PNC Financial Services Group Inc (PNC) 2012 Q1 法說會逐字稿

Good morning. My name is Kamika, 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 reconciliations and other information on non-GAAP financial measures we discuss is included in today's conference call earnings release, related presentation materials, and in our 10-K and various other SEC filings and investor materials. These are all available on our corporate website, PNC.com, under the Investor Relations section.

These statements speak only as of April 18, 2012, and PNC undertakes no obligation to update them. Now I would like to turn the call over to Jim Rohr.

Thank you, Bill. Good morning, everyone. Thank you for joining us this morning.

We are starting 2012 as we had expected, with an excellent first-quarter performance that builds on last year's significant accomplishments. Once again, we have grown the number of customers we serve, effectively managed risk and expenses, and returned value to our shareholders. We saw strong revenue growth this quarter as a direct result of our strategy to grow customers and loans. Net interest income was up, as were several client fee categories.

Let me share some highlights. We earned $811 million in net income or $1.44 per diluted common share. That includes first-quarter integration costs of $145 million or $0.18 per share. In early March, we closed on RBC Bank (USA) and successfully converted nearly 1 million customers. This acquisition was accretive to our first-quarter earnings, excluding the integration costs.

Earlier this month we announced a 14% increase in our quarterly common dividend to $0.40 a share, along with plans to repurchase up to $250 million of common stock in 2012. We continued to have remarkable customer growth in the first quarter, and I will say more about that in a minute.

We saw $8 billion in average loan growth in the first quarter, a 5% increase, following strong results in the fourth quarter. And due to customer growth, loan growth, and our expanded footprint we saw a 5% increase in revenue in the first quarter. Overall, credit quality remained stable and expenses remained well managed.

Our balance sheet remained highly liquid and core funded, with an 85% loan-to-deposit ratio; and our Tier 1 Common capital ratio remains strong and is estimated to be 9.3% as of March 31. The impact to our capital ratio of purchasing RBC Bank was approximately [1.2 percentage points].

With regards to RBC Bank, we estimated an internal rate of return that we gave you at the acquisition time to be 19%. In terms of generating long-term shareholder value, we see that as a more valuable use of capital than share buybacks. At this point, with the conversion behind us, we feel even better about this transaction now.

Lastly, we continue to believe we are well positioned for Basel III capital requirements, and we expect our capital ratios to grow from here.

Moving to RBC's acquisition, the acquisition of RBC Bank significantly expanded our footprint, adding approximately $15 billion in loans and $18 billion in deposits to our balance sheet.

More importantly, it gives us access to very attractive markets in the Southeast. With more than 400 branches, this was our largest single branch conversion in our history, and the process was nearly flawless. That is what makes us so optimistic.

Frankly, when we learned that the -- when we identified that the gap between the RBC Bank product offerings and our product set was larger than even we had anticipated. For example, even online statements were not available.

Beginning on the first day of business, as our products became available as a result of the conversion, we saw customers coming into the branches to open accounts with our new service capabilities. In less than two months since conversion, we already have a substantial pipeline of Treasury Management business and have plans in place to grow our Corporate & Institutional business much in the same way as we did following our acquisition of Riggs. Our Asset Management Group has developed a solid list of referrals from our business partners in our new markets already.

And our new management teams are in place and are comprised of a combination of RBC Bank employees and legacy PNC employees who act as culture carriers, bringing both product and corporate knowledge to these new markets. Looking ahead, we have more people to hire this year in the Southeast. We will be acquiring approximately 200 additional personnel for the Corporate & Institutional Bank and Asset Management over the next nine months. We've got tremendous applications for these jobs.

Overall, this acquisition is off to a great start and we see tremendous opportunities to grow in these markets. And as we mentioned, it was accretive immediately, ex- the integration costs.

Now turning to our business segments, we see the current environment as a great time to add customers, as there is ongoing disruption in the marketplace and the cost of client acquisitions has never been lower. We continue to see strong client growth in the first quarter of 2012.

Let me begin with Retail Banking, where we believe our products and our business strategy are driving significant customer growth. We launched a new suite of checking and credit card products about a year ago, and the acceptance continued to be strong. In fact, 61% of new checking accounts opened in the first quarter were relationship accounts. Our goal is to reach 70% by year-end.

Our Virtual Wallet account -- Virtual Wallet product is helping to drive these gains. In the first quarter we added an average of more than 7,000 new Virtual Wallet customers per week. All together, this strategy helped to add 57,000 new organic checking accounts in the first quarter, which is consistent with the excellent growth we saw last year.

Of course we want to deepen these relationships, and we continue to do so. We saw active online bill payment customers increase 5% linked quarter; that is at a 20% annualized rate.

Our Corporate & Institutional Bank had a good first quarter. Average loans increased by nearly $6 billion, driven by new client growth, new and existing client activity, and the RBC Bank acquisition.

As you will recall, for the last two years we announced a goal of adding 1,000 new primary clients, and we beat it both years. In the first quarter, we added 243 new names, and we are looking to add more throughout the year.

However, we are seeing greater pricing pressure in some markets, which will influence our client growth. Of course, we plan to remain focused on writing business that generates the appropriate risk-adjusted returns. We continue to see strong deposit inflows into our non-interest-bearing demand deposits, as our safety and soundness is attracting customers' liquidity in the current low interest rate environment.

Turning to our Asset Management Group, they delivered a very good first quarter. Referral sales grew nearly 40% in the first quarter compared to the same period a year ago, reflecting strong activity from Retail and Corporate & Institutional Banking referral activity.

The sales growth, along with higher equity markets and successful customer retention efforts, helped to drive asset management inflows. Discretionary assets under management were up nearly 5% on a linked-quarter basis.

In addition to building out capabilities in the Southeast, we are continuing to increase our client-facing staff, especially in our highest potential markets such as Chicago, Florida, Milwaukee, and DC. In the first quarter, the Asset Management Group added 64 employees and has a full-year goal of 250 new hires.

Residential Mortgage had a strong loan production in the first quarter. Originations were up 11% linked quarter to $3.4 billion, primarily driven by refinancing volumes. We continue to expect these volumes to grow from here throughout the year.

BlackRock reported earnings this quarter and had another very good quarter; and Larry will be speaking to you shortly, I believe.

Overall, this was an excellent quarter for PNC. We're off to a very good start for the year, and now Rick will provide you with more detail about our first-quarter results.

Thank you, Jim, and good morning, everyone. Our first-quarter net income was $811 million or $1.44 per diluted common share. Keep in mind that these results included $145 million or $0.18 per share of integration costs.

In my remarks today I will focus on the following -- the growth of our high-quality balance sheet; the strong increase in revenue and our disciplined expense management, resulting in positive operating leverage; our stable credit costs; our strong capital position; and our improved outlook for the full-year 2012 versus 2011.

Now let's talk about our balance sheet on slide 7. Overall, loans increased by approximately $17.2 billion, of which approximately $14.5 billion is attributable to the RBC Bank acquisition and $3.4 billion or 5% is due to organic growth in commercial lending.

Average loans increased by $8.4 billion linked quarter, with gains in every loan category. We saw the highest linked-quarter increases in commercial and consumer lending, driven by the RBC Bank acquisition of $4.7 billion and organic growth in commercial lending of $3.7 billion.

Average commercial loans increased by $5.8 billion on a linked-quarter basis due to the impact of RBC Bank along with new and existing client production in corporate banking, real estate finance, and business credit. Average consumer loans were up by $1.6 billion due to continued growth in auto loans and the impact of the RBC Bank.

Overall, credit quality continued to improve in the first quarter when compared to last year. On a linked-quarter basis, while we continue to see modest improvements in legacy PNC credit quality, we will keep our guidance -- meaning relatively stable linked quarter -- due to the additional credit risk assumed with the RBC loans.

Net charge-offs stayed relatively stable. Overall delinquencies were lower linked quarter, while nonperforming assets increased related to the acquisition of RBC Bank and a policy change related to home equity loans. As a result, our provision remained relatively stable.

Turning to liabilities, transaction deposits were up by approximately $17 billion linked quarter, reflecting the RBC Bank acquisition and organic growth. Higher cost retail CDs in legacy PNC were lower by $4.2 billion as we continue to reposition this book to lower our cost of funds. The acquisition of RBC Bank also added $4 billion in CDs.

Borrowed funds increased by $5.8 billion linked quarter to fund loan growth. We have been tapping short-term markets and Federal Home Loan borrowings to meet our growth in loan balances. As we will essentially complete our CD repricing and run-off in the second quarter, I expect there will be better alignment between our loan and deposit growth in the second half of the year.

Shareholders equity increased by $1 billion in the quarter, primarily due to retained earnings.

Now let's turn to our improving net interest income on slide 9. Let me start with our average earning assets, which grew by $9 billion or 4% linked quarter.

Yields on interest-earning assets declined modestly, compared to the fourth quarter, while the cost of funds continued to decline. Loan spreads especially in Corporate Banking have narrowed as we would expect, as low rates and the competition for assets continue to put pressure on market pricing. However, interest-bearing liabilities were down 10 basis points linked quarter, due to our effort to reprice CDs at much lower rates and reduce our overall funding costs. As a result, our net interest margin of 3.9% increased modestly from our fourth-quarter results.

The first-quarter net interest income was $2.3 billion, an increase of $92 million or 4% linked quarter. Loan growth including the acquisition of RBC and reduced funding costs enhanced our performance.

Looking ahead we have about $5 billion in higher costs CDs scheduled to mature in the second quarter, and this book has a weighted average rate of about 2.2%. Given the nonrelationship 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 30 basis points.

While interest costs on deposits will level out in the second half of the year, we see future benefits to our funding costs related to calling trust preferred securities. We announced in March that we were calling $306 million at a weighted average rate of 6.2%, and last week that we were calling another $500 million at 6.6%. We have an additional $1 billion at an average rate of 10% with par call dates later this year to consider.

This gives us the opportunity to replace these securities with lower-cost funding, providing us with substantial benefits in the future. As an example, the $750 million of trust preferred securities redeemed in the fourth quarter of 2011 had a rate of 6.6%. They were refinanced at a 10-year rate of 3.3% and immediately swapped into three-month LIBOR funding at 1.7%.

As with the trust preferred redemption in the fourth quarter of last year we will incur non-cash charges related to these future redemptions. I will provide you details on these charges in our expense discussion.

Now for those who follow the purchase accounting gain, here is the latest for your scorecard. With the addition of RBC Bank our purchase accounting accretion was stable linked quarter at $263 million. We have provided this information on page 5 of our financial supplement. As I have said before, the balance sheet is positioned for rising interest rates and we plan to remain patient in the current environment.

As you can see on slide 9, we reported approximately $1.4 billion of non-interest income, which was up $91 million or 7% linked quarter, primarily due to higher Residential Mortgage and Asset Management revenues, partially offset by the seasonality of consumer-related fees and lower corporate service fees.

Asset Management fees increased by $34 million to the fourth quarter due to improved equity markets and our share in BlackRock. Corporate service fees decreased $34 million, primarily due to the impact of lower commercial mortgage banking revenue and lower M&A fees.

Residential Mortgage fees were up $73 million, primarily driven by gains on hedging mortgage servicing rights and higher loan origination volumes. Consumer service fees and service charges on deposits were down a total of $18 million primarily due to seasonality -- seasonally lower customer activity. Other increased $35 million primarily due to higher revenue, primarily from private and other equity investments.

Growth in our diverse revenue streams is an important component of driving positive operating leverage. We see further opportunities for growth as a result of our large size, our excellent progress in adding new clients, and our ability to cross-sell our products and services across our expanded franchise.

Now turning to slide 10, as we expected first-quarter expenses were down $264 million or 10% from the fourth quarter. This was the result of much lower charges for Residential Mortgage foreclosure-related matters in the first quarter versus the fourth quarter and a non-cash charge for trust preferred securities redemptions in the fourth quarter, which were partially offset by higher integration costs in the first quarter.

To get a better view of our expense trend, on this slide we stripped out the impact of integration costs and the non-cash trust preferred charge from the various expense categories, to arrive at core expenses.

Our core expenses for the first quarter of 2012 and the fourth quarter of 2011 were elevated by mortgage foreclosure-related matters and additions to legal reserves. These expenses are rather unpredictable and therefore difficult to forecast, but we expect to see more of these expenses throughout 2012.

In addition, the first quarter included $40 million for one month of operating expenses for RBC Bank. I would estimate quarterly spending of $170 million over time as we continue to invest in client-facing personnel to grow in this region.

Looking ahead, we expect integration costs will be lower in future quarters. We estimate they will be $115 million in the second quarter, and $49 million and $25 million in the third and fourth quarters, respectively. In the second quarter, we expect a non-cash charge of $130 million or $0.16 per share associated with calling approximately $800 million of our trust preferred securities. We have $1 billion of securities with call dates in the third and fourth quarters; and if we call them we expect the non-cash charges to be significantly less -- $83 million in the third quarter and $67 million in the fourth.

Regarding our continuous improvement targets, we are looking to achieve $400 million in cost savings in legacy PNC and the $150 million in integration savings with RBC Bank. Collectively, we have identified more than 600 initiatives to deliver savings and have completed more than 40% to date, capturing nearly $250 million in savings on an annualized run rate basis. This gives us confidence that we will achieve our cost savings goals.

Overall, strong balance sheet and revenue growth with disciplined expense management drove positive operating leverage on a linked-quarter basis while credit costs remained stable. This resulted in strong earnings for the quarter that enhanced our shareholders equity.

Now as shown on slide 11, our Tier 1 Common ratio at the end of the first quarter is estimated to be 9.3%. That is down 120 basis points -- 100 basis points from year-end, primarily due to the acquisition of RBC Bank. We believe we are well positioned to reach our Basel III Tier 1 Common target of 8% to 8.5% by the end of 2013.

And looking at our capital priorities for 2012, our number-one priority is to support client growth. In addition, we will return $1.1 billion in capital to our shareholders in the form of dividends and potentially in share buybacks.

When you add the capital we return to our shareholders to the $2.8 billion of capital deployed for the RBC Bank acquisition, we will deploy total capital of almost $4 billion. We see this as an effective way to grow our franchise and deliver long-term shareholder value.

Now, let's turn to slide 12 for our outlook for 2012 versus 2011, which assumes the economic outlook for the year will be a continuation of the current environment. Given our strong first-quarter performance, improving economic conditions, and the addition of the RBC Bank, we are improving our outlook for full-year 2012 versus 2011.

We expect full-year loans to increase by mid to high teens. We now see net interest income increasing by high single digits and noninterest income expected to increase by mid single digits despite further regulatory impacts on debit card interchange fees. As a result, we are raising the outlook for our full-year revenue growth to high single digits.

We now expect expenses to increase in the mid to high single digits over 2011, primarily due to increases in mortgage expenses as a result of higher volumes and the low rate environment and further mortgage foreclosure-related matters. This guidance excludes non-cash charges from the TPS redemptions, and integration costs, and, of course, legal and regulatory related contingencies.

Finally, due to continued stability in our credit metrics, we are updating our guidance on credit costs. Full-year 2012 provisions should improve compared to 2011.

We believe 2012 represents an opportunity for us to deliver full-year positive operating leverage. This forecast gives us confidence that 2012 will be a strong year for PNC earnings growth. With that, I will hand it back to Jim.

Thank you, Rick. This was a very strong quarter for PNC. With our expanded territory and an improving economy, we see tremendous opportunities to continue to grow customers and revenue.

We will continue to work to effectively manage our expenses and reduce credit risk. Our management team and our 57,000 employees are focused on meeting customer needs and leveraging a broad array of innovative products and services and the strength of our brand. As Rick just indicated, subject to the assumptions he provided, we believe we are right on target to deliver a strong full-year 2012.

And with that, we will be pleased to take your questions. Operator, could you give our participants the instructions, please?

(Operator Instructions) John McDonald, Sanford Bernstein.

Good morning. Hey, guys. Rick, a couple of questions on net interest income, which looked like it came in better than expected. What was the contribution from RBC? Did that come in a little better than you guys had thought? And what drove that?

Yes, it definitely did, John. What we picked up was primarily the incremental interest income on the non-impaired loans. Overall, the total contribution of purchase accounting in the quarter for RBC was about $50 million. In addition we had about $50 million of regular net interest income, so a total of about $100 million.

So that was a strong driver, because as you recall, John, we had said the PNC standalone would be relatively flat, as the core would grow and we would have further runoff and purchase accounting.

Okay, so that $50 million is part of the total purchase accounting accretion of the $263 million that you had?

That's correct.

What is your outlook on that $263 million for the total purchase accounting accretion, Rick? How do you see that trending over the next couple quarters?

Well, John, the piece related to the impaired loans is pretty easy to figure out, because that will either stay where it is or go up as the portfolios improve. And that is about $80 million to 490 million for the full year.

The piece that is maybe a little more difficult is on the non-impaired loans. Right now that is estimated between, say, $250 million and $300 million, somewhere in that range.

But on those loans, John, to the extent that those potential credit events could occur on that book, the amount of accretion when you go non-performing could be less. So you shouldn't assume the total difference in the fair value mark will all come back into net interest income over time.

Okay. So when you put those together, that is $263 million, you feel like. Is what you are embedding into your guidance and your guidance slide, that kind of level for this year at least, each quarter?

Well, for the full year, John, we are embedding about $350 million for the full year. And that is embedded in our guidance; that's correct. And that includes both impaired and non-impaired loans.

If you put it all together and look at the yield on the portfolio, it is about a 7% yield on the loans we acquired from RBC.

Okay. Just to be clear, you are embedding $350 million for the year versus $263 million this quarter on purchase accounting accretion?

Yes, John. $263 million is PNC combined. This quarter only $50 million of accretable yield related to RBC. The RBC accretable yield for the full year is about $350 million.

Got it. Okay. And did you tell us what you are thinking for PNC total accretable yield for the full year?

We are still in the same guidance we had before, John, which is that that would be down $500 million 2011 to 2012.

Got it. Okay. One more thing on it, Rick. Does your outlook include the expected benefits of the TruPS redemptions that you are planning?

Oh, absolutely, John. I think we'll have, as I mentioned, we'll have further benefits related to the CDs that repriced in the second quarter, which we have been forecasting for some time. But we also incorporated the benefit of the repricing in the trust preferred.

In all likelihood, given the rates on those securities, unless there is something dramatic in terms of a rise in rates we will be calling those securities. And if there is a rise in rates, we will be okay with that too.

Okay. Then just a little color on the improving guidance around credit costs. Is that driven more by chargeoff, a change in your chargeoff outlook? Or just that you have more flexibility on reserve release?

You are still holding a lot of reserves. Is that what is driving the change in provision guidance?

It is the performance of the first quarter, John. We clearly have beaten the previous guidance we had given you in the first quarter, with it being down from an average of last year's numbers, as well as we feel good about what we are seeing -- modestly improving credit quality statistics on PNC.

And we think we have done a very good job of marking the portfolio of RBC and have considered the risks in that book, and don't expect to have significant credit deterioration in that portfolio as well.

If you look at the numbers in the supplement, John, when you get a chance, you will see the nonperforming loan categories, with the exception of the home equity where we had the policy change, virtually all of the nonperforming categories went down a little bit, which is a continuation of the improvement that we have seen. And when you go over, say, 60 days and over we have had a similar experience in delinquencies. So we are -- it is not a massive improvement in credit quality, but the positive trends continue.

Okay. The last thing for me was just a question on Basel III. With the improving outlook that you have given it seems like you might be able to get to that 8% to 8.5% target earlier than you said previously, the end of next year.

So just wondering why. Are you just being conservative about that? Or why can't you get there a little bit earlier with the better outlook? Are there other puts and takes there?

John, we do expect to continue in that forecast to have loan growth. So the more loan growth we had, the more that is going to use up capital and so therefore we will continue to have that.

We did spend a bit of capital, as you know, on RBC. So that had an impact on where we are going. And we feel that we will hit the 8% to 8.5% range in that time frame; and we see really no reason to get there any sooner.

Okay, great. Thanks, guys.

Okay. Next question, please.

Erika Penala, Bank of America.

Good morning. I just wanted to follow up on John's line of questioning on the margin and take a step back. So it looks like if we are doing a year-over-year comparison, the accretable contribution is really going to be down just $150 million in 2012. Rick, tell me if you are still reaffirming this. You had told us in the past that you could probably extract about $800 million from the right-hand side of your balance sheet in terms of deposit and TruPS savings.

So I guess what I am trying to get at is if you blend that all together, plus assume some sort -- continued pressure on the yield side, it seems like the margin guidance embedded in these numbers is for a fairly stable number. Am I putting the pieces together in a correct way?

No, I do expect that you will see pressure on the margin because we do expect to continue to grow the balance sheet. We continue to grow loans.

Yes, we will get benefit; and yes, we will have a good net interest income. But I think the growth in loans will cause -- some modest pressure is the way I would put it, on the overall margin.

Okay, and just is that -- do you still think that you could extract about $800 million in liability savings for the year, or is that number a little high?

No, no, I think that was pretty good in terms of where we are going to go. We basically are going to get -- no, we are still on that number. We are $800 million improvement on the liability side; a $300 million detriment on the asset side; and a decline of about $500 million in purchase accounting. And that relates to PNC standalone.

Incremental to that we expect to have RBC interest probably between $800 million and $900 million.

Got it. Okay. Just to switch topics on the home equity front, you noted that the change in classification in terms of more aggressively classifying delinquent loans as NPLs, how much of that $156 million linked-quarter increase was attributed to that?

I guess the second part of that question is, I understand that you don't have a servicing portfolio or a first mortgage exposure that is as large as some of your peers. I am just wondering if that change in internal classification was in anticipation of some of the accounting change that your larger peers had to go through.

Well, the $160 million was because we moved the nonperforming category from 180-day delinquency down to 90. And we will continue to look at in the second quarter as to whether we should consider further movement into the nonperforming category, given whether we see delinquencies on the first. We don't have that -- we're going to probably be implementing similar policies to what you saw at the other institutions in Q2.

The implementation of that policy, is that already embedded in your provision guidance for improvement year-over-year?

It is. What we will probably take another look at is the classification of what is nonperforming, determine, whether that has an impact on chargeoffs. But we feel that the reserves we have today have adequately considered those risks. And therefore we will learn from the information, but we don't expect a significant change.

Got it. Thanks for taking my questions.

Next question, please.

Ken Usdin, Jefferies.

Good morning, guys. It's actually Ian for Ken. Quick question on the expense ramp. I know you've given some pretty good guidance on merger integration and some of the TruPS stuff. But could you speak to the step-up related to RBC in 2Q and the overall pace of cost saves going forward?

Yes, I think in terms of cost saves, we have given the $400 million as it relates to the standalone legacy PNC and $150 million on RBC, which will grow to $230 million next year, by the way, when we have the full-year impact of that. As I mentioned, we are well on our way to achieving all of those goals, so very comfortable there.

RBC for the month of -- or the quarter and the month we reported, it was at about $40 million. But as Jim mentioned, we have some pretty significant plans to invest in front-line personnel in order to grow the Asset Management and the Corporate & Institutional Bank activity in that region. And so therefore we expect over time the quarterly number there to grow to about $170 million.

Got you, okay.

That is already in our expense guidance, however, though. We built it into our budget for RBC.

All right. Real quick on just cross-sell, could you speak to the longer-term opportunities? I know you said -- spoke to the fact that they don't even have online statements. But can you speak to the overall revenue opportunity and how long it would take to get there?

Well, we haven't quantified it. The RBC franchise, which was primarily a retail franchise with some small business and commercial, and the product set that they had was very narrow and to some extent antiquated. I think they would use that term themselves.

The cross-sell initiatives are already underway, as I mentioned, with the leadership involved. The leadership is already in place.

The Treasury Management has had a tremendous success right off the bat. So we are very, very pleased about that. We have only been there for two months, and I think the cross-selling opportunity there is as great as it is anywhere else in the Company.

So I would guess over the next two to three years. As we look at our National City experience, we had some of the National City markets take off last year. We are looking at some of those National City markets as having 40% and 50% increases in sales this year. So some of the ones that did not perform quite as well last year.

So depending on how we are able to execute, I would think that this is a two- to three-year conversion to be able to ramp up all of our business lines and execute on our model.

Very good. Thanks for the color.

Next question.

Todd Hagerman, Sterne, Agee.

Good morning, everybody. Just a couple of questions here. First, just in terms of credit, you mentioned, Rick, in terms of the provision improving over the course of the year. I just would -- if you could give a little bit more color in terms of what you are seeing in terms of nonperforming assets.

Specifically I think you mentioned $160 million on the regulatory impact in the quarter. But then you see the $1.243 billion in terms of inflows into NPL this quarter. So I'm just kind of curious.

We have seen kind of a stabilization in nonperformers over the last several quarters. I'm just trying to get a gauge in how you are seeing the outlook for nonperformers in particular, and what we should expect in terms of the RBC reload effect on a go-forward basis.

Yes, let me clarify your first comment, which is that we are not expecting credit to improve from where we are today in terms of the credit costs for the rest of the year. What we are saying is that we expect 2012 credit cost to be better than 2011 credit cost in total. So I wouldn't take what we booked as our provision this quarter and start to see improvements through the rest of the year.

I think it will stay stable. I am not expecting significant change in it. But I'm not suggesting it is going to go down quarter-to-quarter, okay? So just to clarify that.

I think on the nonperforming assets, I think you have to remember that -- one, you're right. We did have the change in the policy, which is about $160 million.

We also added about $250 million of OREO assets in the acquisition of RBC. So that is why you see the inflow is elevated. That represents almost the entire increase in the inflow into the nonperforming category.

Now I don't know if I missed your third question, but --

Yes, and then just the last part was just on what is characterized like the reload effect in terms of with the purchase accounting on RBC on a go-forward basis, how you might expect the trend in terms of just the incremental additions to nonperformers from RBC. In terms of how we should think about that, and the aggregate nonperforming number.

I don't see a huge impact on that from the RBC. I think we did a really good job at taking a look at what they consider to be impaired. We went deeper in the book to identify other loans that we felt had elements of impairment, where they may not have called them nonperforming; and so we impaired those as well.

On the other side, I think the marks we took on the regular portfolio of the performing loans, that $1.1 billion, we think is adequate. Such that you have to -- the accounting on that book just -- I hate to go into the accounting too much; but remember we will be accreting that to future value, right? From the fair value to the EPV.

We won't recognize net interest income if they go nonperforming. But we also won't recognize credit costs anytime soon unless you have a specific credit event. So as you compare the FAS 5 reserve against the unamortized discount, it is unlikely to exceed the unamortized discount. So I am not expecting a lot of credit cost this year related to the RBC acquisition.

Okay. Then just finally again on the home equity and what you added this quarter, could you give us a sense --? I think you mentioned in your remarks that it could possibly change next quarter depending on delinquencies and so forth.

Could you give us an idea of the first-position problem set of home equity? Order of magnitude, what we potentially could be looking at in the next couple of quarters, just as we think about delinquencies and the impaired first position?

Well, I wouldn't necessarily say this is going to be the answer to what the ultimate schedule is going to be; but if you look at some of the percentages other firms have put out, they're about 1.5% to 2% of their seconds.

Okay. That's helpful.

We have about $25 billion of seconds. So we don't have a specific number, but I think there is no reason why we would expect our issues to be greater than that, given the quality of the underwriting that we did in our portfolio and the types of -- a lot of our home equity portfolio is in-footprint. We know the customer. We know that we have the checking account. There is a lot of high quality to that portfolio.

Terrific. Thanks very much for taking my questions.

Yes, we have been focused on this, the high-risk portion of the home equity book for a long period of time. And that has been our primary focus. So that has driven our reserving over time on our home equity book.

That is why we are not certain that there would be any meaningful impact on our provisioning in spite of what accounting change might take place.

That's helpful. Thanks very much.

Next question, please.

Matt Burnell, Wells Fargo.

Good morning, guys. Just a couple of quick questions, I guess more on the core part of the portfolio, away from RBC. I guess, Rick, you mentioned some loan growth statistics on an organic basis.

I just want to get a little more color in terms of where you are seeing growth. I presume it is more on the commercial side than the consumer side. Are there any markets that you are seeing that are doing particularly well or are not doing particularly well within the traditional PNC, in that city franchise?

That is a great question. When you look at page 6 of the supplement when you get a chance, you will be able to see the trends in loan growth. And a lot of it is tied to customer growth from March 2011 through to March 2012, quarterly.

And those kinds of -- it starts in March of '11 and $56.6 billion on the commercial side, to confirm what you were saying. I'd expect that the commercial has grown quite nicely, $56 billion to $75 billion over the course of that 12-month period. So we have seen a lot of loan growth on the commercial space and we continue to see that.

I think the real thing that might mitigate it is the pricing, as I mentioned in my comments. Some of the pricing, particularly in Ohio, seems to have gotten to a place where you are not getting the right -- the appropriate risk-adjusted return, and we would not want to participate in that.

But I think we have added customers, as we mentioned, 1,000 each year for the last two years, and another 243 in the first quarter in terms of commercial customers who pay us over $50,000 a year. So these are meaningful players, and that shows up in the loan growth numbers. 5% organic in the first quarter.

Then Jim, to that point I think we had growth in 24 out of our 32 markets in this quarter. So I think that is good diversification on that growth.

Just a follow-up on the C&I side, the net unfunded commitments were up about $8 billion quarter-over-quarter. How much of that was RBC and how much of that was core PNC?

Very modest portion of it is RBC, because they really weren't in -- they aren't in -- they weren't in that business.

Right. Then just a final question. Rick, you mentioned mortgage originations you felt were going to remain relatively healthy over the course of the year. Most of the banks that have reported already this quarter seem to suggest that they expect pretty good origination volume in the second quarter, but are a bit more cautious about the second half.

What makes you so confident about the stability of the strength of the mortgage market into the second half of the year? And what is the percentage of HARP refinancings that have been included in your first-quarter originations?

About 30% in the first-quarter originations were HARP. We expect the rates to stay low, which drives volumes. I think the HARP impact -- you don't have to requalify as you had to in HARP 1, which was really the flaw in HARP 1.

So I think the HARP 1 volumes will continue. And actually when you see the housing business actually getting better. And last but not least, seasonally the first quarter is a weak quarter, so moving forward the third quarter should be a strong quarter for housing.

Yes, I think the other thing I would mention to you is the revenue guidance we have given you, which is high single digits growth, is not dependent on the volume in the mortgage company. But if we don't have that volume I would say that I think our expense guidance probably could be better than what we have given you so far.

That's helpful. Thank you very much.

Next question, please.

Ed Najarian, ISI Group.

Good morning, guys. So, just a bunch of hopefully short-answer questions here. First one is, when I'm looking at the 30- to 59-day delinquencies going from $945 million to $1.3 billion, how much of that came from the RBC deal?

We will look that up for you.

Yes, I've got it. I will just have to get back to you.

It is not a huge number.

Is it most of it? Or was it -- do you think most of it was the core bank increase?

Short answer -- we don't know. We will get back to you on the 30 to 59.

All right, fine. Just in terms of taking $72 million of legal reserve costs and talking about how you expect more over the balance of the year, can you give us any more color around what that is for and what is going on there?

I think we don't discuss our law suits in public I don't think. What we do each quarter is we set up a reserve for what we believe is the existing liability. So that what we did in the quarter.

And we are hopeful in settling a number of lawsuits in the future, and that is what you reserve for.

Hey, Ed, on your previous question, it is about $166 million in the -- RBC impact on the 30 to 59. And you are seeing most of that in the commercial space as well as in the residential real estate.

Okay, thanks. So then on the litigation side, it is fair to say that something happened in terms of this quarter in terms of your outlook to think that you will need more litigation reserves relative to where you were at the end of the year?

I think what happened in the first quarter is we increased our estimates based upon what we thought various lawsuits might cost us. And that is an estimate, of course. I think our guidance is that obviously we reserve for what we believe is probable and estimable according to the rules.

The guidance going forward I think has to be more of an industry guidance. If we were aware of more estimable and probable items, we would have reserved for it already. But if you look at what is going on in the industry, I think you would be hard pressed to make any other comment besides litigation will continue.

Okay, that's helpful. Thank you.

(multiple speakers) reserve for what was probable and estimable for the quarter.

All right. Okay, all right. That's helpful. Then quickly, you outlined a private equity gain or amount of -- private equity gains helped the revenue this quarter and net MSR hedge gains. Could we get those numbers?

Sure, Ed. The private equity is about $62 million. The hedge gains on the MSRs was about 72 -- $71 million.

Okay, great. Thanks. Then I guess just two more quick ones, hopefully. You did again this quarter recapture a pretty good amount of reserves; yet obviously loan portfolio is growing pretty rapidly and then the impact of the deal as well. You are now down to 2.4% reserve-to-loan ratio.

Should we probably expect the amount of reserve recapture to start to trend down pretty quickly here? Or how much further do you think you can take the reserve-to-loan ratio down? I know those are hard answers, but maybe you can just give us a little bit of sense of that, from an order of magnitude standpoint.

Well, Ed, I think the 2.4% you quote is, as you would imagine, a bit misleading given all the impaired marks we have on the acquired loans.

Right. Fair.

So therefore the reserve on loans would actually be much higher than that. So it is hard to compare that to other industry stats, that people haven't had acquisitions.

So I think there is further room to reduce that over time in terms of that particular ratio, while still being adequately reserved for the acquired loans through the purchase accounting marks we have taken.

Okay, all right. That's helpful. Thanks. Then last one, one of the big things that looked like it positively impacted the margin was the rate paid on CDs dropping from 116 basis points last quarter to 80 basis points this quarter. I know that has been discussed a lot previously, but that still seemed like a giant move.

Any more color on that? And then any more thoughts on how quickly that 80 basis point number might decline in future quarters?

I think in the past we have talked quite openly about the very high-priced CDs that National City had, and they have been rolling off for the last 18 months. We had a big roll-off, as we had forecasted, in the second half of last year, which impacted our interest cost in the first quarter.

I think Rick had a number of comments about the $5 billion that is rolling off in the second quarter this year.

Yes, and the 2.2%, I could see that overall, Ed, you see it's got a deposit rate of about 31 basis points overall. I can see that going further down to probably between 20 and 25 basis points, something like that, based on more repricing that will continue to occur in the second quarter.

Okay. But not -- you are not saying that that is going to go all the way down to -- you are saying that is going to go all the way down to 20 to 25 basis points in the second quarter?

I think that is all-in on deposits when you consider some of the repricing of the broader book as well as the impact of the CDs maturing and so on. I think it is -- I believe that overall cost of deposits of 31 basis points will continue to go lower. I would be surprised if it goes below 20 basis points, but I could see it going lower. Sure.

But getting to that 20 basis points is a number of quarters out, once you have a lot more of the CD repricing and some of the other things we've discussed?

No. Almost all the major repricing we have, Ed, will be finished in the second quarter. After that, almost the entire book of CDs we have is pretty consistent with what PNC would consider a relationship account, and we would price -- that has already been priced accordingly.

The CDs we bought on from RBC, the $4 billion, they are at about 1.5%. They weren't -- they didn't have the large marks that you saw at National City.

Oh, okay. So a big jump down in deposit repricing again in 2Q, in your mind?

Yes, we have $5 billion maturing at a 2.2% rate. We will keep about half of those, and I expect the others to reprice down to around 30 basis points.

Okay, all right, that's all.

Remember, the 2Q number is affected by the maturities in the first quarter.

Right.

And the 3Q number is impacted by the maturities that take place over the second quarter.

Okay. That's all helpful, guys. Thank you very much.

Next question.

Brian Foran, Nomura.

I guess just following up on the expenses, last quarter you said looking ahead the first quarter would look a lot like the third quarter, when you backed out all the noise; and that all seems to be true. But in the first quarter you had some pretty good revenue trends, especially on some things like Asset Management and Mortgage.

So is the implication of that that some of the revenue over this quarter was extremely high incremental margin and didn't really affect the expenses? Or is the implication that even with the expenses associated with the better revenue trends you still hit your expense target, which actually means the underlying expense trends were better than you had laid out?

The expense trends for the revenues we're generating today in the Asset Management side are already baked into the number. To the extent we continue to invest in more people, I presume we will see more revenue beyond where we are today.

On the Mortgage side, it is a little bit more direct. As the mortgage volume goes up, the expenses go up with it; and we saw a little bit of that in the first quarter.

One of the reasons why we had projected full-year expenses to go to mid to high single digits is because of that volume and the fact that we will see further mortgage-related expenses on that volume as well as the mortgage foreclosure-related pieces.

So I think Mortgage expenses could go up as the revenues and volume goes up; where I think Asset Management we are pretty much at the running rate.

Then just a follow-up question on the potential for mortgage volume specifically through the HARP program. I mean, I guess one thing that is notable is you have the $120 billion servicing book. It has a 5.3% average coupon. That coupon hasn't come down a whole lot -- a little but not a whole lot this cycle.

So it would seem to imply there is a lot of maybe a disproportionate amount of HARP-eligible borrowers in your servicing portfolio. Is it conceptually the right way to think about it?

Is there any work you have done to maybe quantify how much opportunity there is to kind of HARP your own borrowers, if that is the right term to use?

I think we have done a fair amount of work in that, and that is why we are particularly comfortable with the forecast that we gave a little earlier, that we expect these mortgage origination volumes to continue and actually grow through the rest of the year.

Got it, and that would be a fairly -- while you expect rates to stay low, that wouldn't be very interest rate-sensitive in the sense that the people in the HARP program will benefit really as long as mortgage rates are below 4.75% or so?

I think you are exactly right on that.

Okay.

That was the qualification we gave a little earlier, and you are exactly right on that. If the rates stay where they are today, we expect volumes to be very strong for the year.

Great, thank you.

Next question, please.

Gerard Cassidy, RBC.

Good morning, guys. Jim, you mentioned the competition in Ohio in the commercial side is intensifying. Is that from the larger commercial banks or is it from the smaller banks? Where are you guys seeing that?

Well, I just -- I don't think we want to be too particular. But it does seem now that we have a relatively large footprint -- and as Rick said we have grown loans in 24 of our markets. And last year, all of our markets exceeded plan.

But right now we are just seeing that the pricing side, not so much the structure but the pricing side, is starting to become so competitive that you're not getting the right risk-adjusted return. So I think we will probably slow our growth there if we are not able to get that kind of return.

Okay, thank you. I may have missed this; I jumped off the call for a minute. In the commercial loan growth that you reported, I know a portion of that was due to the RBC deal. How much of the commercial loan growth was organic versus purchased from RBC?

It was 5% in the quarter. I think the most interesting thing to do is, when you get a chance, page 6 of the supplement. We have been driving, and we have talked about how we grew 1,000 primary customers each of the last two years in the Corporate Banking side. You can see it resulting in the loan growth that you see starting in March 31 of '11, where we had $56.6 billion; and then it grew to $75.5 billion in the first quarter.

Obviously those of you -- there were a $10 billion lift in the first quarter. But we have been growing $3 billion or so a quarter, right along for some period of time now, in organic growth.

The $9.8 billion increase in the quarter, $3.4 billion of that was organic, which is a 5% growth over the prior quarter.

Great. Rick, what is the duration of the securities portfolio now versus what it was in the fourth quarter?

It hasn't changed. I am going to say probably between two to three years, somewhere in that range.

We remain short. We are not betting on interest rates. And as you can see, we are not making bets on adding a lot of residential mortgage loans to our book, either.

Right, right. But could you remind me again, speaking of residential mortgage loans, the increase in the nonperforming assets, that went to $741 million on the resi mortgages from $685 million. Was that -- where did that come from?

The residential mortgages on the nonperforming list?

Correct, correct. That was the only category that really increased.

We will look it up for you.

Okay. (multiple speakers) On the same kind of subject, you give us on page 10 the inflows and outflows of your nonaccruals. It jumped up to $1.2 billion versus $854 million in the prior quarter. Is there any color behind the sequential increase?

Yes, Gerard. We had -- with the change in the nonperforming policy for home equity loans, where we moved delinquency from 180 to 90, we moved it to nonperforming, that is about $160 million of the increase. The other piece of the increase is we acquired OREO assets from RBC of around $250 million. The two of those together make up for the inflow.

Great, thank you. Then finally, Jim, when you look out, obviously the RBC deal is fresh, and you look out on potential acquisitions in the future, is there anything that you are focused on? Whether it is more depositories, or asset management type assets, or what are you guys looking at from that standpoint?

I think what we are looking at right now is really building out the RBC franchise. We have done a good job I think of building out the National City franchise, but we are not complete yet. We have got some more hires in order to fully implement our business model in the National City markets.

And we are brand-new at the RBC markets, where RBC really didn't have a full complex of products and services to compete in the marketplace like we do. So I think those are the -- executing on those two acquisitions really is by far our biggest opportunity. And it is looking better than we ever expected. I'm [bold] to acquisitions, I might add.

Thank you.

All right. Next question.

Mike Mayo, CLSA.

Hi, good morning. My question relates to deals past, present, and future. So, thanks for the numbers from the legacy CDs from National City. What is the total amount of these high-priced CDs that still remain? And where do you think they ultimately go? I know you gave the numbers for the second quarter.

Yes, that is pretty much it, Mike, on the National City acquisition, which is where all the high-priced CDs came from. Those, like we said, we got about $5 billion repricing in the second quarter, average rate 2.2%. That is about it.

After that, I would say we picked up $4 billion from RBC at about 1.5%. That is -- some of those have repriced over time, but I am not looking for a big drop in yield related to those, or a big drop in costs.

All right, so the big driver then will be RBC from an acquisition standpoint. How much accretion was there for the one month?

We had about $50 million of accretion related to purchase accounting at RBC, which was a combination of accretion on the impaired loans as well as accretion on the nonimpaired loans.

How about EPS?

EPS accretion.

EPS accretion for RBC.

Around $0.05 to $0.07, Mike, somewhere in that range.

That much for one month?

Yes, absolutely. I think if you think about the fact that we had -- we didn't issue any equity. You look at the cost we had for the month, it was $40 million. So as we had previously described, the ability to take costs out quickly was something that we were very excited about with this deal.

And then when you add in the accretion related to the impaired loans and the unimpaired loans, you get to that much in the first month. Yes.

And so next quarter --

Ex- the integration costs.

Yes, ex- the integration costs, Mike.

Right. So next quarter, just how much accretion do you expect when you get the full-quarter impact?

I think for the full year, Mike, we will get on this transaction, excluding integration costs, we should get close to $0.40 accretion.

Okay, and then is that pretty much where you were before? Or is that better? I know (multiple speakers)

No, it's better.

Well, excluding the impact of capital.

Mike, it's better for two reasons. It is better because of the fact that we didn't have to issue equity, and we got clarity around that. So obviously that has improved it. That is about $0.12.

As well as the fact that we have higher accretion on the unimpaired loans than was originally anticipated.

And then deals future, you are kind of hanging out down there in the southeast now. What about future acquisitions?

I think the future acquisitions for what we see right now is building some new branches in a few places. I don't think -- I think really it is about people for us right now in the southeast.

So we will be acquiring people at a pretty good pace. But we have got lots and lots -- we have thousands of applications. So that is the execution for us and the opportunity for us right now.

So a link-and-leverage strategy. How may branches do you think you will open down in the south?

Not a lot. In the 10s, 20, 30, over time. We have said for example, and I think we have talked about it, in Atlanta we thought we would need maybe 100 branches in Atlanta in the right places in order to compete. So we acquired 55 with RBC and 27 with Flagstar, which puts us pretty close to where we need to be. So we can build a few branches and be done without having to do any meaningful acquisition at all.

All right, thank you.

Next question.

Paul Miller, FBR Capital Markets.

Hey, thank you very much. Good morning, guys. Hey, on the loan growth, I know you were talking about last quarter that you are starting to see some really middle-market guys starting to expand, getting a lot more (technical difficulty) out there. Has that trend continued, improved, or gone down?

No, I think it's continued. I think the economy is, I think, continuing to do a little better each time we look. We are seeing unemployment has come down. Employment has gone up.

We are seeing capital expenditures grow. We are seeing -- but we are seeing capital expenditures grow. We have seen loans grow. So I think the economy continues to do a little better.

And even housing is doing a little better in certain pockets. So I think the customers we have -- and we just finished the new survey and again 40% of our new small business and middle-market customers are talking about raising prices, so I think obviously their businesses are doing better.

What we don't see is anybody stepping up saying -- I am going to build a giant plant and add lots of people, because I think that is the confidence level that is missing in this economy.

Then what about loan competition? There is a lot of anecdotal evidence out there or commentary I say from banks about how people are doing loans at yields that don't make any sense and getting rid of personal guarantees on the underwriting side. But through the earnings cycle, no banks -- or all the banks are saying no, it's not us. I am just wondering, what are you seeing on the competition side?

No, it's not us. Obviously we are being -- it is a competitive marketplace. It always is. The best of loans are made in the worst of times and vice versa.

So I think we are entering into better times, and banks are becoming more aggressive in their pricing and in their policies. We haven't seen a big change in structure. Seen some, but not a big change in structure as yet, especially in the commercial and middle-market side.

But the pricing especially on the larger credits is clearly being impacted by competition. We see it particularly in Ohio, where when we take a look at our entire footprint -- and by the way, we compete. We are not going to lose any big customers in Ohio for price, but -- unless it is really crazy. But when we are looking at new customers, I think we have to really make sure that we are getting the right risk-adjusted return on the relationship.

One last question is, I know you mentioned that HARP was a -- middle of the quarter that HARP applications are very strong. Is that continuing, increasing? How much of your pipeline is related to HARP?

About 30%.

30%?

And it is continuing and it is increasing.

Just one other question, and you might not know the answer; if not, you can get it to me. Is it mainly the 105s, 105 mean LTVs and below? Have you guys started doing the 125s yet for HARP?

I can't answer that question. We can get back to you.

We can get back to you on that one, Paul.

Okay. Hey, guys. Thank you very much.

With that, I think that concludes our call. Jim, do you have any closing remarks?

Thank you very much, everyone, for joining us. We think it was a very, very strong quarter for PNC. We are very pleased with what we were able to accomplish this quarter, including the conversion of RBC and bringing it online. And we are pleased to raise the dividend, too. Thank you for joining us this morning.

Take care.

Good job, everybody.

This concludes today's conference call. You may now disconnect.