10.3%, as of March 31, was a new record for us.

One of the strengths is our disciplined capital management.

Earlier this month we announced a 250% increase in our quarterly common dividend to $0.35 per common share.

We confirmed a 25 million share repurchase program and announced plans to repurchase up to $500 million of common stock in 2011.

This quarter, also, we continued our momentum to grow the number of clients we serve and deepen our relationships with them.

And we also continued our transition to a higher-quality balance sheet with excellent bank liquidity to support client growth.

And with regards to credit, our provision was lower, as expected, and our overall credit metrics continued to improve.

We are off to a very good start to what we believe will be another strong year for PNC.

Let me turn to our businesses.

We had a lot of energy coming out of a strong year in 2010, and we believe our first quarter results reflect that continued momentum.

Retail banking saw strong client growth in the quarter.

Net new checking relationships grew by 56,000 during the first quarter, reflecting gains in all of our markets.

In just one quarter, we achieved 75% of the net new accounts growth we saw for all of last year.

We also delivered more net business banking checking relationships in the first quarter of this year than we did in all of last year.

And, we are seeing strong retention.

We launched a new suite of credit, debit and checking products late last month, and we are already seeing evidence that the customers like the greater choice that we are offering.

Our early data indicates that significantly fewer customers are signing up for the free checking account option, and more are moving to an account that increases our deposits while providing customers with greater rewards.

And sales of new credit cards were up sharply compared to the same period last year.

Our goal is to deepen our client relationships, and we saw active online bill payment customers grow by 5% in the quarter.

On the retail side, we are also looking to increase our distribution capabilities in Florida.

We reached an agreement in January to acquire 19 branches in the Tampa area and approximately $350 million of deposits from BankAtlantic.

We expect the transaction to close in June, subject to customer closing conditions.

Turning to our corporate and institutional bank, they saw average loans increase by $1.2 billion in the first quarter, compared to the linked quarter.

As a result, increased utilization and new business activity, primarily in the middle-market across the current.

Treasury management revenue was up 2% in the first quarter compared to the same period last year as a result of stronger sales across the franchise, but lower on a linked quarter basis due to seasonal trend.

With a solid business pipeline for the rest of year.

Capital markets posted lower revenue compared to the linked quarter, which benefited from very strong results from Harris Williams one of the nation's largest M&A advisory firms for middle-market companies.

Their fourth quarter was extraordinary.

First quarter was a little softer, but the pipeline for them remains strong as we look forward to the rest of year.

We also see additional opportunities this year with our syndication business.

Last year our corporate bank exceeded its goal of adding 1,000 new clients.

The same target is in place this year, and through the first quarter we are ahead of schedule to reach that objective.

Our asset management group reported first-quarter earnings that were up sharply linked quarter, driven by strong sales and improvements in the equity markets.

Credit cost and expenses were lower, and fee-based income was higher than the fourth quarter of last year.

We continue to invest in staffing to drive revenue growth in this area, and we are piloting Wealth Insight, a new tool designed to help our high net worth customers see their money in much the same way that Virtual Wallet helps our retail customers.

As it's under administration as of March 31 we are approximately $219 billion, and operating expenses remained well-controlled, net of our investments to grow the business.

We saw strong sales momentum and cross-selling across our markets this quarter.

And I was especially pleased to see growth in our predominately legacy National City markets.

Sales in corporate banking, wealth management, institutional investments and commercial banking products, and those markets were up 25% in the first quarter compared to the same period in 2010.

And new client acquisition in those areas increased by 76%.

Residential mortgage also had a good quarter.

First-quarter mortgage loan originations were $3.2 billion, up sharply from the same period a year ago.

But lower than the fourth quarter.

While refinancing volumes were lower linked quarter, we are seeing stronger growth in the purchase applications market, which is a positive trend for us and the country.

Turning to our distressed asset portfolio, we continue to make good progress.

We ended the first quarter with average assets of $14.1 billion, down $5.4 billion from the same quarter a year ago, and down $1.3 billion linked quarter.

This portfolio has been reduced by more than 40% since the acquisition of National City.

Overall, we have done an excellent job maximizing the economic value of these assets.

BlackRock, they announced an excellent first quarter this morning.

Beat the street estimates and ended the quarter managing $3.64 trillion.

And I think that is an outstanding performance for them.

At the end of the first quarter we held a 20% economic interest in BlackRock.

Also, as a result of the excellent efforts of our employees, last month we were honored to be named a 2011 Gallup Great Workplace award winner in recognition of our strong employee engagement.

A key ingredient in our financial performance.

We see this as an important acknowledgment of our continuing commitment to becoming a great company.

Now, Rick will provide you with more detail about the first quarter.

Thank you, Jim.

And good morning everyone.

Our first quarter net income of $832 million, or $1.57 per diluted common share, reflects our strong performance and demonstrates the ability of our larger franchise to deliver a higher level of results for our shareholders.

In my remarks today, I will focus on the following.

The continued strengthening of our balance sheet, the key drivers of our strong earnings, our valuation drivers and our performance measures.

Let me begin with our balance sheet, as shown on slide seven, which remains highly liquid and well capitalized.

While overall loan balances were stable, we saw commercial loan growth of $1.2 billion.

This growth is in commercial lending, is a great indicator.

It is primarily in manufacturing with our middle market customers, and we are seeing gains across all our markets.

This gives us greater confidence regarding future growth potential.

On a spot basis, security balances are down linked quarter as a result of prepayments and balance sheet management actions that included sales of agency mortgage-backed securities and government agency securities.

On the deposit side, while transaction deposits were essentially flat linked quarter, we reduced our high cost CDs and other time and savings accounts by $1.2 billion.

Looking ahead, we have about $14.5 billion in these CDs scheduled to mature over the remainder of 2011 at a weighted average rate of 1.78%.

Clearly, these will be repriced at a lower rate which will have a positive impact on our core net interest income and margin.

For the quarter, we reduced average long-term borrowings and increased average short-term borrowings.

As a result, the cost of our funds decreased by 39 basis points linked quarter.

As I mentioned earlier, when combined with our deposit pricing initiative, total cost of funds fell by 13 basis points in the first quarter compared to the fourth quarter.

At the same time, common equity increased by more than $800 million this quarter bringing our total to $30.5 billion as of March 31, 2011.

Now slide eight shows our credit quality metrics, which overall continued to show improvement in the first quarter and from a year ago.

Early-stage delinquencies, that's 30 to 59 days, were up linked quarter, driven by an increase in commercial real estate delinquencies due to an increase in maturities at year-end.

And offsetting declines in other categories.

Loans past due 60 to 89 days were down 13% compared to the linked quarter.

And late stage delinquencies were down 10% compared to the fourth quarter.

Overall, our credit trends are improving.

Our nonperforming loans at the end of the first quarter we down $73 million, or 2%, on a linked quarter basis, primarily driven by declines in commercial and consumer loans.

Now, what you can't see in these numbers is the decline of approximately $1 billion in our criticized commercial loans.

Which was a decrease of more than 5% from the linked quarter.

This is a good sign for the future.

First-quarter provision was $421 million.

First quarter net charge-offs of $533 million were down $258 million, linked quarter.

Primarily driven by declines in commercial loans and residential real estate charges-offs.

Appropriately our allowance to NPLs was 108% in the first quarter.

Now, let's turn to net interest income on slide nine.

The table on the top shows the breakdown by quarter of core net interest income, scheduled purchase accounting accretion, cash recoveries on commercial impaired loans, and total net interest income.

It also shows our net interest income adjusted for our provision for loan losses.

The chart on the bottom of the slide graphs net interest margin, core net interest margin, and the provision adjusted net interest margin.

Net interest income was $2.2 billion, essentially flat with the linked quarter results.

As expected, lower cash recoveries on impaired commercial loans were partially offset by improvements we expected in core net interest income due to an overall cost of funds decline of 13 basis points.

Net interest margin remained essentially flat at 3.94% in the first quarter, while core net interest margin increased by 11 basis points to 3.43%.

As you can see on slide 10, we continued to maintain the diversity of our revenue streams.

We delivered $1.5 billion in noninterest income in the first quarter, a 5% increase over the same period last year.

Excluding the impact of $85 million in loss fees due to regulatory changes, noninterest income was up 11% compared to the first quarter of 2010.

Thus reflecting the momentum we are seeing on a year-over-year basis.

Asset management fees in the first quarter were generally in line with previous quarters.

And on a linked quarter basis, our asset management group produced strong results.

However, we saw a lower contribution from BlackRock due to their fourth quarter strong performance.

Consumer service fees are typically lower in the first quarter versus the fourth quarter.

But were up 5% compared with the same quarter in 2010.

Corporate service fees were affected by a $35 million impairment in commercial mortgage servicing rights from the impact of interest rats on deposit values compared to a recovery of $48 million last quarter.

Residential mortgage fees were up $38 million linked quarter, largely as a result of higher net hedging gains on mortgage servicing rights and lower repurchase reserves.

On a year-over-year basis, residential mortgage fees were up 33%.

As expected, service charges on deposits were down $9 million, linked quarter, prevailing due to seasonality.

The other fee category saw an increase of $88 million linked quarter, primarily due to $92 million in repurchase reserves that were booked in the fourth quarter.

Overall, the diversity of our revenue stream enabled us to achieve a solid performance.

At the same time, we see opportunities for growth in our fee-based revenues as a result of our larger franchise.

Now, as you can see on slide 11, noninterest expenses decreased, as expected, by $270 million to $2.1 billion on a linked quarter basis, primarily due to lower residential mortgage foreclosure expenses, lower compensation expenses, lower integration costs and lower marketing costs.

Our expense performance this quarter was slightly better than forecast as a result of a $38 million reversal of a portion of an indemnification liability for Visa litigation.

At PNC we have a culture of continuous improvement.

This means we have dedicated resources that work closely with our businesses to help improve our efficiency and reduce costs on an ongoing basis.

This practice has been very successful.

At the same time, we plan to invest in people, products and technology to grow our businesses in 2011.

We will continue to look for ways to successfully balance these demands.

As shown on slide 12, our tier 1 common ratio at the end of the first quarter is estimated to be 10.3%, up 50 basis points linked quarter, primarily due to first-quarter earnings.

Since March 31, 2010, our tier 1 common ratio has increased by 240 basis points .

In addition, our book value per common share during the same period has increased 15% as we produced value for our shareholders.

Based on this strength, we were able to announce a significant increase in our dividend earlier this month, and confirm our plans to begin again to repurchase shares of common stock.

Slide 13 shows our performance measures.

Our return on average assets grew from 1.02% to 1.29% during the period shown, reflecting our ability to execute on our business model.

The improvement reflects lower provision due to improved credit cost, partially offset by lower revenue and lower assets.

Our long-term goal is a return on average assets of 1.5% which we believe is achievable in a higher rate environment.

Now, let's turn to our return on tier 1 common of 15.4%.

We increased our tier 1 common capital by 25% or $4.4 billion during the last five quarters.

This increase has made it difficult to maximize our return on capital.

However, our higher earnings offset that increase, enabling us to hold our returns on tier 1 common equity fairly steady throughout the period.

Our current capital levels are at the upper end of the range of our peer group.

If we were to reduce our capital ratio to 8% to 8.5%, the return on tier 1 common capital would increase by over 300 basis points.

Our long-term goal is to deliver returns of on tier 1 common capital of at least 20% if an 8% to 8.5% tier 1 common capital ratio is acceptable.

As we look at the full year, slide 14 provides a summary of our outlook for 2011 compared to our reported results for 2010.

While not much has changed since the guidance I provided to you during our call in January, I am more optimistic today at our ability to exceed these expectations.

Of course, this guidance continues to assume an improving economy.

Now, let me begin with our balance sheet.

In terms of the loan growth, we expect that distressed assets will run off at a 25% base, which is the same rate as last year.

Excluding the distressed runoff, we believe we remain on track to deliver modest loan growth in 2011, with most of the increase coming from commercial loans.

And, we continue to see a shift in our deposit mix towards transaction accounts.

Turning to our income statement, we continue to believe our core net interest income and net interest margin will increase during the full year.

Due to higher rates and our increasing confidence in commercial loan growth, I expect to see core net interest income increasing by more than $100 million year-over-year.

We continue to expect purchase accounting impact to decline by $700 million.

Overall, this is a more optimistic perspective on our net interest income.

We believe our provision will decline by at least $800 million and should average approximately $400 million per quarter in 2011.

Not much of a change here.

We see opportunities to increase in non-interest income revenue this year in the low to mid single digits, excluding the expected incremental negative impact of approximately $400 million in reduced fees due to regulatory changes, half of which is related to debit charges.

And full year expenses should be lower in 2011, apart from the possible impact of the legal and regulatory contingencies we discussed in our recent 10-K.

And with that, I will hand it back

Thank you, Rick.

In summary, PNC delivered very strong first quarter profits.

We increased the number of customers we serve and we are seeking further market share growth.

Our balance sheet continues to improve and our expenses are well managed.

Our tier 1 common capital ratio ended the quarter at record levels.

And we significantly increased our dividend and we announced a stock repurchase plan.

As Rick just indicated, and subject to the assumptions he provide, we believe we are on target to deliver strong full-year 2011 results.

Given our enhanced size, scale and earnings power, we believe that PNC is in a position to deliver future financial performance that will be more in line with levels indicated by this quarter's results.

And assuming higher interest rates and higher loan growth, we see even greater potential going forward.

To highlight our success, since we closed on the acquisition of National City, our book value per share at the end of the first quarter increased by almost 50% to more than $58.

During the same period, our tangible book value per share went up more than 180% to almost $38 as of March 31.

We believe this demonstrates the new level of what our franchise is capable of producing.

With that, we will be pleased to take your questions.

Operator, could you please give our participants the instructions?

(Operator Instructions).

Paul Miller.

On slide 14 you talked about how you are more optimistic today than you were last quarter, meeting a lot of these goals.

I think a lot of investors out there keep on looking for this loan growth across the space, not just with you guys, but out there, but they keep on getting disappointed about it.

And as one of your competitors also made a comment that March was not a great month that they saw for business confidence.

Can you address why do you feel more optimistic today out there, and what are you seeing out there that maybe other people aren't?

I think, we saw a number of changes in the trajectories of different loan categories.

The first of which is the utilization rate.

We've talked about that to a great extent in the past.

We saw a 2% increase in the utilization rate, that's almost 6%, in the quarter.

And I think that's the first time we've seen something like that.

We used to declare victory when we saw it flatten.

And now we're seeing that increase.

If you look at the Midwest, the manufacturing companies have turned around, clearly.

I think this morning they showed the employment in the manufacturing companies in the newspaper.

That's changed.

And from a borrowing point of view, the people who aren't flush with cash, they have had increases in their commodity prices, metals and all sorts of materials.

And so, from our point of view, they have to borrow more to support inventory and receivables levels, so that's a good thing.

We also saw a $1 billion increase in our production of small business loans.

I think that's a good sign.

The other, part of the real estate business, most of the real estate is soft on the commercial side, but we've seen a change in mobile family which has turned around.

And so, there's a number of pockets where we're seeing -- educational loans are up, of course -- there's a number of pockets where we are seeing growth where we had seen declines and then flattening.

Now, we still have the runoff of the distressed books so on a net basis, it will be a while before you'll see a significant increase in our net loans, I think.

But, on the other hand, the newer loans are much higher quality than the ones in the distressed book and don't carry with them quite the credit loss.

So we are pleased to see that growth.

And, real quick, you didn't address the M&A issue which is always on the top of everybody's list with you guys.

Do you see any possible M&A activity in your future going forward or are you going to be contentious, buying back stock?

M&A is always on the horizon.

I think there are a number of things for sale.

But I think we just have to be disciplined.

We like the idea of growing in footprint acquisitions and I think there will be a lot of small banks for sale, as we have said over a long period of time.

And we like to be one, two or three in a market, or we like to have 10% market share in very large markets, which allows us to cross sell a lot of our other products.

And I think that's the model that we've had for a long period of time and it's working for us and we're going to stick with it.

The other thing is, that when you buy small banks, we've shown than we have the ability to take out a significant portion of the cost.

And I think that takes a lot of risk out the transaction for shareholders and for PNC.

Ken Usdin

Good morning, thanks.

I was just wondering if you could just give us a little bit of incremental color on some of the bigger deltas within the fee lines from this quarter as far as sizing some of the moving parts.

Maybe you could talk to the MSR gain, the CMBS write-down, and then the magnitude of repurchase losses.

I'd be happy to.

I think the big delta there is in corporate services where we had, as I mentioned in my comments, we had an improvement in the valuation on the commercial MSR in the fourth quarter of about $45 million.

And then we took a charge this quarter of about $38 million.

So you've got a pretty significant swing there impacting that line.

I think Jim also mentioned that line, how strong a quarter Harris Williams had at the end of the year.

And, that's come down.

With the softer quarter this period we expect that to look fine going forward.

The other delta would have been in the other category of noninterest income.

If you recall, we had about $90 million of repurchase reserves taken in the fourth quarter of last year.

So that obviously held that number down.

In the first quarter of this year, we also had about $35 million in recoveries on some insurance claims.

That private equity was about $67-some million, so that was a good return.

We don't know that that's going to repeat.

So I think that line is probably a little high for this quarter versus what we can expect going forward.

But all in all I think those are the major deltas that you have there.

Okay.

And then my second question is, on your comments about core NII growing, can you just talk about the contributors to that?

Whether it's the magnitude of it being driven by margin improvement versus the balance improvement.

It's a combination of both.

Obviously the balance improvement is helping overall net interest income with the loan balances going up.

But it was higher rates in the quarter which actually is helping the margin.

I think that's one of the biggest levers we have right now.

To the extent that rates go up and you look at the positioning of our balance sheet, our margin will go up with it.

And that's the prospective drivers, as well, going forward, not just in the quarter but it's both going forward?

Going forward it's more the expectation that the balances will be, as I said, modestly higher.

We're not making a lot of predictions where we think rates are going to go, but if they go up I think we can probably get even more confident than we are on the $100 million.

The other thing, too, is you're also going to see -- we still have $14 million worth of deposits to reprice from a rate of 1.78%, probably down go-to rate ultimately of about 60 basis points.

So, that is going to have a real positive influence, still, for the rest of the year on our core margins.

John McDonald.

So, Rick, on the purchase accounting accretion, just a reminder, what drove the commercial cash recoveries to come in better this quarter?

Are you just able to sell more of the marked loans or is that better prices?

Yes.

John, it's a combination of sales and settlements, where we had marked it down and the customer actually came in and settled.

But the number is actually down from the prior quarter, John, down from about 130 down to 80.

Now, we had, I think, given you guidance of about 50 in that line.

I'm still down at 40 to 50 number.

I think that's probably where that is going to come in.

I wouldn't give us much credit than that each quarter.

And that's what's baked in to your total NIM guidance, right?

The 40 to 50 a quarter in that?

Actually that is baked into my down $700 million guidance on the impact, so that's correct.

Okay.

And so, beyond that, meaning the 40 to 50 a quarter for this year, just longer term, when do you see the convergence of the core NIM and the reported NIM?

Do they move significantly closer to each other in 2012 and then in '13 you're just talking about one NIM?

How do you see that unfolding?

I think you will see more convergence because we are still, even at $700 million down, we've still got a lot of purchase accounting accretion taking place.

So it will be, John, less of an impact from '11 to '12 and even less than that as you go '12 to '13.

But by then, other than the debt , which goes on for 15 years, which is pretty de minimis anyway, we should be pretty well done

And we should be just looking at your core NIM later '12 into '13?

Yes.

I spend a lot of time focused on core NIM right now because that's what we are managing to, we are growing that.

We don't have as much control, as you know, in the runoff of the purchase accounting impact.

And we are focused on growing core margin and core net interest income.

Okay.

And then just on credit, a couple of things.

Why was the reserve release so much less this quarter versus the fourth quarter where you had $350 million or so of reserve release?

We just, in the fourth quarter, had higher charge-offs.

We had a portfolio which we moved into the held for sale category which caused us to take about $110 million of charge-offs we wouldn't normally have.

And we didn't feel the need this quarter, we didn't have that much in terms of the charge-offs levels being down $250 million basically.

So this quarter is more of the magnitude that you would expect as we go forward?

On the provision level, I gave 400 on average per quarter.

Charge-offs are less predictable, John.

I think you are probably in the range of what we can expect, but as you know, that number can go up or down $100 million or more depending on the events of the quarter.

Okay.

And then the last thing is the NPA inflows and the delinquencies had a little bit of a mix trend there.

The NPA inflows, was that broad-based or just CRE where you saw some more inflows?

If you could just comment about where you saw those metrics improving and where they didn't improve, that would be helpful.

Yes that's mostly, the NPA is mostly your TDRs.

We have a lot of modifications taking place, as you can imagine.

The consumer, a lot in the commercial.

And so the roll in, once we modify those loans into the TDR, is causing that to go up slightly, or flatten out, I should say.

You can see, further down in that schedule you can see that rolling out from there.

The delinquencies, I'm not as concerned, John.

That early stage increase on the commercial real estate, the piece that was probably, the fourth quarter was very low.

If you look at the trend, as this business gets to maturity, and we go into the workout phase, you should expect that the early stage delinquencies on the commercial real estate to maintain the level we have in the first quarter .

But, I don't expect them to mature to later stage delinquencies.

You can see in the commercial real estate space, those numbers have come down dramatically.

And I don't expect these delinquencies to mature into late stage delinquencies, as well.

They will either be charged off or they will be restructured with more equity and taken off the watch list.

John, the most important thing on the credit side is we did see a $1billion-plus drop in commercial criticized and classified loans.

That's something that doesn't show up in delinquency or the NPL table, but that's the next level up credit.

And we've seen a huge migration there

Matt O'Connor.

Just any update on BASEL III capital levels in terms of what they are now and what the roll forward will look like, and when we might know what you need along with other banks?

Not a lot of change, Matt.

If you recall, we gave you, when we go live in 2012, the end of 2012, we said we'll be at 10% plus.

If you recall, that was before the capital actions.

That did not include the capital actions just approved.

So that will leave us really around, that's about 1 point, so that will leave us 9% plus.

Nothing further has been clarified in terms of how the rules are going to work.

Although, it is clear that the regulators are interested in hearing more and more about how those rules are going to be written.

But, our story doesn't change other than the capital actions.

Okay.

And the current level is around 7% right now?

It's not effective now, so what I'm giving you is the current level in two years time.

Okay.

And then just separately, the expense story I think is really good.

The legal costs that you mentioned that could be a wild card, any sizing of that?

We are having a little trouble hearing you, there is some background noise.

The crux of my question is on the legal related cost that you have excluded from the expense guidance, just any sense of what the magnitude might be for those, or maybe you could remind us what it is that might result in some charges.

Yes.

We are going to update that with our 10-Q.

As you know, we put that number out in the 10-K.

So, we will update it at that point, Matt.

And, to date, nothing has changed.

Betsy Graseck.

Hi good morning.

Two questions.

One on the criticized asset number that you mentioned, the $1 billion decline in the quarter, where did that go from $2 billion?

And what kind of rate changes that relative to what you've seen in the past couple of quarters?

Actually, we've been reducing that number all year long.

That's been something we're working on.

But this was a pretty sizable change relative to prior quarters.

It's mostly in the commercial book.

I'd say half of it is commercial.

Commercial real estate is probably $200 million, $300 million, in that range.

And then the other de minimis amounts from other lines.

And then the NPA staying flat was more to do with CRE?

And I'm just wondering, was that something you were doing proactively on your side to assess or was it just environmental?

No, that's just proactive management of the credit book.

Nothing there.

You saw a little bit of a blip in the home equity space with some of the bankruptcy costs going up and things of that sort.

But that, I would say, would be the only area where we saw any kind of modest, very modest, deterioration.

And the market still is good for selling assets.

We sold 569 parcels over the quarter at about 89% of book.

We usually look for maybe 90%.

So I think the market remains good.

I think we'll continue to see the flow of those assets coming on and going out.

So the forward look on NPLs is to come down, right?

Yes, it will come down.

But I think the other thing is, when you look at our NPLs to total loans, you look at our delinquencies to total loans, our ratios are much lower than the average of the peer group.

So maybe the kind of declines you are seeing at others, we've already had.

Okay.

And then separately on marketing and client flows, you were mentioning how you had very strong client inflows in terms of number of accounts on both the consumer and the commercial side.

At the same time, I saw your marketing dollars come down, which is nice for the quarter but I'm just wondering how do I square that with forward look on account acquisition?

I think you'll see, the marketing dollars are relatively low, as you know, compared to the rest of the expenses.

I think you'll see some more marketing dollars in the second quarter and softer in the third, and picks up again in the fourth.

So, those are seasonal in nature.

So, with the introduction of the new accounts and some other initiatives that we have going on, you'll see marketing expenses blip up a little bit in the second quarter.

Betsy, we push them up a bit in the fourth quarter, just finishing the integrations and we wanted to get some good marketing in all our new markets.

Okay, but your client flow, your growth of acquisitions, is, you think, going to be on track with what you've done recently?

There's no question about it.

I think the trends and the momentum actually are increasing rather than flattening.

So we are having great success.

The C&I group has targeted 1,000 last year, got that, and they are ahead of schedule this year .

Were ahead of schedule in the consumer space, we're ahead of schedule in the small business.

So, I think growing customers is going to be a good year

Brian Foran.

Just piecing together all the things you said about the core margin and the trajectory, is it fair to assume that a 3.50% core margin is achievable even in a 0% rate environment, and maybe if rates go higher the core margin to be like 3.75%?

Is 3.50% to 3.75% a reasonable range to think about of a long-term ex accretable yield margin?

What I would tell you is just add $100 million to what we had last year in core net interest income and do the math.

I really don't predict where I think the margin is going to land.

I think it continues to improve.

Core margin continues to improve but I haven't specifically done the calculation.

We can go back and do that for you.

And then on capital, can you just remind us how the process works going forward?

Is the capital policy now set in stone for 2011?

And do you resubmit a plan as we get closer to 2012?

Or can the plan be revisited in 2011?

Or does the next round of dividend and buyback work once you've worked through the current authorization?

We are expected to get some feedback on that in the next couple of weeks.

I think once we have that feedback we will have greater clarity on how it's going to move forward.

But right now the last communication on the whole topic was just approval.

They did not object - excuse me.

Let me be clear about that.

Moshe Orenbuch.

Actually, most of my questions have been asked and answered.

You did talk, in addition to the marketing you did mention that the mortgage costs were down.

Is that just because of big charges in the fourth quarter, or is there something else going on, because obviously you're somewhat unique in that respect?

Yes, that was what we incurred as expenses in the first quarter associated with the moratorium on foreclosures and the whole exercise and review that was going on by our regulators.

So, we incurred about $70 million of costs associated with that in the fourth quarter which was our estimate of what the total cost to us would be for the foreclosure process ceasing.

Now it's back up and running in almost every market.

So, I think, at least related to that pause, we are very comfortable with the reserves we have today.

Okay.

And, ongoing effects on the servicing book?

That's baked into our marks.

We've been updating it all year long, and updating it based on what we've received in the consent decree.

Our marks are pretty good and I think if you look at it we are one of the lowest marked MSRs out there in the industry.

Gerard Cassidy.

Good morning, guys.

I may have missed this but I know you talked about the commercial real estate NPAs and what's going on in commercial real estate.

What happened in the home equity loans in the retail bank this quarter?

There seemed to be obviously an increase in the charge-offs and also an increase in the NPAs for home equity loans.

We saw a slight increase in delinquencies.

We saw an increase in the number of bankruptcies in the industry as a whole.

And so, as a result, we increased the reserves in the quarter.

Looking at those delinquency trends now into the new quarter, we are actually seeing those come down.

So, I think we're feeling better about where that's headed.

But, we were just being prudent to set up the right reserves based on the information we were seeing in the first quarter.

Okay.

You mentioned about the decline in classifieds.

About 5%, I think you said, $1 billion.

And the number was about $12 billion in the 10-K.

Do you guys have the classified numbers for the end of 2009 by chance?

No, we have not disclosed those.

Okay.

Was it higher than the $12 billion?

Yes.

That's a fair statement.

Yes.

Okay.

And then on the commercial loan growth, you guys identified manufacturing was pretty good.

Was there much syndicated lending where you participated in large leverage types of loans that are used for acquisitions or leveraged buyouts or anything like that?

Obviously, we are in the syndication market.

There is a lot of volume in that activity but spreads are getting tighter so generating revenue from that is a little bit more challenging than what it was a year ago.

But, we're not retaining a lot of large credits associated with the syndication market.

And just finally on the BankAtlantic branch acquisitions, when you look at the deposits, what percentage of those are going to be transaction type accounts versus CDs?

A higher percent.

It's a pretty core book.

I can't get into the specifics.

As you know, Gerard, there's $350 million in deposits, I think, in total.

Yes, pretty small.

Mike Mayo.

This is actually Tom Hennessy.

Real quick, just a follow-up on the syndicated lending.

What percentage of your commercial loan growth would be coming from syndicated lending?

How are the fees impacted from this and where do you see this going forward?

The percentage the came from syndicated lending?

Yes, of the growth, of the commercial growth.

Let us dig that number out for you.

That is a volatile number.

Sometimes you have very, very large syndications that will make that a lumpy number, quarter to quarter.

The biggest issue, I think, in corporate services was the volatility around Harris Williams.

Which had such a spectacular quarter in the fourth and was softer in the first.

But, those are lumpy numbers, as well.

Yes and you had, as you know, $90 million swing in the commercial MSRs credit to debit from the fourth quarter to the first.

We will dig out the syndicated portion of it.

We'll have to get back to you on that.

There are no further questions at this time.

Great.

Jim, do you have any closing remarks?

Thank you very much for joining us this morning.

We are very, very pleased with the first quarter.

It turned out particularly well.

We think we've established a new performance level for ourselves and looking forward to an excellent 2011.

And thank you for your support.

And this concludes our first quarter call.

Thank you very much.

Thank you.

This concludes today's conference call, you may now disconnect.