PNC Financial Services Group Inc (PNC) 2011 Q3 法說會逐字稿

Good morning.

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

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

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

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

(Operator Instructions).

As a reminder, this call is being recorded.

I would now like to turn the call over to Director of Investor Relations, Mr.

Bill Callihan.

Please go ahead sir.

Thank you and good morning.

Welcome to our conference call today for the PNC Financial Services Group.

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

Today's presentation contains forward-looking information.

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

Information about such factors, as well as GAAP reconciliation and other informational non-GAAP financial measures we discuss, is included in today's conference call, earnings release, related presentation materials, and in our 10-K and 10-Q and various other SEC filings and investor material.

These are all available on our corporate website at PNC.com under the Investor Relations section.

These statements speak only as of October 19, 2011, and PNC undertakes no obligation to update them.

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

Thank you Bill.

Good morning everyone.

Thank you for joining us.

First of all, I'd just like to say that we're pleased with the quarter.

We believe it's a very good quarter in an environment where we have very slow economic growth, and clearly interest rates continue to be a challenge.

We saw good loan growth, good customer growth, and we saw credit quality trends that will continue to go in the right direction, so we're very pleased with the quarter.

In the presentation today, I'll talk about PNC's third-quarter financial accomplishments.

I think we believe that given the trends that we've seen, we believe that PNC is well-positioned to deliver short as well as long term value.

Last month, I outlined strategic priorities in this current environment, which we know what kind of environment it is very well.

We are focused on four things -- one, growing customers; managing risk; managing expenses; and managing our capital.

I think our strong third-quarter performance demonstrates progress in all of these areas.

We earned $834 million in net income, or $1.55 per diluted common share.

Second, due to our innovative product offerings and our strong cross-selling ability, we grew the number of customers we serve at record levels.

In fact, our retail checking relationships and corporate business clients are growing faster than we had ever expected, and we continue to deepen our relationships with them.

Thirdly, due to our success in adding new clients and improved utilization from existing ones, we saw strong commercial loan growth of $3.7 billion in the quarter.

Consumer loans grew an additional $500 million during the quarter.

Our overall credit metrics showed significant improvement on a year-over-year basis.

Our balance sheet remained highly liquid and core funded with an 82% loan-to-deposit ratio, and our expenses were well-managed, reflecting our focus on continuous improvement while continuing to invest in our businesses.

Our strong Tier 1 common ratio is estimated to be 10.5%, which held steady from the second quarter.

The third quarter benefited from retained earnings.

That benefit was offset by higher risk-weighted assets primarily from loan growth.

Overall our Tier 1 common ratios remains very strong, and we believe we are well positioned for the BASEL capital requirements.

Last but not least, in the quarter, we issued $1 billion of preferred stock in July, which enhanced our Tier 1 ratio, and we also issued $1.25 billion in debt in the third quarter, further improving our liquidity.

Overall, we produced excellent results during the first three quarters, and we believe this will be another strong year for PNC.

Let's turn to the business segments.

Our business segments reported strong third-quarter results as well.

Let's begin with Retail Banking.

We recognize that customer banking trends are changing as check-writing continues to decline and technology, including tablets and smartphones, becomes more popular.

Our Virtual Wallet meets those needs and is helping to drive our customer growth.

In the third quarter, we added an average of 10,000 new Virtual Wallet customers per week, a significant increase from the second-quarter average of 6000 per week.

In some weeks, a number of the new accounts reached as high as 14,000 due to new student accounts.

Our Virtual Wallet website was also ranked as the best bank website for user experience in 2011 when compared to 14 other major competitors.

We also, on the retail side, we launched a new suite of checking and credit card products in late March.

We're seeing strong acceptance by new and existing customers.

In fact, an average of nearly 70% of new checking accounts that were opened in August and September were relationship accounts.

Only 30% of the new customers opted for free checking.

That's exactly the mix we hope to achieve as relationship customers in general produced two to three times more revenue than free checking account customers.

We are expecting -- we are reaching that goal much sooner than we had expected.

The winning strategy has helped to drive customer growth.

In fact, we added 95,000 organic checking account customers in the third quarter, giving us year-to-date growth of 225,000 customers, which is 3.5 times greater than the same period last year.

On an annualized basis, our checking relationships through September 30 saw organic gains of nearly 5.5%, far exceeding the average population growth in our Retail Banking markets.

Our Corporate and Institutional Bank also had a good quarter.

We saw average loans increase in the third quarter compared to linked quarter with growth predominately in middle market and corporate finance sectors.

This included quarter-over-quarter increases in asset-based lending and public finance and healthcare customers.

We are adding new primary clients in our Corporate Bank at a record pace.

In the third quarter, new primary client growth through nine months was 869, an increase of 25% from a year ago and on pace to well exceed the 1000 new primary client target that we had in 2011.

If we cross-sold to these new clients equal to our existing book, it would represent approximately $200 million in additional annual revenue.

[Treasury] Management revenue was up linked quarter and is on track to have another successful year.

We continue to see excellent sales activity across all of our market.

Capital Markets had a strong third quarter due in part to the performance of Harris Williams, one of the nation's largest M&A advisory firms for middle-market customers.

Harris Williams saw higher third-quarter revenue as a number of transactions closed during the period.

Our Asset Management Group reported solid third-quarter earnings despite the challenging markets.

Assets Under Administration as of September 30 were approximately $202 billion, slightly lower than the second quarter due to a weaker equity market.

However, in the third quarter, the business delivered its highest level of sales year-to-date as a result of significant increases in new primary clients and referrals from our Retail Banking and Corporate and Institutional Banking business.

PNC remains one of the largest wealth managers in the country.

In the quarter, we launched PNC Wealth Insight late last month.

This tool allows our high net worth customers to aggregate and view all of their investments, regardless of which firm is managing them.

Some 12,000 clients now have access to it and we've been averaging about 250 additional clients every week since we offered the tool.

We believe this will give us a competitive advantage in the marketplace that we can leverage.

Residential Mortgage had a good quarter.

Mortgage loan originations were $2.6 billion in the third quarter, which was consistent with the second-quarter results and slightly lower than a year ago.

The applications increased 28% on a linked-quarter basis, primarily due to refinancing activity.

This creates a solid pipeline as we head into the end of the year.

BlackRock reported earnings this morning and had another good quarter.

At the end of the third quarter, we held a 21% economic increase -- interest in BlackRock.

Let's turn briefly to loan momentum.

We're starting to see the real revenue benefits in our efforts from growing clients in the C&I business, especially in the area of increased credit.

Taking a closer look at commercial loans on Slide 6, we are seeing gains due to continued growth of new commercial customers and improved utilization from existing customers.

On a linked-quarter basis, we're seeing a 4% increase in loan commitments, including a 3% increase in loans.

Since the fourth quarter of last year, loan commitments increased by 7% and loans were up 8%.

In addition to increased loans, the growth in unfunded commitments generates fee activities, as you know.

We have opportunities to cross-sell our fee-based products to our credit customers.

We are seeing these increases in spite of a tepid economy due to the quality of the product offerings and our client relationships.

Of course, we remain focused on making loans that meet our risk criteria.

Now, Rick will provide you with some more detail about the third-quarter results.

Rick?

Thank you Jim.

Good morning everyone.

Our third-quarter net income of $834 million, or $1.55 per diluted common share, is a strong performance and reflects our ability to deliver quality results to our shareholders.

In my remarks today, I will focus on the following -- the growth of our high-quality balance sheet; key drivers of our strong earnings and returns; our capital adequacy and strong liquidity; and our positive outlook for the remainder of 2011.

Let me begin with our balance sheet as shown on Slide 8.

Starting with assets, loans increased by $4 billion or 3% linked-quarter as we saw increases of core commercial and consumer lending activities.

In commercial lending, we saw gains in virtually every industry sector and market.

Consumer loans increased primarily due to higher indirect auto and education lending.

We believe commercial real estate may have reached an inflection point, as run-off is slowing and commercial mortgage originations grew linked-quarter.

Our distressed loan portfolio continues to decline but at a slower pace than in the past.

Looking at our loan book, we see stronger origination trends and a solid pipeline of business.

Given our improved credit metrics, we believe this will lead to further loan growth.

Turning to liabilities, transaction deposits were up by approximately $6 billion, or 4% linked-quarter.

We saw strong deposit inflow to non-interest-bearing demand deposits this quarter as customers are looking for quality during these times.

Higher-cost retail CDs were lower by $2 billion as we continue to lower our cost of funds.

Shareholders equity increased by $2 billion in the quarter due to retained earnings and our preferred stock offering.

As you can see on Slide 9, we had another strong quarter in terms of our assets quality as our overall credit metrics continued to improve.

Third-quarter net charge-offs of $365 million were down $49 million or 12% on a linked-quarter basis, primarily driven by declines in commercial real estate and residential real estate loans.

Given the overall improvement in our credit metrics, our provision for the quarter decreased to $261 million from $280 million last quarter.

Now, let's turn to net interest income on Slide 10.

This table shows the linked-quarter and year-to-date comparisons of core net interest income, purchase accounting accretion, and total net interest income.

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

Net interest income of $2.2 billion increased by $25 million linked-quarter.

Net interest margin of 3.89% was in line with second-quarter results.

[Core] net interest income increased $23 million compared to linked-quarter results due to loan growth and reduced funding costs while purchase accounting accretion remained stable due to better-than-expected cash recoveries on commercial impaired loans.

Provision-adjusted net interest income was also up linked-quarter by $44 million and up 11% on a year-to-date basis compared with last year.

The year-to-date improvement was due to significantly lower provisioning, which more than offset for the expected decline in purchase accounting accretion.

Looking ahead, we have about $6 in billion CDs scheduled to mature in the fourth quarter of 2011.

This book has a weighted average rate of about 2%.

Given the non-relationship nature of many of these accounts, we only expect to retain about half of the maturing CDs, and we expect those to re-price on average to approximately 30 basis points.

As a result, we expect fourth-quarter net interest income to remain stable as core net interest income should continue to grow to offset the expected decline in purchase accounting accretion.

We also expect the provision to remain stable with the current-quarter performance.

Of course, this assumes a stable economy.

Now, as you can see on Slide 11, we reported $1.4 billion of non-interest income, which decreased $83 million linked-quarter, while our client fee income of $1.1 billion was essentially flat.

Asset Management fees remained stable despite lower equity values.

Consumer service fees were consistent with the previous quarter as higher credit card fees were offset by lower brokerage activity.

Corporate service fees decreased $41 million linked-quarter due to reductions in the value of commercial mortgage servicing rights.

Last quarter, the CMSR valuation decrease totaled $69 million.

In the third quarter, the valuation decrease totaled $105 million, reflecting the low interest rate environment.

This more than offset the gains from Harris Williams, which had a number of transactions close in the quarter.

Residential mortgage fees increase 21% due to an increase in loan sales and hedging gains on mortgage servicing rights.

Deposit service charges were higher by 7% due to seasonally higher customer activity.

Other fees decreased $72 million, primarily due to lower asset values, including hedges on deferred compensation obligations.

Year-to-date non-interest income, adjusted for regulatory changes, increased 4% over the prior year.

Overall, we see this as a strong performance in the current regulatory environment.

As we look to the fourth quarter, we do expect an additional $75 million, or $0.09 per share, reduction in consumer service fees related to debit card regulatory changes.

Despite these headwinds, we believe non-interest income in the fourth quarter should be flat to up compared to the third quarter.

The diversity of our revenue streams enabled us to achieve a solid performance in an environment that will continue to be affected by regulatory reform headwinds and implementation challenges.

At the same time, we see opportunities for growth in our fee-based revenues as the result of our larger franchise, our ability to cross-sell our products and services to existing clients, and our excellent progress in adding new clients.

Turning to Slide 12, our culture of continuous improvement is reflected in our well-managed costs which are down $36 million or 2% linked-quarter as most categories were lower.

Marketing expenses increased in the quarter due to advertising costs associated with new product and new market launches.

Our year-to-date non-interest expenses increased 2% due to legal contingencies and higher foreclosure-related costs of approximately $46 million.

In the fourth quarter, we do expect a non-cash charge of approximately $198 million, or $0.24 per share, associated with calling $750 million of our trust preferred securities, which we announced last week.

While this represents a non-cash cost for accelerating the discount on this debt, it provides us with an opportunity to reduce our funding costs going forward by at least $30 million annually.

Considering this is very long paper, we see substantial future benefits.

Excluding the impact of the non-cash charge and any legal and regulatory contingencies, we expect fourth-quarter expenses to be relatively consistent with third-quarter expenses.

As shown on Slide 13, our tier 1 common ratio at the end of the third quarter is estimated to be 10.5%.

This was unchanged linked-quarter as our strong asset growth offset the benefit from retained earnings.

Since September 30, 2010, our tier 1 common ratio has increased by 90 basis points.

Our tier 1 common ratio is estimated to be 13.1% at the end of the third quarter, an increase of 30 basis points linked-quarter primarily due to the issuance of $1 billion in preferred stock during the quarter.

Now, with regard to BASEL III, using reasonable assumptions, we believe we will be in a pro forma range of 8% to 8.5% for our tier 1 common equity ratio by the end of 2012, which will put us above the 2019 requirements.

This includes conservative assumptions as to the incremental capital requirements for sub investment grade securities.

The pro forma range also assumes no common stock issuance in connection with the pending RBC Bank acquisition.

We expect to hear from our regulator sometime this quarter regarding the capital plan was submitted related to our RBC Bank acquisition application.

This was another strong quarter for PNC, and we are expecting the fourth quarter to be in the same -- to deliver similar results subject to the trust preferred security call.

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

Thank you Rick.

Rick spoke quite a bit about our expectations for the fourth quarter, so I'll turn my comments to the outlook for 2012.

We believe that we're well positioned to deliver quality growth, assuming modest economic expansion.

Slide 14 provides a summary of our current expectations.

Let me begin with PNC, excluding the impact of the RBC Bank acquisition.

We expect NII will be stable in 2012, assuming low rates and no loan growth.

However, we're currently seeing loan growth.

If that were to continue, we would see upside benefits to this forecast.

We believe our provision will continue to decline in 2012 versus 2011.

With our customer growth trends, non-interest income should increase in 2012 despite further regulatory impacts on debit card fees.

Finally, full-year expenses are currently expected to remain relatively flat in 2012 versus 2011.

Of course, this is apart from any legal and regulatory-related contingencies, as well as the integration in operating cost related to RBC and Flagstar.

Regarding RBC Bank, we expect the acquisition to be accretive in 2012, assuming we do not issue common equity related to the transaction.

All in all, we have positive expectations for earnings in 2012.

In summary, this was another strong quarter for PNC.

Given the guidance we just shared, we believe PNC will report strong results for all of 2011 and 2012.

A stronger economy or higher interest rates could make those results even better.

Since the current economic downturn began in mid 2007, it's clear that PNC's management team has navigated this environment and delivered real value to the shareholders.

As you can see on Slide 14, our tangible book value per share has more than doubled during the period and our pretax pre-provision earnings per share have increased more than 60%.

When we compare both of these metrics to our peers, you can see that we dramatically outperformed them during this period.

While economic and regulatory uncertainty remain, at PNC, we remain focused on managing our business by, one, growing our customers; two, managing expenses; three, managing risk; and four, managing our capital effectively.

We believe our third-quarter results reflect our ability to produce excellent earnings in this kind of challenging environment.

We're looking forward to a good fourth quarter of 2012.

With that, we'd be pleased to take your questions.

Operator, if you could give participants the instructions please?

(Operator Instructions).

Betsy Graseck, Morgan Stanley.

Good morning.

A couple of questions, one on the NII outlook.

Rick, you mentioned about the CD rollover that you're expecting, that you expect to retain about half of the $6 billion that's coming due and repricing from 2% to 30 BPS.

Is that because you're anticipating that's going to roll over into a different type of liability category, or are you offering new CDs at 30 BPS?

No, we're actually offering -- right now our CDs are at 30 basis points.

We figure that about 50% of those are customers who will want to stay with that product with us, and we're figuring the other 50% would be non-customers who would just roll off.

We'll see whether they go into other deposit products or would reduce asset balances if we don't have that liquidity.

That's a one-year duration?

One-year duration?

Yes.

That's correct.

(inaudible) that's right.

And then on the yields side, there was another earning asset yield, which went up during the quarter.

Could you go through what that was all about?

Yes, we lowered our average balances on deposit with the Fed during the course of the quarter.

So as you would imagine, if you have less on the deposit with the Fed, then the rest of the balances go up.

Then how are you thinking about the trajectory for the securities yield?

That's where it's going to -- clearly we cannot replace the current deal we have on the securities book, so that will continue to come down as time passes.

But that's where we have the advantages on the liability side where we have substantial repricing in both near-term and long-term, a Jim said, of 2012, we're very comfortable that the liabilities side is going to keep pace and maybe even outpace the asset [lift].

What's the duration of securities portfolio right now?

Probably 3.5 years.

Would you think about extending that at all, or switching around the asset classes or --?

Not right now.

I think we'll be very careful about what might happen when rates rise and the capital impact that might occur there.

Okay.

Then Jim, just one for you on the comments around RBC Bank.

Obviously, the deal would be accretive if there is no capital issuance.

When do you think you get that clarification or certainty?

Sometime in the fourth quarter.

We have submitted -- we have submitted the stress results on the application.

The application went in a few weeks ago.

The forecast went in about two weeks ago.

We would expect to hear back probably late November or early December.

That would be our expectation.

So you don't have to wait for the CCAR to have that answer?

No, this is separate from the CCAR.

Okay, so we should potentially hear by the end of the quarter?

Yes.

Thanks.

Erika Penala, Bank of America Merrill Lynch.

So my first question is a follow-up to Betsy's.

It seems as if, because of the RBC transaction, unlike other large banks, you are potentially having to formalize conversations with the regulators with regards to capital adequacy or capital floors.

I guess do you suspect that the regulators are -- have their act together enough that the marker that you're going to get in November is going to be the same marker that you're going to get on the CCAR next year?

I think the regulators have their act together, yes, but I can't speak on behalf of them.

But they're very consistent about wanting us to meet capital requirements.

I think that's why we're optimistic that we won't have to issue any common, because they're really focused on the longer-term capital adequacy of the Company and the risk profile that we have, and I think they do have their act together.

So that's why we think we'll hear on the RBC transaction before the end of the quarter, and then we'll take a look at our income projections for next year and talk to them about or make a submission about dividends.

Okay.

On the margin, could you give us a sense of how commercial loan yields trended this quarter versus last?

Given what you're seeing with regards to origination spreads today, how you expect that trend over the next few quarters?

The commercial loan yields held up very well in the quarter, maybe a 2 or 3 basis points decline, not much.

Most of that is very short-dated sort of reprices, and most of the book has been repricing to the lower-rate environment.

In fact, you might even see a lift in that, given that some of the short-dated rates have actually increased as we go (technical difficulty).

Hello?

Just one last question.

I know you haven't close the transaction yet, but if we're thinking about how much RBC could potentially contribute in terms of purchase accounting accretion, I guess is a good starting point for us to add back the interest rate or liquidity mark that you told us you took when you announced the deal?

We haven't given any guidance really with regards to the accretion level of the Company.

We believe that we'll be able to take the marks, the credit marks that are required at closing.

There's really no liquidity risk in the Company.

Balance sheet will be marked to market.

We'll be able to take up to what we expect $150 million worth of expenses from that next year.

As you know, the whole conversion takes place the first weekend that we close, so a lot of those cost saves we front-end loaded, and so we think it will be nicely accretive, assuming we don't have to issue any common.

I don't think we've given any guidance yet as to what level that might be.

Okay, thanks for taking my call.

John McDonald, Sanford Bernstein.

Good morning.

Rick, any color on reasonable assumptions you're using for BlackRock and the sub-investment grade debt in your pro forma BASEL III?

Then somewhat related for Jim, how long do you expect the buybacks to be on hold?

You have to close the deal first.

You have to wait for -- to see how the Fed decides how you fund it.

Then on M&A, are you on hold for now or would you still be open to other RBC-type deals?

Thanks.

In our assumptions, we put in about a 1.4% mark related to the capital ratio for sub-investment grade securities.

In our discussions so far with the regulators, it is clear that they recognize that the dollar-for-dollar capital on those securities is more than is necessary for senior tranches.

I think where they're still working through is trying to figure out how to come up with a way to do the calculation which reflects the inherent risk in the securities.

We'll just have to wait and be patient for that answer.

So I expect that 1.4% impact that we showed to come down hopefully pretty dramatically once we understand the true risk content and we have a model that works for both us and the regulators.

As far as BlackRock goes, we only had to add I think it's like 20 basis points, 30 basis points more deduction from our capital ratio, but that gives us about a $1.5 billion economic capital, $1.5 billion regulatory capital.

We make over $300 million a year from BlackRock, so that's a 20% return on any capital calculation I do, and that looks like a pretty good return.

Okay.

With regards to capital, I think it's a step-wise function.

We've got our application in for the RBC transaction.

I think, as I said, I think we'll hear about that in the quarter.

Then we'll take a look and make an application for what we think might be appropriate capital policies for the following year in the CCAR.

Hopefully, I think we'll be able to increase the dividend as the payout ratio is still relatively low, and then that would be the number one priority.

To the extent that share buyback might be available, that would be the number two priority.

With regards to M&A, we really don't see any meaningful transactions on the horizon.

I think we might be interested in doing something like the BankAtlantic or Flagstar branch acquisitions if something fit and was priced appropriately.

But I think our work today is -- the opportunity for us is just continuing to make our franchise work and the pricing on the RBC transaction I think works for us in terms of risk-reward and making the RBC transaction work.

So that's our focus right now.

One follow-up on RBC.

How much investment do you need to make into this franchise in order to get the revenues and the ROA of that franchise up to par?

Does your accretive immediately for '12 include investments you'll be making next year, and then does that investment pick up in '13 that you need to put into this franchise that you bought?

The interesting part about the RBC transaction is that, from an infrastructure point of view, we have to make almost no investment.

The technology that we have available to us is certainly scalable, and we're converting their entire franchise to our platform that weekend, so that will be the good news.

On the other hand, they really don't have the staffing to sell a lot of the products that we have, and so the investment will be mostly people in.

I think where we'll be -- [if] the accretive number does, it does have us investing in those people right away.

As a matter of fact, we're hiring some people as we speak.

Then thirdly, we'll be building branches I think.

We spoke -- there was a question asked of us what about Atlanta?

RBC thought they might need 100 branches in Atlanta, for example.

With -- if they're in the right places.

With RBC we get 55 plus 27 and Flagstar gives us 82.

We'll close five or six and build 20 and we'll be done.

And so we'll be adding branches at various markets, but we'll be taking other branches out of the system as well at the same time.

So I think the investment is not a huge investment in order to really take full advantage of it.

Okay, thank you.

David George, Baird.

Good morning.

Thanks for taking the question.

A question on your 2012 commentary, namely the provision.

You guys have recaptured -- I don't know the exact math -- between $300 million and $400 million of reserves so far this year.

So is your lower credit cost guidance a function of the provision going down relative to 2011, or credit losses coming down?

Just trying to gauge the sustainability of reserve releases for you guys going forward.

Thanks.

I would say, from the beginning of 2011 until the end of 2011, both credit costs and the provision have been coming down.

So just on that basis alone, you would expect, even if we maintain the level of credit costs and provisioning through all of 2012, we'll be down.

In an under moderate -- or modest recovery here, we expect that would be the case.

Appreciate it.

Thank you.

The assumption is about further decreasing.

Todd Hagerman, Sterne Agee.

Good morning everybody.

A couple of questions.

Jim, if you could maybe just give us an update.

I don't think you mentioned it in your prepared remarks in terms of your continuous improvement program and some of the cost savings you're thinking out next year.

You guided towards kind of towards flattish expenses.

Just wondering if you could give us an update in terms of how you're thinking about things today, as we continue to hear the word "uncertainty" thrown around by a number of competitors.

How do you think about that continuous improvement going into next year?

Any thoughts surrounding that?

We have a lot of thoughts about continuous improvement.

This is the beginning of the budget cycle, so we're working on it hard.

As you know, and we made the announcement at Barclays, that we had over 1000 suggestions and we're implementing about 750 of them to take out $400 million worth of expense.

I think that's a number that we're working hard at, and I'm pretty confident we're going to get it.

So the statement that we were saying is that our expenses will be relatively flat next year.

That's where we're driving right now in the budget process.

The ideas that came from the employees are certainly going to help us get there.

So again, just to be clear, the $400 million is factored into the outlook for the full year 2012?

That's correct.

Okay.

Then Rick, just, again, following up on the funding side, you mentioned the [trust] redemption.

I think, again, at a previous conference, you talked about potential funding cost reductions upwards of $450 million to $500 million for 2012.

Could you just elaborate on those figures in terms of reminding us where that's coming from?

Sure, I'd be happy to.

A couple of things -- one is I mentioned the fourth quarter this year, we're going to have about $6 billion of CDs that will reprice from about 2% down to 30 basis points and we'll retain about 50% of those.

We also have approximately $11 billion that are going to reprice in the first half of next year, and they're coming down from an average rate of 2.6%.

We don't have high expectations of how much of that is going to reprice.

These are sort of the three-year CDs that City put off for liquidity.

We're not sure.

We'll maybe run a lot of those balances down.

So there's a lot of funding benefit coming out of that.

All that CD repricing is about $250 million to $300 million between 2011 and 2012, but annual running rate of that is about $400 million to $450 million going forward, so you can see a big wave of benefit going beyond 2012.

The others -- I mentioned the trust preferred securities.

We've got about $2.2 billion of those maturing between now and the end of 2012.

We think that will have a year-over-year impact of about $60 million and an annualized impact of over $100 million.

We have about $5 billion of debt maturing between now and the end of next year, again for about a $75 million to $100 million impact this year and next.

Then you have the overall repricing of the deposit base, lowering rates given this extremely low rate environment.

That's going to run into about $50 million to $70 million on a going-forward base.

So all of those together are going to benefit our funding costs year-over-year by about $450 million to $500 million and on an annualized basis about $700 million, so you see the benefit we'll get in 2012 and even further benefit in 2013.

That's very helpful.

Thank you very much.

It is very helpful.

It's really helpful.

Matt O'Connor, Deutsche Bank.

Hey guys.

Two unrelated questions -- first, on the RBC deal, can you remind us what the repricing flexibility is there?

Obviously, macro conditions have deteriorated a bit, maybe not so much on the credit side, but the rate outlook and obviously stocks are down.

But just remind us of the flexibility that you have and when the final price will be determined.

The price is $112 million below book value --

Tangible book.

Tangible book.

So whatever happens to their [bid out] between now and then, we don't have to pay for it.

Okay, so that's that.

Okay.

Then separately, I think we're seeing this at a number of banks where there's been just such a sharp improvement in credit quality the last several quarters.

We are starting to kind of bump up around the bottom.

I just wanted to ask specifically on the home-equity past dues which picked up a little bit off somewhat low levels, but any color that you could provide there and thoughts on kind of how this home equity in general plays out, because the minimum payment each month is pretty low.

Eventually the stuff starts to amortize.

Eventually you've got to pay it back.

You've got a lot of reserves and have written down some of the riskier stuff, but just thoughts on how this plays out over time will be helpful.

That's a great point because I believe that is the area, the credit sets that we all are watching very carefully is the home equity as well as the residential mortgage.

We've been seeing substantial improvements in delinquencies and non-performings in that space, but clearly more recently they've flattened out a bit and in some cases have backed up a little bit.

That's why we've been pretty cautious about releasing reserves against the consumer portfolio.

So, we're watching that very carefully and want to make sure that we're not overly aggressive in releasing reserves until we see a sustained improvement in those metrics.

Thank you.

Remind us when some of amortization kicks in, right, because the vast majority of it is I think interest-only for five, seven, ten years, something like that?

They're amortizing now.

Most of those grace periods are over.

We can get back to you with a little bit more specifics, but most of the grace periods are done.

Thank you.

Ed Najarian, ISI Group.

Good morning guys.

So most of my questions have been answered, but two specific ones.

You went through a lot of the CD repricing, which obviously will be very helpful to lowering funding costs.

I was wondering if you could give some outlook on how quickly over the next several quarters you would expect the accretable yield contribution from the deposit side, which I think was about $90 million this quarter, how quickly you would expect that to come down.

It will come down pretty dramatically because we're going to have most of those CDs repriced by the middle of 2012.

Therefore, you're going to stop seeing the accretable benefits.

What you have to keep in mind that when we did the marks on those, the ones that are maturing in the first half of next year with a coupon of about 2.6%, we'd actually marked to roughly 2%.

So the purchase accounting is the benefit of going from 2.60% to 2%, and then we're picking up the benefit of going from 2% all the way down to 30 or less.

So even though that's running off, you're going to get a substantial benefit in the core net interest income.

That's helpful.

Then -- and so we should expect that to be pretty much gone by, say, the end of the second quarter of next year?

There's more, but I would say it's going to have a big run-off by then and it's going to be pretty well done by the end of '12.

(multiple speakers) de minimis amounts that will go into '13.

Then you talked about getting to 8% to 8.5% on BASEL III.

You talked about, by the end of 2012, you talked about not -- that includes not issuing any common for RBC.

I'm assuming that, in your plan -- you sort of alluded to this before -- that you'd be potentially looking for a dividend increase next year in terms of your quest in the CCAR.

Any thoughts on what you might be looking for in terms of a stock buyback request or how you're thinking about that from sort of a ratio of earnings perspective above and beyond dividends next year?

I think, like I said before, it's a step-wise function.

We've got to get the RBC transaction approved and understand the capital requirements, if any, around that, but we have to issue -- we have to run the CCAR.

We don't even have the input from the regulators yet on the CCAR.

That will change and evolve, and so we have to see what the projections for earnings on that are.

We're comfortable, as you know as well as anybody, that we're comfortable with a payout ratio much higher than we have today.

The Board has been comfortable in the 40% to 50% range with dividend payout if we don't see any need for the capital, and then we have to take a look and see how BASEL looks.

Those things are changing as we speak.

Rick mentioned a couple of items that I think we're taking a particularly conservative view on.

When we say 8% to 8.5%, if those go the other way, it kind of changes the opportunity.

So we just have to walk through this, so there's no reason to be out in front of this right now.

I think we've managed the capital very well and we're going to continue to do that going forward.

To the extent we have way too much, then we'll return it to the shareholder if we can't, if we can't put it to good use.

And you know that in the period of 2004, '05, and '06 when loan growth, we didn't want to put it -- the risk return on subprime and stuff like that, we didn't see it was right, we didn't grow the balance sheet and we bought back a fair amount of stock.

So that's all part of the appropriate capital management for the time.

That's very helpful.

Then one last question -- I'm not trying to put words in your mouth, but as we go through your 2012 guidance, I think that would -- if I'm understanding it correctly -- would clearly lead us to an EPS estimate for next year that's higher in 2012 and in 2011.

Is that your intention?

I think we gave you what we could give you in terms of we're going through the budget right now, so we don't have any numbers.

We just told you what we thought the trends would be for the four most important parts of the P&L.

Okay, thanks guys.

Ken Usdin, Jefferies.

There were a bunch of items this quarter on the B side that were largely related to marked-to-market type of stuff, whether it was the commercial services or the other income.

I'm just wondering what the outlook is for what needs to happen for some of those to become recoverable or are they just at a new run rate for now?

I think, on the commercial mortgage servicing rights, to not have the negative impact we had this quarter, you just don't -- you need rates not to go any lower, and obviously we wouldn't have the charge.

To the extent rates do back up, and they have already this quarter a bit, we could see some recoveries.

And we have about $150 million to $200 million of impairment over the last two years in this book.

I'm not suggesting that rates are going to go up enough to recover all of that, but I think we do have some potential here for rates to improve and for us to be able to get some of that back.

The other item that was in there, as you probably know, we have some deferred comp plans where we have the obligation on our books and we hedge our exposure in those comp plans.

So depending on how up and down the rates go in the market or interest rates move, you end up taking a marked-to-market on the non-interest income side on the hedges, but you also take a marked-to-market on the expense side.

That number this quarter is about $25 million in terms of a loss in the fee income category, but also was a reduction in expenses by a similar amount.

If market rates should change next quarter, then that will reverse itself.

Great.

Then a follow-up just on foreclosure and other real estate expense.

It looked like that was up this quarter.

Can you just talk a little bit about was that due to moving more inventory along?

A more broader question -- just are we kind of at the peak for -- I know it lags the improvement in credit quality -- but are we at the kind of peak yet as far as OREO costs and environmental/credit related costs?

Most of these foreclosure costs were related to penalties that we will incur from the GSEs for delays in getting our foreclosure process complete.

Our expectation prior was that the moratoriums put on by the state would be honored by the GSEs, and we're coming to find out they won't be.

So therefore, those moratoriums are causing us to fall behind, and so we set up a [light] state reserve on those costs.

I expect we'll have to modify that each quarter but I don't -- I think this is a very high charge this quarter that we shouldn't expect to see this level of charge repeat itself in the future.

Last quick one, can you just give us the magnitude of the sub investment grade run-off, and if your assumptions have changed and what they are going forward as far as kind of the either monthly or quarterly roll-off that you're expecting looking ahead?

The run-off was about -- the pay down was about $230 million.

The only offset to that was the fact that we had further sub-investment grade securities downgraded.

So net-net, the actual book value changed by about $50 million to $100 million, not as much as we would've expected, but we still are holding to our assumptions around -- as to the impact on our capital the next 15 months.

Got it.

Great.

Thanks guys.

Brian Foran, PNC.

I guess I work for you now.

It seems like expanding some of the consumer businesses is a long-term opportunity, but the card balances were roughly flat this quarter and the mortgage origination volumes were roughly flat this quarter.

Can you just talk through, both in the short-term, what drove those things in the quarter and then the long-term, just remind us overall appetite for how big you want those businesses to be?

We would expect -- we started a marketing campaign in the summer on the credit cards.

The acceptance ratio has been very good.

We started it as part of our -- as part of our relationship banking on the consumer side, and we've had run-off, as everyone has, in existing balances but the growth of new cards has been quite good, so we're pleased about that.

With regards to mortgage originations, going into the fourth quarter, mortgage apps were up 28%.

So going into the quarter both for credit cards and for mortgages, I think we're very optimistic about how the fourth quarter will turn out.

Then just a follow-up question on the guidance.

Just as we think I'm sure some people will model to an operating number where some people model to a GAAP number, can you just remind us, when we think about merger integration expenses next year as well as any potential additional non-cash charges from trust preferred, is there a ballpark you're thinking of penciling in, in terms of these non-operating numbers that we should arrange [of] nonoperating numbers we could expect next year from those two items?

The total integration charges that we assumed with National City in the original assumptions previously announced was about $300 million.

Not all of that will occur next year, but probably a good majority of it will.

As far as other factors, trust preferreds, when we call those, we have a number that are maturing next year.

We'll have to look at rates at that time and make a decision as to whether or not it's a good decision to call or not and to the extent there may be a charge with those as well.

I can't venture a guess on what other litigation or regulatory type charges might present themselves.

If we do it, we would reserve for them already.

Okay, thank you.

Gerard Cassidy, RBC.

Thank you.

Good morning guys.

Jim, when you look out after the RBC deal is closed, and maybe it's about this time next year, and maybe considering other acquisitions, would you guys consider another transformational type of deal like you did with Nat City, or is it more the regional banks that you can bolt-on to the existing franchise that you have interest in?

I think the National City transaction was a unique opportunity.

At $2 a share, buying the bank that had the highest at least book-capital ratio in the industry was a unique opportunity.

In order for that to happen again, we would have to have another financial crisis and we'd have to have the courage to do it.

I'm not sure those -- I'm not sure we want any of those things to happen again.

So as we look forward to a slow-growing economy which I think is where we're at, I would think that we would just be doing small branch acquisitions to fill out the RBC and the PNC franchise if it's priced right.

One of the things we saw is -- this is a longer answer than you probably wanted, but the trends -- we're growing customers at a tremendous pace because branch utilizations are down and the utilization of our technology is way up.

And so in many cases, I'm not sure we have to buy all of these customers or the branches.

So we look, for example, and Chicago I think is a good example, we wanted to grow in Chicago.

We're fourth or fifth in Chicago.

We looked at a small bank in Chicago and they wanted two times book, and we said "That was swell." And we built 30 branches.

I think we can maybe build another 20 branches in Chicago and we'll be done; we'll have all we want.

So then we sell our electronic products.

So I think the acquisition piece is probably a pretty slow process going forward.

I don't see it, but to answer your question, I don't see any transformational deals on the horizon.

Okay.

Moving on to -- I may have missed it in your prepared remarks, but have you guys come out with your strategy to help offset the revenue loss from the Durbin amendment on the debt card issue?

We look at that a little differently than just trying to -- obviously that costs us a lot of money.

The real issue I think is the fact that interest rates are so low, we've got $180 billion worth of deposits that basically we don't really make any money on in this interest rate environment.

So I know a lot of people want to look at Durbin, but we look at it from the point of view of how do we reprice the consumer relationship in order to get the appropriate return on the business?

That's why we still have a free checking product, we've got three relationship products, and now we have 70% of our customers buying relationship products, and so as someone might say, well, it's because of Durbin.

But Durbin is only a part of the revenue expense relationship with the consumer.

So, I think the consumer pricing model will just evolve over the next few years.

Consumers will either purchase the products they want to purchase for different kinds of fees or balance requirements, or not, or they'll change their behavior.

I think you're seeing behavioral change being -- growing a lot with online banking for us growing at 20%, mobile banking going at 40%, branch utilization which will be down 7.5% this year, down 6% on average for the last five years.

So the consumer is changing.

I think it's just repricing the new relationship with consumers given the interest rate environment.

Speaking on this consumer behavior, have you guys been able to look at the recapture of the Regulation E fees that the industry lost and you guys lost obviously as you had to change your methodologies?

Have you been able to figure out if you've recaptured all of that revenue?

I think it's the same point that Jim made on previous, is you've got to look at the whole relationship.

What we've been able to do through changing the checking relationship and other factors is to drive a lot of volume of new customer accounts into the Company.

If we can drive the volume in and increase transaction activity through that, then we can overcome some of the fee factors.

The other we can do is to take a very hard look, given the change in consumer behavior, on consolidation of branches as well as the cost to serve the branches and putting the right staffing models in place.

These are things that we're working on today.

But you're not going to get all of that money back in one year.

It's going to take a couple of years to be able to recoup it.

Sure.

Then final question, talking about branches, obviously aside from the new expansion into new territories as you pointed out with Chicago, with the success of the online banking and mobile banking, do you see, over an extended period of time, that the branch -- your branch network should shrink if you're delivering more of your customers through these electronic channels?

Absolutely.

One of the things that we found in our studies is that 77% of all of our customers and prospects want to have a multi-channel capability.

So fewer than 20% will even consider a relationship with somebody who has -- who does not have a multi-channel capability.

So people want to have branches, but branch utilization is going down significantly, and obviously the utilization of online and remote capabilities are growing.

So, I think it's a trend we're going to follow, and I think we're cross-selling those products very, very successfully.

I think the Virtual Wallet product, which we mentioned was named the number one player by far, as a matter of fact if we look at the study, is a great success.

Those are the kinds of things that are going to drive a lot of growth into the future.

This year, we'll open 50 branches; we'll close a little over 80.

Next year, we might open as many.

We're doing budget right now, but we'll probably close at least as many as we open.

So that rationalization of the branch system I think is something that we've been doing for a period of time but that will just continue.

Thank you.

Chris Gamaitoni, Compass Point.

Good morning.

Thanks for taking my call.

Just some clarity on that $3.3 billion of securities that were shifted to held in maturity.

What exactly was that?

They're primarily agency mortgage-backed securities and some high-quality commercial mortgage-backed securities that we moved to held for sale because we have an intent to hold to maturity, so very high-quality securities and move them into hold to maturity.

Then are you having any valuation or capital impact from recent volatility in prime MBS markets given the development of Primex?

No.

How you'd value the non-investment grade securities?

Hello?

Next question please?

What just happened?

Paul Miller, FBR Market.

Thank you very much.

Just to follow-up on two questions again about the branch utilization rates, do you find a difference in branch utilization from the bigger cities like Chicago or DC versus the smaller rural towns which you guys like -- it's one of your sweet spots?

The answer is yes.

It's different everywhere in each market.

In Washington DC, we have Starbucks in several of our branches.

In some parts of small towns in Pennsylvania, our coffee expenses -- our own expense and people come and meet there.

So it depends on the market you're in, and we manage the branch based on utilization and the customer base that we have in those markets.

So it does vary a lot.

Some branches are totally tied to small business; some branches are totally tied to high net worth.

So you really have to look at each market.

We actually design the branches.

We only build green branches; we have more green buildings than any other company in the world.

But we design those branches based upon the customer mix that comes in.

Then one follow -- just one last question.

On your accretable yield versus non-accretable yield, over the last year, it looks like you've switched about $800 million from non-accretable to accretable.

I believe the last time I asked this question a couple quarters ago, you said mainly it was due to the HELOCs performing much better in-footprint from that city versus out-of-footprint.

Is that still going on today, or are there some other -- is there some other things going on in there with that changeover?

If you look at from the second quarter to the third quarter, you saw about a $200 million shift.

Half of that is due to the commercial book.

In the cash recoveries and the improvements, we're seeing that.

The other half is where the consumer book is extending the life of the loans out.

As a result, we're going to be receiving more interest for a longer period of time than our original assumption.

So it's a little mix of both.

Are you modifying those loans?

Is that why they're extending out?

Some are modified, yes, but that's not the primary reason for the extension.

It's just that our assumption around the cash flows may have been more conservative than it will be in the future or where it is now.

I was, sorry, more conservative previous than it is now.

Thank you very much gentlemen.

Operator, are there any other questions?

I have no further questions.

Thank you very much, everyone, for joining us.

As I said in the beginning, I think this is really a solid quarter for us, a relatively clean quarter, to use your term, and we're very, very pleased with it in this economic environment.

We're looking forward to a good fourth quarter and 2012.

Thank you for joining us.

Thank you.

That does conclude the conference today.

You may disconnect your phone lines at this time.