PNC Financial Services Group Inc (PNC) 2011 Q4 法說會逐字稿

Good morning.

My name is Carlos 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 will now turn the call over to the Director of Investor Relations, Mr.

Bill Callihan.

Sir, please go ahead.

Thank you and good morning, everyone.

Welcome to today's conference call 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 reconcilements and other information on non-GAAP financial measures we may discuss, is included in today's conference call, earnings release, related presentation materials and in our 10-K, 10-Q and various other SEC filings and investor materials.

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

These statements speak only as January 18, 2012 and PNC undertakes no obligation to update them.

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

Thank you, Bill, and good morning, everyone.

Thank you for joining us.

Today's presentation, I will focus on PNC's full-year achievements and financial highlights, which included strong growth in clients, loans and deposits.

Looking ahead, we believe we are well-positioned to deliver strong results again in 2012.

Rick will take you through a more in-depth review of the fourth-quarter results and our outlook for the full year.

Looking back 12 months when 2011 began, it was predicted that banks would be facing an operating environment dominated by low interest rates, slow economic growth and new and challenging regulations.

Well, as it turned out, 2011 was, in fact, all that it was advertised to be and then some.

In spite of that, overall, PNC had a good year of solid accomplishments, focusing on what we do best -- serving customers, cross-selling products and services and managing risk and expenses.

Let me share some highlights.

For the year, we earned $3.1 billion in net income or $5.64 per diluted common share.

With a recognized brand, innovative product offerings and strong cross-selling ability, we saw remarkable growth in the number of customers we served and in fact, our retail checking relationships and corporate business clients are at record levels.

All of our markets, all of our markets were ahead of their sales goals in 2011 and due to our success in adding new clients, we saw a strong full-year loan growth of $8.4 billion or 6%.

Fourth-quarter loan growth was $4.5 billion or 12% on an annualized basis.

An important item, full-year net interest income, was driven by stable core net interest income due to higher spot loan balances and the impact of actions that we took to reduce our funding costs.

These were good results in the current low interest rate environment.

Our fee income in 2011 was solid despite a series of regulatory changes.

We see good opportunities for fee income growth this year as we continue to expand our franchise.

Overall, our credit metrics showed significant improvement on a year-over-year basis.

Our balance sheet remained highly liquid and core funded with an 85% loan-to-deposit ratio.

Our Tier 1 common capital ratio remained strong and is estimated to be 10.3% as of December 31 and we believe that we are well-positioned for the Basel III capital requirements.

And by leveraging our strong capital position, we were able to announce plans for a number of strategic acquisitions last year, which will expand our presence in very attractive markets in the Southeast.

We received regulatory approvals to acquire RBC Bank USA.

We expect to close in March subject to the remaining customary closing conditions.

And when we do, we expect that acquisition to be accretive to our 2012 earnings, excluding integration costs.

And last, but not least, part of our regular assessment of contingencies and commitments includes residential mortgage foreclosure-related matters, including ongoing governmental ones.

As a result of some recent discussions, we increased our accrual for these matters in the fourth quarter to $240 million or $324 million for the year.

Now despite these unusual items taken in the fourth quarter, we believe that 2011 was yet another good year for PNC.

Now turning to our business segments, a key test is the ability to acquire and retain customers.

For PNC, 2011 was an excellent year for customer growth, our best ever actually.

Let me begin with Retail Banking.

We recognize there are significant changes in the consumer behavior taking place today.

Check writing continues to decline, branch utilization is lower and electronic transactions are increasing.

But we took a number of steps last year to position us to have additional growth in 2012.

Our Asset Management Group had a solid full-year earnings in 2011 despite volatile markets.

Looking ahead for the Retail Bank, we will be focused on three issues -- one, reducing the cost to serve our Retail Banking customers; second, branch optimization; and third, growing our high-value client base.

Moving to the Corporate and Institutional Bank, they had a very good year last year with increased earnings compared to 2010.

We saw average loans increase for the full year, led by growth in commercial and asset-based lending.

In the fourth quarter, we saw lending increase in every loan category and across nearly all of our markets.

We added primary clients in our corporate bank at a record pace.

For the full year, new primary client growth was 1165, an increase of 15% over 2010, which was a record year itself.

In terms of customer growth, these were primarily commercial and middle-market customers.

I should add that this marks the second consecutive year that we have added more than 1000 new primary clients.

Turning to Asset Management, they reported a solid full-year earnings in 2011 despite volatile markets.

New primary client acquisition grew by 26% for the year, reflecting strong referral activity from retail and corporate and institutional banking.

For the year, nearly one-third of sales came from these referral channels.

The customer growth helped to drive dramatic change in asset inflows.

We made significant investments in this business in 2011 in terms of people and technology as we seek to expand our abilities to serve our growing retirement and investment market.

We added 290 employees, primarily on the front lines.

Most of these deployed in our higher potential markets such as Chicago, Florida, Milwaukee and DC.

We have plans to hire additional staff in 2012.

In terms of technology, we launched PNC Wealth Insight in September.

This tool is clearly giving us competitive advantage.

Some 12,000 clients have now access to it and more than 50% of them are active users.

We will continue to invest in this business as we see opportunities to capture a greater share of the current customers' investable assets, which we estimate to be more than $1 trillion in our market.

And residential mortgage had a good year in terms of loan production.

Mortgage loan applications were 11.4 billion for the year, up 9% from 2010.

Overall, this was a very good year for customer growth and that paves the way for additional success in 2012.

Now beyond our current year returns, I think it is important to take a longer view of PNC's performance.

Since the economic downturn began in mid-2007, it is clear that PNC's management team has navigated this environment well and delivered long-term value to the shareholders.

As you can see on slide 6, our tangible book value per share has more than doubled during the period.

And our pre-tax pre-provision earnings per share have increased by 40%.

When we compare both of these metrics to our peers, you can see we dramatically outperformed them during this period and we are very optimistic about the long-term value that we will provide to our shareholders.

Now as I reflect on the year, we took a number of significant actions in 2011, many of which are listed on slide 7 to help or manage risk.

Overall, we have been able to return to a moderate risk profile.

Now clearly challenges remain, but I believe adherence to the risk management principles we have established will continue to serve us well.

In terms of our earnings outlook for the year, Rick will give you some more detail, but we continue to assume a continuation of the current slow growth, low interest rate economy in a dynamic regulatory environment.

I believe that we will continue to grow customer relationships and loans do derive revenue, manage credit costs and expenses and maintain strong liquidity and capital levels this year.

With that background, there are two key items I see for 2012.

First, we expect legacy PNC full-year earnings to improve next year because we believe we will grow loans across all our customers and focus on managing our credit costs and expenses.

Second, we expect our planned acquisition of RBC to be accretive to 2012 earnings, excluding the integration costs.

With that discussion about 2012 behind us, Rick will give you more detail about our fourth-quarter results and our full-year outlook for 2012.

Rick.

Thank you, Jim, and good morning, everyone.

Our fourth-quarter net income was $493 million or $0.85 per diluted common share.

Now before we get started with the details, let me walk you through a couple of adjustments included in the fourth-quarter results.

Let's start with expenses.

We had a charge of $240 million or $0.30 per share related to residential mortgage foreclosure-related activities, primarily as a result of ongoing governmental matters.

We also had a non-cash charge of approximately $198 million or $0.24 per share associated with redeeming $750 million of our trust preferred securities.

As this was high-cost long-term paper, this should reduce future funding costs by $30 million annually.

We also had an increase of $103 million or $0.13 per share in personnel costs, primarily driven by increases in stock market prices, including PNC's stock price and PNC's higher business production in the fourth quarter.

Given these unusual fourth-quarter items, I should add that we expect total expenses in the first quarter of 2012 to be substantially lower and more consistent with expenses in the third quarter of 2011.

On the revenue side, regulatory changes on debit card transactions reduced consumer service fees by $75 million or $0.09 per share.

When considering all these adjustments, our fourth-quarter results reflect a solid earnings performance.

Now let's talk about the fundamentals of our business performance beginning with our balance sheet on slide 9.

Starting with assets, loans increased by $4.5 billion or 3% linked quarter or 12% on an annualized basis.

Core commercial loans increased by $3.6 billion on a linked quarter basis with gains in virtually every client segment and market.

For the full year, commercial loans were up by $9.6 billion.

Core consumer loans increased $1.4 billion, primarily due to higher indirect auto and education lending.

You will notice that we renamed our Distressed Asset segment to the Non-Strategic Asset segment.

This segment includes portfolios we do not intend to grow and the vast majority of the assets are performing.

We believe the new name is more appropriate.

In looking at our loan book, we see strong origination trends in a solid pipeline of business.

Given our improved credit metrics, we are well-positioned for future loan growth.

Turning to liabilities, transaction deposits were up by approximately $4.6 billion or 3% linked quarter and higher cost retail CDs were lower by $2.9 billion as we continued to reposition this book to lower our cost of funds.

As a result of our efforts, our deposit costs declined to 42 basis points for the quarter, a decline of 9 basis points on a linked quarter basis.

For the full year, deposit costs were 51 basis points, which was 19 basis points lower than in 2010.

As you can see on slide 10, we had another strong quarter in terms of asset quality as our overall credit metrics continued to improve.

Excluding the impact of government guaranteed loans, delinquencies, non-performing loans and charge-offs all declined linked quarter.

Given the overall improvement in our credit metrics, our provision for the quarter decreased to $190 million from $261 million last quarter.

Now let's turn to net interest income on slide 11.

Net interest income of $2.2 billion increased by $24 million linked quarter and the net interest margin of 3.86% was in line with third-quarter results.

In this environment, we see a $60 million linked quarter increase in core net interest income as a very good outcome.

For the fourth quarter, this performance was aided by our ability to grow loans, reprice CDs at much lower rates and reduce overall funding costs.

Provision-adjusted net interest income was also up 12% on a full-year basis.

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

Looking ahead, we have about $12.5 billion in higher cost CDs scheduled to mature in the first half of 2012.

This book has a weighted average rate of about 2.5%.

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 reprice on average to approximately 33 basis points.

The interest expense impact of repricing this tranche of CDs is expected to be approximately $175 million in 2012 and on an annual basis, we expect the benefit will increase to about $275 million.

As you can see on slide 12, we reported approximately $1.4 billion of non-interest income, which was essentially flat linked quarter.

While our Asset Management Group continued to deliver solid results, Asset Management fees were lower in the fourth quarter, partially due to a non-cash tax benefit that Blackrock recorded in the third quarter.

Consumer service fees decreased $61 million linked quarter.

This was driven by debit card interchange fees, which were down by approximately $75 million due to regulatory changes.

This decline was partially offset by higher transaction volumes.

Corporate service fees increased $79 million from the linked quarter, primarily due to the impact of a valuation impairment of commercial mortgage servicing rights in the third quarter of 2011.

Residential mortgage fees declined mainly from lower hedge gains on mortgage servicing rights.

Deposit service charges held steady with the third quarter, which was better than expected as the third-quarter results were due to seasonally high customer activity.

And Other increased $56 million for a variety of reasons, including an increase in the value of the hedges on deferred compensation obligations related to the higher stock market prices.

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 as a result of our larger franchise, our ability to cross-sell our products and services to existing clients and our excellent progress in adding new customers.

Turning to slide 13, the full-year expenses were up 6%.

However, when you exclude the fourth-quarter charges for residential mortgage foreclosure-related matters and the cost of the trust preferred securities redemption, expenses continued to be essentially flat year-over-year.

As I mentioned, fourth-quarter expenses were unusually high due to $240 million of expenses related to residential mortgage foreclosure-related matters, the redemption of trust preferred securities, which resulted in a non-cash charge of approximately $198 million and higher personnel expense of $103 million, most of which was driven by higher stock market prices and by PNC's higher business production in the fourth quarter.

We do not expect quarterly expenses to remain at this level.

In fact, excluding the anticipated RBC Bank first-quarter integration costs of $172 million and any legal and regulatory-related contingencies that may be incurred, we expect first-quarter 2012 expenses to be relatively consistent with our third-quarter 2011 expenses.

As shown on slide 14, our Tier 1 common ratio at the end of the fourth quarter is estimated to be 10.3%.

That is down 20 basis points since the end of the third quarter due to strong customer loan growth.

Our Tier 1 common ratio is up 50 basis points from the end of last year.

Let me give you an update on our Basel III outlook.

As we have said before, we are targeting a Basel III Tier 1 common ratio of 8% to 8.5%, which is above the regulatory minimum of 7% to provide a buffer for economic uncertainty.

We currently estimate that our Basel III Tier 1 common ratio should be in an operating range of 8% to 8.5% during 2013.

We have revised our previous forecast to be in our operating range by year-end 2012 due to the strong loan growth we have been experiencing.

However, if the rules on sub-investment grade securities are adjusted to be more risk-sensitive, we may be able to get to our operating range sooner.

We will have three capital priorities in 2012.

First, build capital so that we continue to support our clients, grow new relationships and invest in our businesses.

Second, continue to maintain appropriate capital in light of the uncertainty in the global economic environment and third, return excess capital to our shareholders.

Obviously, we will seek to achieve these priorities, which will be subject to review by our regulators.

Now let's take a look at our outlook for 2012 on slide 15, which assumes the economic outlook for the year will be a continuation of the current environment.

As Jim stated earlier, we expect full-year PNC standalone financial results will improve in 2012 and RBC Bank will be accretive in 2012, excluding integration costs.

So let me give you some of the combined company expectations.

2012 loan growth for legacy PNC is expected to be in the mid to high single digits.

When RBC Bank's $16 billion loan portfolio is added, we should see loan increases in the mid to high teens.

We are looking for full-year revenue growth in the mid to high single digits.

Net interest income should increase by mid to high single digits, non-interest income should increase by mid-single digits despite further regulatory impacts on debit card interchange fees.

2011 core expenses of $8.7 billion are expected to increase by mid-single digits reflecting flat to down expenses for PNC standalone and 10 months of RBC Bank expenses.

Let me explain.

2011 expenses were $9.1 billion.

If you back out the unusual fourth-quarter charges for mortgage foreclosure costs and the TPS redemption, 2011 core PNC expenses were $8.7 billion.

After adding RBC expenses of $600 million, core 2012 expenses will increase by mid-single digits over 2011.

Of course, this is apart from any legal and regulatory-related contingencies, non-cash charges on further TPS redemptions and RBC Bank integration expenses.

We believe our provision will remain stable in 2012 versus 2011.

This forecast gives us confidence that 2012 will be a strong year for PNC.

With that, I will hand it back to Jim.

Thank you very much, Rick.

In spite of a couple of unusual items in the fourth quarter, 2011 was a solid year for PNC.

We continued to grow customers and loans.

We managed the challenges of the current operating and risk environment and with the pending acquisition of RBC Bank, we are well-positioned for future growth.

PNC's management team continues to deliver on its promises to customers, employees, communities and shareholders.

Taken together, we have positive expectations as well for 2012.

With that, I will be pleased to answer your questions.

Operator, if you would give our participants the instructions, please.

(Operator Instructions).

Brian Foran, Nomura.

Good morning.

I guess given the change in the way the guidance is -- prior quarter was legacy PNC and the current quarter, now the guidance is combined.

Even qualitatively, is it just possible to give us a sense for apples-to-apples where the guidance is better for 2012 for legacy PNC and where it might be worse?

Yes, the net interest income guidance is basically the same as we gave you before, embedded in that.

We believe that will be essentially flat year-over-year.

We believe fee income will be up despite the regulatory impact.

We expect that credit costs will improve, but we are going to incur probably additional credit costs with RBC.

That is why we are saying stable.

And then on the expense side, clearly, if you back out some of the adjustments we had in the fourth quarter, we are pretty comfortable that we are going to manage those expenses flat to down year-over-year.

That is that $8.7 billion number.

But again, I do want to qualify that to the extent that we could have further reductions of trust preferred securities and we could have potentially further litigation and other regulatory charges that we can't anticipate at the moment.

Okay.

And then I guess not the biggest issue in the world for you, but just given the increase in government guaranteed loans that are delinquent on the balance sheet, and a lot of them being FHA mortgages, FHA and VA mortgages, I guess, on the one hand, most of this stuff was underwritten post the crisis, so hopefully the underwriting is better.

But on the other hand, the government hasn't been a great counterparty for the banks this cycle.

So what risk, if any, do you see of potential problems or losses emerging from government guaranteed loans?

Obviously, we would reserve for some if we perceived that there was additional risk in that portfolio.

Obviously, the FHA can change their minds about things, but we would expect that they would live up to their government guarantee.

Great.

Thank you.

John McDonald, Sanford Bernstein.

Good morning.

Rick, did you give an outlook for purchase accounting accretion in 2012?

I'm not sure if I missed it or if you were that specific.

No, I didn't, John.

Reason being is we are pretty confident what we think the PNC standalone decline is going to be, which is probably about $0.5 billion year-over-year.

But remember, when we do RBC, we are going to pick up some purchase accounting accretion with that transaction.

So there is an estimate embedded in there, but we are not going to know until we close and get a look at the valuation on the books and all that and we will have a better idea of that.

But I am very comfortable with the overall net interest income guidance that I gave for the combined company, as well as the fact that I think PNC standalone will be flat year-over-year.

And the reason for that, John, is even though there is $0.5 billion decline in purchase accounting accretion, the way we are growing core net interest income, because of the reduction in funding costs and the increase in loans, is going to make up for that full decline in purchase accounting accretion from 2011 to 2012.

Okay.

Could you remind us what are the integration costs you expect to take in 2012 related to RBC?

It is about $300 million in total, John.

It is $170 million in the first quarter.

Okay.

Do you happen to have an estimate of how much Tier 1 common of the RBC acquisition cost you or what that does to your capital ratios as it comes on in the first quarter?

Yes, I would look at that as a one point -- given we are not issuing any equity related to the transaction, it would probably -- I estimate it will drop our Tier 1 common ratio by 1 percentage point.

That is a combination of the goodwill we'll record, as well as the new risk- weighted assets we will put on our balance sheet.

Okay, great.

Thank you.

Erika Penala, Bank of America-Merrill Lynch.

Good morning.

My first question is on your potential appetite for M&A.

Clearly, you have been in the headlines of late and I was wondering, Jim, if you could remind us, as you look to integrate the RBC deal, what your plans are for M&A and generally building your Southeast franchise over the next 12 to 24 months.

That is a great question.

We really look at the RBC franchise as a great opportunity.

As you know, we are acquiring RBC at a discount to tangible book with a negative premium on deposits.

And to a great extent, it is positioning us very well across the franchise and we don't think that we have to do a great deal of acquisition at all in order to fill out what we think is a good branch franchise with the exception of just hiring people.

I will give you an example.

In Atlanta where the expectation was that we might need 100 branches in Atlanta because of the decline in utilization of branches, 100 would probably suffice.

That was our number, as well as RBC's.

Well, we will get 55 with the RBC transaction.

We acquired 27 with Flagstar and so we are basically there already.

We will build a number of them in the right locations.

So we really don't have to do a lot of additional acquisitions to build out the RBC franchise in the Southeast.

So I think you will see us be very judicious in terms of considering acquisitions in the future.

If there is something remarkably cheap that fits our risk profile and is wonderfully accretive that you would be very happy with, (technical difficulty).

I think we are particularly focused on just executing around the RBC transaction.

Okay.

I just wanted to ask a follow-up question on the CD repricing that you mentioned that will occur in the first half of the year.

The 2.5% rate that you gave us, is that the effective rate of taking into account any purchase accounting discount?

So if we are doing the math, is it 2.5% to 33 basis points on the $750 billion that you wish to retain or is the effective rate already lower than 2.5%?

The 2.5% is the actual rate of the CD itself.

It is not adjusted for purchase accounting.

The adjustment for purchase accounting is why the purchase accounting is coming down year-over-year.

So that is embedded in that $500 million I spoke about.

This is the contractual rate and these will be repriced down to 33.

But what I would say is the benefit we are getting from the repricing here given rates have dropped so dramatically is much greater than the runoff of the purchase accounting related to these deposits.

Got it.

And my last question is just a follow-up to John's question.

The net interest income guidance of mid to high single digits, it includes that run-off in that city purchase accounting benefit and includes some estimate of purchase accounting from RBC?

That is correct.

Okay, great.

Thank you so much.

Matt O'Connor, Deutsche Bank.

There has been a lot of talk about banks purchasing some loans from, in part, foreign banks looking to deleverage and I'm just wondering what your appetite is in that area and what specific areas you might target.

Well, we have been interested in doing that, as you know.

With an 85% loan-to-deposit ratio and interest rates being so low, clearly, we would have an appetite for that.

We have bought a few things; I would say modest.

What we have found is that most of the things being offered are either plain vanilla assets that are bid to a point where the return on risk is not attractive or they are just items that we wouldn't be particularly interested in.

So there are some opportunities.

I think there is going to continue to be more opportunities in the future as the number of these things appear to be surfacing at an increasing pace.

So I think there will be opportunities for us to buy things at good yields.

So far, our purchase activity has been modest, but I would guess it would increase.

I think, Matt, we are also focused on where we can add the customers and actually grow the business from there as well.

So both of those would be important to us.

Okay, that's helpful.

Then just coming back to the pending RBC deal, can you just remind us -- I think on the fee revenue side, you have talked about some low-hanging fruit.

How quickly does that come onto the revenue platform and then the cost savings, remind us how much and the timing of that?

The low-hanging fruit I think is across the board.

This is really a retail franchise.

It was a franchise that was put together by the Royal community banks primarily and then they were all placed on the community bank platform and as a result, they had a retail community bank product set.

When we acquire them the first week of March, we will convert the entire franchise that weekend.

So all of the electronic products that we have -- Virtual Wallet, Wealth Insights, myCFO -- will all be available to them and those are products that they have not had at all.

So I think that we'll have a terrific uptick in that space.

Also, we are in the process of hiring C&IB personnel.

We have unidentified a regional president for all but one of the markets.

Some of them are RBC folks, some of them are PNC people that will be moving.

So I thing the C&IB opportunity will get underway rather quickly because I think the calling effort will be beginning prior to the closing.

So I think you will see an uptick in business coming out of the Southeast right off the bat.

Okay.

On the cost-saving side then too?

On the cost side, we said we would take out I believe $230 million.

$150 million of that will be this year.

$150 million will be the first year.

A lot of the $150 million will be front-ended.

As we do the conversion, the payments to the Royal for processing will stop.

So that is a big part of the cost-saves that will start in the second quarter.

Okay, thank you very much.

Ed Najarian, ISI Group.

Good morning, guys.

My main question was already asked, but I just wanted to make sure I was clear on the guidance for non-interest expense.

You are starting with the $8.7 billion and you are saying that that number mostly due to flat or down expenses at legacy PNC, plus expenses at RBC will cause a full-year '12 number to be up mid-single digits from that $8.7 billion.

Is that correct?

You got it, Ed, exactly.

Okay.

I am all set then.

Thank you.

Paul Miller, FBR Capital Markets.

Thank you very much and good morning, guys.

My question relates to the $240 million residential mortgage foreclosure expenses and can you just elaborate on that more?

That is a higher number than we were expecting.

Is that related to either the robo-signing litigation or is this related to the OCC consent letter?

Can you just give us some background to this?

I wish I could, but, unfortunately, this is a governmental relations matter.

We have talked to a number of regulators.

Most recently, we have been contacted by additional regulators who gave us some information that we believed that we needed to accrue for in the fourth quarter.

We accrued for it as best we know now and I think that is about all I can say about the discussion.

Two items that the accountants always say is is something probable or estimable.

We believe that there was something that was going to come from the mortgage arena on the servicing side, but we never could figure out how to estimate it, but the recent conversations we had gave us some additional information, which we accrued for in the quarter.

When you talk about the additional regulator, is that the Consumer Financial Protection Bureau?

I think we just have to say additional regulators.

Okay.

We are restricted in discussing our relationship with our regulators.

Okay.

It is just a confusing number because usually -- is this a litigation expense?

This is the regulators coming to you and your accountants saying that you got a better handle on what these future expenses are going to be basically.

That is what this number is?

Yes.

Okay, that's all the questions I have.

Thank you very much, gentlemen.

(Operator Instructions).

Moshe Orenbuch, Credit Suisse.

Great, thanks.

Good morning.

That kind of three-stage priorities on capital management, could you maybe amplify on that a little bit?

You did say that the RBC deal would cause a 100 basis point reduction.

Is that the amount that you would be expected to kind of recapture before starting capital management or is it a different number?

How should we think about that?

I think the capital management issues are really we would like to invest in our customers first.

The loan growth side I think is very pleasing indeed -- the idea that we were able to grow loans 12% in the fourth quarter.

If that kind of loan growth continues, I think we would both be very, very happy that we were using our capital for that.

I would guess -- my guess, M&A -- utilization of capital for M&A is probably very limited, so we would look to support our customers and then we would look to return any excess capital.

We would need to build capital, obviously, to get to the Basel numbers that we talked about.

Rick mentioned that we expect to be in our range, 8% to 8.5%, sometime in '13 and if we get some more reasonable interpretations of how they apply capital to the sub-investment grade securities, I think we would be there much earlier.

And obviously, in that would be a consideration of whether increases in dividend or share buyback would be appropriate during that time as well.

So we look at all three of those things and obviously, the regulators look at them as well, as well as our Board.

And to your question specifically, the RBC has been in our numbers for a couple of quarters, so that is nothing new.

Okay, thanks very much.

In all of our forecasts that we give the regulators, as well as our own, include the RBC transaction.

Todd Hagerman, Sterne, Agee.

Good morning, everybody.

A couple questions.

Just Rick, going back to the expenses and the outlook, you mentioned in this particular quarter foreclosure-related matters I think for the year have now exceeded $300 million.

I am just curious your assumption for next year, kind of the flat legacy PNC, how should we think about, again, kind of this tough regulatory environment, ever-going changes.

What gives you that confidence that the legal regulatory matters won't continue to increase?

Or said another way, how should we think about how much is embedded within that expense guidance on the regulatory mortgage-related matters?

Well, we have had these costs in each of the quarters through the year.

What is unusual is the increase in that in the fourth quarter.

I expect we will continue to have costs similar to what we have seen in previous quarters.

I don't expect to have items as large as we have incurred in this quarter; I don't expect that.

Now that is still possible it could occur.

But I think at least for the moment, we think, at least from what we know, we have estimated and accrued for what we think this will cost us.

But there is always a risk that we will get more information that will change that estimate.

But I think we are going to have some costs as we go into the next year and I would say that right now I have estimated that more consistent with what you saw in the first three quarters.

Okay, that is helpful.

Then just again remind us, just on the funding side, the outlook was roughly $550 million I think for the year in terms of cost-saves.

Was that inclusive of the RBC cost-savings expectation, just as a reminder?

Yes, it was.

Yes, it was.

Okay.

Then just last --

There is $150 million coming from RBC in the first year.

Right.

Another $80 million would come in '13.

And $400 million from PNC.

$400 million from PNC.

Right, got you.

And then just finally, just in terms of Durbin, again, the outlook very positive in terms of the fee income for 2012.

Could you just talk a little bit in terms of -- you have the impact this quarter on Durbin.

How do we think about kind of the mitigation efforts and how you're thinking about overcome that shortfall in the coming year?

Again, thinking in terms of kind of legacy PNC?

Obviously, we had a $75 million impact in the quarter.

There will be -- when you look at '12, there will be an additional $175 million that we didn't incur this year.

That will be partially offset by the fact that we are growing that business rather dramatically in terms of new customers.

So the net impact of the debit interchange won't look like $175 million additional next year because of the additional volume coming through to customers.

The real issue for the whole consumer bank is that we have to reprice our relationships with the consumers and you have seen -- we came out with the new product set in March of this year.

We have grown 300,000 households, including 40,000 with acquisition, but 260,000 households that we grew over the course of the year.

It's a really remarkable growth process and I think we just have to keep repricing our products and looking at products and services and also bringing down the cost to serve.

So I think it is not a case.

I think some people have learned that you just don't say, okay, we will make it up with one new fee.

I think you just have to look at the whole consumer relationship.

To be honest about it, if interest rates were at 5%, we were making a lot of money on the deposits that we have with the consumer, it wouldn't be quite the issue that it is.

But clearly, with interest rates being so low, obviously, you have to use different types of pricing, including different kinds of fees in order to make the relationship more profitable.

Terrific, thanks very much.

Nancy Bush, NAB Research.

A question for you, Rick.

I think you gave the cost of funds in the fourth quarter as 42 bps, is that correct?

I think that is correct, Nancy, yes.

Yes.

Wells Fargo gave their cost of funds I think yesterday at about 22 bps and I am assuming that that is probably the lower end of your peer group.

Can you tell me where the 42 bps sort of lies within the peer group and how much lower you guys can or want to go?

A lot of it is going to be the repricing of the CDs that you are going to continue to see in 2012, which is going to lead to a reduction in funding costs of almost $175 million in 2012 and $275 million going into '13.

Now some of that will be offset by purchase accounting coming down and the benefit there, but, overall, that will drive that rate down lower.

So right now, we are probably a little bit inflated given we have a lot of these CDs still to reprice.

Do you want to stay sort of in the middle of the pack in terms of deposit pricing or sort of what is the philosophy of deposit pricing right now?

Deposit pricing, I think when you think about what the opportunity for the deposits are, we have been running off high-cost CDs.

You can see it easily in the balance sheet.

We have been growing customers and growing transaction counts dramatically.

So I think we are really looking at growing transaction accounts and growing time deposits in this interest rate environment is really not a very attractive endeavor really.

We do it on a relationship basis, not on a hot money basis.

Secondly, I believe you mentioned that there might be further TRUP redemptions this year.

Can you just remind us where you stand in TRUPs still on the balance sheet at this point and what the triggering event or what the thought process about future redemptions might be?

Obviously, we retained $750 million in the fourth quarter.

We have about $1.5 billion of redemptions, primarily in the second, third and fourth quarters of this year and the average rates on those are between about 6.5% to 12%.

So I think with each one of them, we will have to see where rates are and make an economic decision as to whether it is appropriate to refinance it.

And obviously, at 12%, I think it is highly likely.

At 6%, maybe it is a little bit more of question mark.

So we're going to have to see where rates are at that time.

Okay, thank you.

Ken Usdin, Jefferies.

It is actually Ian Foley for Ken.

A quick question on security yields.

They have generally hung in better than expected.

We were wondering if you could give some color on what the new go-to rates are and what, if any, your investment strategies has changed given the current rate environment?

Well, we remain very, very short in terms of the current rate environment.

We have spent a lot of time building capital and we are not about to give it away in a bond trade.

We will remain very short in the securities book for the time being.

Got you.

Okay.

Then just a general housekeeping question, did you guys take an impairment on the commercial mortgage servicing right this quarter?

I think you had given that number in the past, but I couldn't find the earnings release.

It is less than $10 million.

A pretty small number.

Very good.

Thank you, guys.

Mike Mayo, CLSA.

I'm going to start with -- put you on the defensive a little bit, I think.

If I take out those first two charges, then your earnings go up to $1.39 and that is $0.02 above consensus.

But then if you take out the tax rate impact, you now go down to $1.31, which would be $0.06 below consensus.

You sound as though you are pretty positive and you thought it was a good quarter, but how do you help reconcile the $1.31 that I get with consensus of $1.37?

Are there other noise or one-time charges or am I missing something?

Well, you have a couple of things.

One is I assume what you meant is that we are getting the benefit because of the lower effective tax rate.

Correct, Mike?

Right.

Yes, a lot of the reason for the lower effective tax rate is because of the lower earnings, which, obviously, the tax credits don't go as far.

So that is part of the affect.

They go further I should say against lower earnings.

The other thing that we are missing here is, if you look at the personnel line, clearly, we have had a $100 million increase in that line.

A lot of that is just simply driven by stock market prices and PNC's stock price where it was at a very low point at the end of September and obviously, a lot of improvement by the end of December.

And a lot of that number, at least a majority of that number, is driven by the change in stock market prices.

So unless the markets go up, which is a good thing, we don't expect to have those costs in the future and that is over half of that number.

So I think that is something which isn't necessarily repeatable.

Okay, that is clear from what --

If it doesn't repeat, it is a good thing.

I don't understand that though.

In other words, this is your fifth bullet point in your press release, increase in personnel expense of $103 million primarily driven by higher stock market prices and higher business production.

So higher business production, you are simply paying more incentive comp; I understand that.

But how do higher stock market prices increase personnel expense?

We have a lot of stock-based plans, which are based upon performance and so the expense is variable in some cases.

So to the extent that the market goes up, the value of that stock goes up and that is an expense impact when that occurs.

And these would be those that have been awarded in the past year or in prior years.

We have moved away from options in the recent years and moved towards performance-based restricted shares and so the accounting on an option would be fully accrued at the beginning.

It is not the same accounting treatment for the performance shares.

The other impact, Mike, is on deferred compensation where, obviously, the stock market prices go up and that has an increase in the cost to us of that deferred comp.

Now we hedge some of that through other income and you see that on the other side in revenue.

And you also had some integration charges of $0.03, is that correct?

That is correct, yes.

Absolutely.

I can give you a whole list of things probably.

You look at the occupancy and equipment, we had some facility write-offs in the quarter related to one of our buildings in one of our markets, which was about $16 million to $18 million.

Wrote off some software pre-tax.

We wrote off some software and some other items as well.

So there is a whole litany of things in the expense line, Mike.

That is kind of where I am leaning back and saying I am very confident we have been through the first quarter and obviously, I have got to qualify everything I say subject to, subject to and subject to.

The first-quarter expenses will be very close to what we reported in the third quarter of 2011.

Okay.

Can I ask a separate question?

Sure.

Commercial loan growth, what was the change in loan utilization and is the loan growth coming from increased borrower demand or from marketshare?

The majority -- we did not have a meaningful increase in the utilization rate.

So we had loan growth and you can see it in the chart, across the board, in terms of industries and across the board in terms of markets.

And I think that actually is the reason we are a little bullish on loan growth going into '12 because it wasn't one segment, it wasn't one market or one region.

It was really across the board in diversified growth in all of the various loan categories.

So we were very pleased about that.

And so you are bullish on PNC's loan growth, not necessarily the industry's loan growth because why?

How are you getting this loan growth if demand is not picking up?

It appears -- from what I have read, it appears as if loan growth is picking up across the country, but I think our 12% loan growth in the fourth quarter -- in the supplement that we sent out on page 6, you can see that the retail wholesale was up, manufacturing was up, service providers were up, real estate-related was up, financial services.

So we have more activity -- healthcare.

We had increased activity in virtually every different segment that we measure and that is very exciting.

When we look at the economy, Mike, obviously, residential housing is still massively challenged and there is going to be some more challenges for another year or two in that space, but the rest of the country is doing better.

And when you look at the earnings reports that have come out, retail sales, unemployment coming down, the rest of the country is doing better.

Now, it is not great and it would be nice to have some residential housing because that adds all the spinoffs with washers and dryers and refrigerators and the rest.

But the national economy is doing better than it was a year ago and I think there is a number of signs that you can point to where we are making a comeback.

Mike, we probably don't have as many headwinds as we had in the past from a loan growth [bead].

The Non-Strategic Assets portfolio is much smaller.

The commercial real estate business has hit an inflection point in terms of its ability to grow loans because it is not running down as much the previous loans that were impaired or otherwise having credit problems.

So we are not having as much headwind and I think as a result, you are seeing some good growth.

All right, thank you.

All right, operator, are there any other questions?

There are no further questions, sir.

All right.

Thank you very much.

Thank you, everyone, for joining us this morning.

This concludes today's conference call.

You may now disconnect.