PNC Financial Services Group Inc (PNC) 2012 Q2 法說會逐字稿

Good morning.

My name is Susan 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, 10-Q, and various other SEC filings and investor material.

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

These statements speak only as of July 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 and thank you for joining us.

Today, we reported earnings of $546 million in net income, or $0.98 per diluted common share, in the second quarter.

While I am not pleased with the reported number this quarter, I am very pleased with our overall operating performance.

Our reported results were affected by three items that reduced our after-tax earnings by a total of $403 million, or $0.76 per diluted common share.

First, we have $0.06 per share for integration costs related to the RBC Bank (USA).

We see great potential for growth in these new southeastern markets, and this is really a great investment.

Second, we had $0.16 per share for the non-cash charges for the redemptions of trust preferred securities that had a weighted average rate of almost 6.5%.

These redemptions will lower funding costs.

And third, we have $0.54 per share for the provision for residential mortgage repurchase obligations.

Now, I am disappointed by the size of the provision for the mortgage repurchases.

It's a function of our more recent experience and our new expectations regarding mortgage repurchase activity from both GSEs.

The higher amount we announce today reflects our expectation of both Fannie Mae and Freddie Mac.

Based upon what we know today, we believe we are appropriately reserved.

These items aside, PNC had a very strong operating performance this quarter.

The majority of our markets are above plan for the first six months and our southeastern acquisitions are performing well and above our expectations.

Let me share some of the highlights of the period.

First, we continue to execute our customer growth strategy and that's followed in the second quarter.

This drove increases in loans and underlying fee income.

Total loans increased by $4.2 billion, or 2% on a linked-quarter basis, primarily driven by commercial loan growth.

That growth drove net interest income, which was up 10%.

We saw growth in underlying consumer and commercial fee categories as well.

And the expansion of our southeastern markets certainly helped.

Overall credit quality improved, and expenses were well managed.

At the quarter end, our balance sheet was highly liquid and corresponded with an 87% loan-to-deposit ratio.

Our tier 1 common capital ratio remains strong and is estimated to be 9.3% as of June 30.

We believe we are well positioned to meet the Basel III capital goals and we received some good news on six in the quarter and Rick will go into that during his presentation.

So as I look at the performance of our businesses this quarter, we posted strong results that position us for continued growth in the second half of the year.

Now, I would like to spend a few minutes talking about the performance of the business segments, which posted strong client and loan growth in the second quarter.

Let me begin with Retail Banking where we are executing servicing customers tomorrow, a multi-year strategy based upon customer banking trends.

Our goal is to increase cross-selling while moving customers to more efficient channels.

And we will do that in a way that's consistent with our brand.

We continue to post excellent customer growth, adding nearly 130,000 new organic checking accounts during the first half of the year.

On an annualized basis, organic checking accounts increased 4% during the first half of the year; that's twice as fast as the population growth rate in our footprint.

And 65% of our new checking accounts our relationship accounts.

Virtual Wallet, which we launched four years ago and of course we update regularly, is helping to drive these gains.

Last month, we announced that we had more than 1 million Virtual Wallet accounts; that's a really impressive accomplishment.

And we want to deepen those relationships as well.

We saw a number of active online bill payment customers increase by 8% during the first half of the year, as more customers migrate to this channel where we also see cost efficiencies.

Our customers want easy access to their money.

Reflecting that need, we deployed more than 400 image-enabled ATMs during the first half of the year.

These machines will allow customers to cash checks and make deposits along with getting cash.

Unlike a branch, these ATMs lower our cost, they are always open and they create greater convenience for our customers, resulting in higher customer satisfaction.

Now, our Corporate and Institutional bank had a very good second quarter, driven by our focus on customer growth.

As you will recall, for the last two years, on average we added new primary clients in the Corporate bank by approximately 10%.

During the first six months of the year, this growth stayed at about the same level, and we added nearly 500 new names.

These gains are helping to drive growth in loan originations and fee-based products.

Average loans increased by $9 billion, a 12% linked-quarter increase.

This was driven by new and existing client business and a full-quarter impact of the RBC acquisition.

On a year-over-year basis, average loans increased by $21 billion, or 32%.

On the fee side, we saw Treasury Management increase by 3% linked-quarter, or 12% annualized, a great performance.

And commercial mortgage banking revenues increased by $65 million in the first half of the year compared to the same period in 2011.

This increase was primarily driven by higher mortgage loan servicing fees and lower CMSR impairments.

Turning to the Asset Management Group, they saw good client growth in the second quarter, but overall results were affected by lower equity markets.

At the end of the second quarter, assets under administration were $214 billion.

We saw new primary client growth for the first half compared to the same period last year, and referral sales were up nearly 25% linked-quarter, reflecting strong activity from the retail Corporate and Institutional Banking areas.

Residential mortgage saw strong loan production in the second quarter, originations up 38% on a year-over-year basis, primarily driven by refinancing volumes.

Spreads in the second quarter increased by 18% compared to the previous quarter.

We are very pleased with that.

But clearly the repurchase provisions had a negative impact on this quarter and Rick again will provide more in his comments.

BlackRock reported another good quarter this morning, and Larry has a number of comments and I'm certain you heard that.

Overall, our businesses performed well in the first half of the year, creating strong momentum for the second half.

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

Thank you Jim.

Good morning everyone.

Our second-quarter net income was $546 million, or $0.98 per diluted common share.

Keep in mind that these results included charges of $403 million after-tax, or $0.76 per share for mortgage repurchase provisions, non-cash charges related to the redemption of trust preferred securities, and integration costs.

Clearly, these items had a significant impact on our quarterly results.

Excluding these factors, our core performance in the second quarter was very strong.

In my remarks today, I will focus on the following -- our loan growth and favorable shift in our deposit mix; our strong gains in net interest income; our growth in commercial and consumer fee income, excluding our mortgage repurchase provision; our disciplined expense, capital and liquidity management; and an update on our outlook for 2012 versus 2011.

As you can see on Slide 6, total loans increased by $4.2 billion, or 2% on a linked-quarter basis.

The primary driver was total Commercial loan growth, which increased by $3.5 billion, or 3%, as a result of new customers, primarily in Corporate Banking, real estate finance and asset based lending.

Growth on the consumer side was primarily driven by automobile loans due to auto paper securitizations and indirect auto lending.

Overall credit quality improved in the second quarter with linked-quarter declines in nonperforming assets, overall delinquencies and net charge-offs.

However, the provision increased by $71 million, or 38%, linked-quarter due to the loans from the RBC acquisition.

These modest provisions included impaired residential loans that were further affected by declining home prices, and commercial loans that went nonperforming post-acquisition.

It is important to note that the accounting for acquired loans post-acquisition is not necessarily symmetrical.

Individual loan deterioration hits the provision immediately while cash recoveries and loan quality improvements enhance current and future net interest income.

The important message is that, overall, we continue to remain comfortable with our initial marks on this portfolio.

Turning to liabilities, transaction deposits were up $1.5 billion linked-quarter, reflecting increases by both consumer and commercial clients.

Time deposits increased by $2.4 billion, reflecting higher Eurodollar deposits as part of routine liquidity management activities.

Retail CDs declined by $3.1 billion in the second quarter.

This essentially completes the expected runoff and repricing of the higher-cost CDs that we acquired from National City.

As a result of these efforts, our deposit costs declined 24 basis points for the second quarter.

That's down 7 basis points linked-quarter.

Now, let's turn now to our improving net interest income on Slide 7. Let me start with our average earning assets, which grew by $12.4 billion, or 5% linked-quarter, aided primarily by loan growth from the full-quarter impact of RBC and organic commercial loan growth.

Yields on interest earning assets increased by 10 basis points to 4.51% compared to the first quarter, primarily due to our expansion into the Southeast markets which added loans with an average yield of 7%.

In addition, the average rate on interest-bearing liabilities declined 12 basis points linked-quarter to 58 basis points, primarily due to our continued CD repricing efforts, the redemption of trust preferred securities, and the maturing of higher-cost debt.

As a result, second-quarter net interest income was $2.5 billion, an increase of $235 million, or 10%, and our net interest margin was 4.08%.

Obviously, in the current low-rate environment, we believe our net interest margin will come under pressure in future quarters as rates remain low and as some of our assets will reprice to those lower rates.

On a year-over-year basis, second-quarter net interest income increased 7% compared to the same period a year ago.

We redeemed approximately $800 million of trust preferred securities in the second quarter.

Additionally, we have announced we will redeem nearly $1 billion later this month.

These securities have an average rate of almost 8%, giving us the opportunity to replace them with lower-cost funding.

Now, we will incur a non-cash charge of approximately $95 million in the third quarter related to these redemptions, and by accelerating the call of these two securities, we will save $27 million between now and their scheduled call dates.

I'd like to point out that the interest expense associated with these redemptions on an annualized basis is approximately $75 million.

Now, as you can see on Slide 8, second-quarter non-interest income reflected some strong performances from several of our fee categories.

Excluding mortgage repurchase obligations and the impact of Durbin on debit card fees, we saw non-interest income increase by $62 million, or 4% linked-quarter, and $132 million, or 9%, year-over-year.

The adjusted increase is consistent with our strong consumer and commercial client growth rates.

Corporate service fees increased $58 million or 25% on a linked-quarter basis, primarily due to higher M&A advisory fees and a higher Commercial Mortgage Banking revenue.

Consumer service fees and service charges on deposits were up $43 million, or 11%, linked-quarter, with gains in all fee categories as a result of customer growth in seasonally higher customer activity.

Residential mortgage fees increased $265 million in the second quarter -- to $265 million in the second quarter excluding the repurchase provisions.

The linked-quarter increase was driven by higher origination activities.

Now, as we previously disclosed, we have recently and expect to continue to experience elevated levels of residential mortgage repurchase demands.

As a result, we also reached out to both GSEs in an effort to get a better understanding of their expectations with respect to file demands.

Clearly, expectations have increased at both GSEs, and these increased claims are primarily related to 2006 to 2008 vintages of loans, particularly those that defaulted more than two years ago.

As a result, we have increased our residential mortgage repurchase reserve to $462 million, resulting in a provision of $438 million for the second quarter.

This reflects discussions with both GSEs and our future expectations for life of the loan demand.

This brings the expected life time losses under total portfolio to $1.7 billion.

Now, barring a significant change in the expected future behaviors and demand patterns of all our investors or guarantors, or other unforeseen circumstances, we believe we are appropriately reserved.

However, we also believe it is reasonably possible that we could see additional losses of up to $350 million over time should investor behaviors and/or assumptions change.

We are still working on refining this estimate.

Going forward, however, we will continue to provide for expected losses on new originations and we will update our assumptions above based upon actual investor behaviors and changes in our estimations.

Now, turning to Slide 10, as previously disclosed, total expenses were affected by the non-cash charges related to redeeming trust preferred securities, and integration costs related to the RBC Bank.

Excluding these items, core expenses were up $156 million from the first quarter, primarily due to the impact of $149 million in full-quarter operating expenses for RBC, and that compares to $40 million in RBC Bank expenses in the first quarter.

In addition, OREOs expenses increased linked-quarter by $20 million due to a strong spring selling season.

Compared to the same quarter a year ago, core expenses were higher by $295 million due to $149 million of operating expenses for RBC.

Expenses also were higher due to increases by approximately $20 million to $30 million each for higher charges for legal, OREO, mortgage foreclosure related expenses and our pension costs.

Second-quarter integration costs of $52 million were much lower than expected.

Looking ahead, we expect integration costs of $68 million and $28 million in the third and fourth quarters respectively.

Now, regarding non-cash charges related to trust preferred security redemptions, we expect approximately $95 million for the third quarter related to redemptions that I mentioned earlier, and a possible $67 million in the fourth quarter, assuming another redemption of approximately $500 million.

Turning to our continuous improvement targets in 2012, we are looking to achieve a total of $550 million in annualized cost savings at Legacy PNC and an integration savings on the RBC Bank.

We have identified more than 600 initiatives to date, these savings goals, and have completed some 60% to date, capturing more than $300 million in estimated savings on an annualized run rate basis.

This gives us confidence that we will reach our cost-saving targets.

Turning to Slide 11, our Tier 1 common ratio at the end of the second quarter is estimated to be 9.3%.

Our capital priorities for 2012 remain the same, and we continue to maintain strong bank and parent company liquidity.

[We have not] evaluated the Fed's NPR on bank capital under Basel III, we believe we could have an improved outcome in our sub-investment grade securities that could benefit our Basel III tier 1 common ratio by approximately 90 basis points once implemented.

As a result, we believe we are well positioned to reach our Basel III tier one common goal of 8% to 8.5% by the end of 2013 without the benefit of the phase-ins.

Let's turn to Slide 12 for our updated outlook, which assumes the economic outlook for the rest of the year will be a continuation of the current environment.

Our full-year 2012 expectations versus 2011 remain largely unchanged from our previous guidance.

We continue to expect full-year loans to increase by mid to high teens.

We are raising the outlook for our full-year net interest income 10% to 12% based on our strong second-quarter performance.

Given the mortgage repurchase provision, non-interest income is now expected to be essentially flat.

We continue to see total revenue increasing in the high single digits, excluding any future significant provisions for mortgage repurchase costs.

Excluding non-cash charges from TPS redemptions and integration expenses for both years, we continue to expect expenses to increase in the high single digits.

Of course, this guidance excludes future significant legal and regulatory related costs.

Finally, we continue to believe that a full-year 2012 provision should improve compared to 2011.

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

Now, with that, I'll hand it back to Jim.

Thank you Rick.

Overall, PNC had a very good first half.

We grew customers, loans, and generated revenue growth.

Our expenses and credit remain well managed.

While the mortgage repurchase provisions clearly affected our second-quarter results, our operating performance creates good momentum for the second half of the year and we expect the second half to be much better.

We remain comfortable with the Street's range for the full-year EPS expectations of our performance.

And with that, we will be pleased to take your questions.

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

(Operator Instructions).

Erika Penala, Bank of America.

Good morning.

My first question is -- or my first questions are on the margin.

Rick, could you give us a sense?

You mentioned in previous calls that there is going to be a step function of the accretable related to the Nat City deposits rolling off in the second half of this year.

If your purchase accounting accretion was a run rate of $343 million this quarter, what does that step function do to that dollar number?

Well, for the quarter here, basically it flattened it out.

So what you are expecting to run off as it relates to RB -- National City is actually being replaced by the increase related to RBC.

So there is really no impact quarter to quarter.

But in our full-year guidance, as I think we said before, we would expect year-over-year for that to decline and have an impact overall.

But the fact is we are growing our core, and that's been very good.

So, when I look at purchase accounting accretion from 2011 to 2012, I think it's going to be relatively flat, and when I think about the core, the core is growing quite a bit, and half of that is coming from RBC and half of that is coming from core PNC.

Got it.

And just on the core side, I notice that the securities yields were relatively stable, and your RMBS yields actually picked up quarter-over-quarter.

Could you give us a little bit of color of what went on there?

Yes, I would just say that's a bit of an aberration that went up in the quarter.

We've been tactically buying some munis and other activity which have higher yields in the portfolio so --.

But I think, over time, you should expect that clearly we will have an impact on that to the extent rates are lower.

We will replace as much as we can of that with loan growth, which we feel pretty comfortable with.

And we've been very focused over the last couple of years to buy securities which are less susceptible to repayment and try to focus on that, given we expected rates to remain low for some time.

And just one last question for Jim.

Given that the -- after the NPR was released, your Basel III outlook in terms of getting to your targets have improved.

Does that change your view in terms of PNC's strategy on capital recurring or M&A going forward?

I think the M&A market I think will remain very soft.

I think what we see in the M&A space is we really want to continue to execute around the National City and the RBC USA acquisitions.

I think the loan growth and the customer growth has been quite terrific, as we see more and more companies move to quality, and it's benefited PNC tremendously.

So that's the number one, two, three item for that.

And then to the extent that we need capital for our customers with loan growth, that's obviously the best place to go.

Capital after that, I think we will be focused on returning it to shareholders because I think the M&A market when you look at the small banks are very expensive.

When you buy deposits in today's markets, the deposits aren't worth very much.

And we are growing customers dramatically by taking customers from other people, which is really what you're supposed to do in the business.

That's where we are going to really focus on.

Thank you so much.

Scott Siefers, Sandler O'Neill.

Good morning guys.

Rick, I guess this first question is probably most appropriate for you.

I guess I'm hoping to get a little more -- a little better of an understanding on sort of the expectations for the repurchase-related costs in coming quarters.

I appreciate all the detail you offered.

And if I'm reading it correctly, probably no huge additions to the reserve in coming quarters, but maybe the provision that runs through the P&L every quarter may be a little closer to the actual losses, is that a fair way to read it?

No, I'd say, going forward, what you'll definitely see is reserves related to new originations because we have to start to provide for those, and we have been all along.

But I'd say that's probably $5 million to $10 million a quarter.

That's not a really big number.

I think the other factor you should see is, if we have appropriately reserved in total for this, what you'll see is the friction I guess from the behaviors we have heard we're going to get, the estimates we've made versus what actually happens and whether that causes us to update our life of the loan assumptions.

And if that causes us to update the life of the loan assumptions, then we will obviously have to record that in the quarter that we change those assumptions.

But our goal here was to try to estimate life of the loan losses associated with this risk based upon what we heard from the GSEs and based upon what we've seen in terms of actual loss rates and severity rates historically.

Okay.

That's helpful, I appreciate it.

And then Jim, I was just hoping you might be able to comment a little on -- I know you guys have a pretty broad franchise now that hits several different markets.

Just your thoughts on overall pricing competition, where it's most and least intense and how you're thinking about that dynamic generally.

It's a very competitive marketplace, as you know, Scott.

The spreads have come in over the last 18 months on those of the corporate loan activity.

I would say that the -- I would say that the compression is slowing as we reach places that have more realistic returns on equity.

And given the economy has done better, the perception of risk is -- the perception of risk is the risk in this environment is lower than it was a couple of years ago as you might imagine.

But I would still have to say that Ohio, even though we've grown customers very well in Ohio, I would say that Ohio still has some unreasonable pricing that takes place there more than elsewhere.

Yes, okay.

All right, I appreciate the thoughts.

Thank you very much.

Matt O'Connor, Deutsche Bank.

If we could just get a little more color on I guess kind of the stress scenario in the mortgage repurchase.

You had said if the behavior changed, it could be up to another $350 million of reserve that would be needed.

And I guess just conceptually how do you estimate that?

What are you doing differently than what you did to come up with the $438 million this quarter?

What we did was we took a look at the existing reserves we have for the GSEs as well as the outstanding portfolio still remaining on the other business we have out there, which obviously is a smaller part of our book but nonetheless an important one.

And what we did was we looked at the various factors we had in there and we said what if demand patterns should change in some of those other areas and what would happen if some of the estimates we made could be off by a variation of X?

We just did some stressing around it, and based upon that analysis, we determined that we think there is a reasonably possible loss which could be anywhere from zero, which is very possible, all the way up to $350 million.

But we looked at the entire book, we revisited demands, and we revisited all of our estimates under a stress scenario.

Okay.

And I guess just separately, like if you step back and look at bigger picture, there's been some more noisy items this year, the big one-time mortgage repurchase, obviously the trup charges, integration that is understandable related to a deal.

But from what you can see now as you look out to next year, would the hope be that you get some of these kind of chunkier items out of the way this year so it's a little bit cleaner next year?

Absolutely.

We don't expect any further integration costs next year related to the RBC transaction.

We don't have any further trust preferreds to be called in the new year going into 2013, so -- and I hope we have adequately reserved for mortgage repurchase, so hopefully there won't be anything related to that but I can't guarantee that.

I will just say that we would love to have a clean year as well.

Then lastly, as we think about your capital stack, you obviously issued some preferreds a few months ago and you're getting rid of all the trups.

Is there interest in issuing more preferreds?

I think it's a little over 1% of your RWAs.

How do you think about what level the preferreds should be in your capital?

Yes, if you look at the regulatory guidelines, the difference between a minimum of 7% for Tier 1 common and Tier 1 at 8.5%, that just defines for you 1.5 points of capital that I would say we will probably want to hold over time in preferred stock.

We are not there yet, probably, so I think over time, we will definitely consider more preferred issues.

Okay.

What's the right level for annual preferred dividends?

I know there's some lumpiness.

There's like every six months one of the CREs, but what should we think on annual preferreds, the dividend?

We'll get back to you if that's okay.

We'll have to call you back with that one.

We can get that for you.

No problem, thanks guys.

David George, Baird.

Hey guys, thanks for taking the question.

A question on loan yields really kind of throughout the loan book, and I guess we can talk about maybe just Commercial since it's a big book.

Can you talk about -- obviously the loan yield in the quarter was 4.75%.

I know purchase accounting accretion is going to have an impact on that obviously.

Can you describe or characterize the kind of yields that you're getting on new production today relative to that 4.75% number?

One of the big impacts was the addition of the RBC loans.

And the RBC loans, as Rick said, have an average yield of 7% after we took the march against them.

So that was a very beneficial part to increase in the overall yields.

And when you look at what happens is it falls into a series of categories with the exception of large corporate.

They really weren't in the large corporate business; they were in that commercial space and the small-business loans.

So their loan book enhanced the overall corporate yields quite a bit.

Okay.

So can you give any kind of ex -- I guess we are trying to get a sense as to, ex kind of PAA adjustments, what the core drivers of the margin are going to be as we go through the balance of '12 and as the accretable runs off into '13 and beyond?

Yes, I think what you'll see is you'll continue to see us repricing deposits to the extent we can.

And most of the CDs are done, but we'll continue to evaluate our cost of funds on the deposit side.

We are continuing to replace some of our higher cost debt.

We are continuing to call trust preferred securities, but I think the combination of those could further reduce cost of funds.

I think, if you look at the securities book, naturally when you've got a book with an overall yield of about 3.4%, weighted average life of about three years, we will maintain that yield for a period.

But the replacement rate for that is probably been around 60 basis points, so that will put -- obviously over time, that will have an impact on that if rates don't rise up.

But we'll try to replace as much of that as we can through good commercial and in some case good consumer loan growth, such as in the indirect auto space or others.

So, we are hoping that, to the extent the yields on securities go down and the balances decline, we can replace as much of that as possible loan growth.

Okay, appreciate it guys.

Thanks.

Ken Usdin, Jefferies.

Good morning guys.

I just want to get a little bit of color just on RBC progress on the revenue front.

Anything tang we could point out?

Then secondary to that, based on your kind of response on how that's gone and the fact that you're getting a bit of a boost relative to expectations on Basel III, any updates in regard to that saturation you have in the Southeast and thoughts on M&A, given kind of the combo of RBC and a better capital set up than you thought a little bit while ago.

I'll try and take them one at a time.

I would say we haven't given out any specific items about RBC's revenue as RBC, once we converted it, we converted everything right into the system so we are not keeping a separate set of books.

The general goals and objectives that were set are the ones that we know we are exceeding at this point.

The specific goals and objectives for market by market will be implemented in the third quarter.

We wanted to make sure we get the conversion done and make sure we understood the portfolio before we actually set specific targets that we hold people comp (inaudible) to.

The staffing levels, we have achieved virtually all the staffing levels we want.

We are still hiring a few people we have left to hire in the Southeast but not a great deal, so we are very, very pleased.

We received more applications for those positions that we offered there than we could ever have imagined.

The quality of people we've put together is really terrific.

And so when I look at the new customer count and the activities that have taken place already, we are just well ahead of expectations in general.

And then we will be able to get to the specifics market by market in the third quarter.

And your last point about -- may be I skipped one, but your last point about M&A need in the Southeast, we really don't think we need to -- I think the description that we made of Atlanta -- we've talked rather specifically about the declining need for branches.

87% of our customers and prospects say they want to have a multichannel distribution system, which means they want to have branches in the neighborhood, but they use them less.

All the electronics in the full-service image ATMs and what have you cause people to be able to access their accounts without having to go to the branches frequently.

So when we looked at Atlanta for example, we estimated we would need about 100 branches.

We got 55 from RBC.

We've got another 27 from Flagstar.

We can build 15 or 20 branches and we'll be done in Atlanta without having to make any acquisitions.

And the ones we build will be in the right places and they look like ours and all the rest.

So we are pretty pleased with where we are right now and the M&A front I think is pretty quiet.

Great.

And Rick, my second question just relates to the provision in credit quality.

The metrics continue to improve but the magnitude of reserve release slowed meaningfully.

I know the guidance is just for provision to be down year-over-year.

But can you kind of give us any color in terms of how it should trend from here in terms of both the direction of reserve release versus charge-offs?

There is no doubt on the commercial side credit quality continues to improve and in each quarter we are releasing reserves in that space.

We still have a pretty sizable home equity high risk loan portfolio, so I think, while all the credit quality looks better, I think we are going to be cautious about releasing reserves in the home equity space until we work our way through some of those principal payments that are going to come up over time which are well disclosed.

But this quarter was all about RBC.

And basically what you had was you had housing prices decline further, so on impaired loans and on consumer impaired loans, it's almost like a mark-to-market; you have to take the provision immediately.

That was $30 million of the provision.

And another $40 million came through on the commercial side where we had some downgrades post-acquisition.

I will tell you then, in our overall final reviews, we've had as many upgrades as we've had downgrades.

The problem is when you get a downgrade, you book provision, and when you get an upgrade you either get the cash today and you put it in or you get a future yield.

So it doesn't really work symmetrically.

So that's why I think I've tried to say I think our provisioning levels, $150 million to $250 million and in that range, and I can't guarantee that range but I think that's about what I would expect in terms of volatility.

And then last quick one, last year you guys called out the litigation spend in the quarter.

Can you tell us what it was for this one?

It was around $60 million.

Around $60 million, yes.

$60 million versus $72 million.

Okay thank you.

That's correct.

It was pretty flat first quarter to second quarter as we cleaned up a few cases there.

We were pleased with the cases we cleaned up as well.

Should that put that behind?

Should we start to see kind of a gradual improvement in that?

No, I think you look at our reasonably possible disclosures on that we provided in the past is probably around $450 million.

I think it will come down -- $550 million, it will come down from there and given some of these cases we've settled.

But it will still be a reasonably possible loss out there, a number that will be rather sizable.

Got it, thanks very much.

Todd Hagerman, Sterne Agee.

Good morning.

Rick, just to follow-up on the reps and warranties outlook, if I heard you correctly, with the change in the GSEs in terms of their requests, I think you mentioned a lot of it related to defaults a couple of years ago.

And if you could, if I heard that correctly, I'm just trying to better understand, one, I thought we were kind of past the inflection point on those defaults from a couple years ago.

And then what we are hearing from others is it's more related to repurchase requests on early-stage delinquencies, if you will.

So I'm just trying to better understand what exactly the changes that have taken place with respect to GSEs and your product.

What typically would happen is that you would have the early payment default less 120 days.

The agency would ask for the file.

We would give them the file.

They would do a review and they would come back with a demand within 3 to 6 months.

Well, in some of these vintages, that just didn't happen.

The '06 to '08, there was no request for files; it didn't happen.

And then subsequent to that, we've had a lot of defaults that have occurred well beyond 120 days going on as far as three years to five years after origination.

And again, not a lot of requests for files.

We'd see it anecdotally over the last probably 3 to 4 months, but -- I should say over the last six months, but in the last three months, we've seen it accelerate pretty aggressively, which is exactly why we reached out and engaged in conversation with both agencies to understand what the expectations are going forward so that we could prepare for that, we could reserve for that, we can make estimates of loss for that.

That's what this is intended to do is just to pick up on what we saw was a change in behavior on their part and based upon direct conversations with them.

Okay.

So all else being equal, it sounds as if though as you put it all together whether it's default of a couple years ago, earlier stage of delinquencies for more recent vintages, that we have likely seen the inflection point in terms of your reserving, again, plus the $0 to $350 million potential.

Subject to future changes in behavior of the agencies, the government agencies, the private investors, and the estimates we put around future defaults, demand rates, repo rates and severity rates.

There's a lot that goes into these estimates.

We think we've done a good job calculating that reserve, but there could be variation off of a $460 million number.

Okay.

And then just separately, you mentioned in terms of with the NPR and capital, you mentioned the [segment of] securities book.

Just curious, not having been able to go through the entire document, just in terms of an update in terms of your BlackRock stake and how that might change in terms of your RWA and holdings.

No real change on the BlackRock stake.

The massive amount of work we went through in the last couple of weeks was to understand very clearly the impact of changes to the standardized approach and changes to the advanced approach.

And just to make sure, because we are going to have to use the higher of the two, that the one we had been using in the past, the advanced approach was going to be the higher RWA for us.

So we are still comfortable with that.

And then obviously -- based upon a lot of work on a lot of people's part, we are able to get people to recognize that the rating agency view of the credit as opposed to the subordination of the underlying security is much more important, the performance of the underlying collateral within the securitization much more important and as a result, they changed the rules on that.

And based on that, our risk weighted assets went from about 1100% down to about 250% RWA in our sub-investment grade securities of about $6 billion, which is a 90 basis point improvement in our capital ratio.

Now, that being said, the NPR still draft rules.

We expect this will play out but we have to wait until they finalize it.

Again, I don't know if I heard -- on the RWA on BlackRock specifically, what was the delta there that preliminary that you're estimating?

No, BlackRock actually comes more on the capital side, the denominator side, and that is, at least for the moment as we interpret it, it's included in the unconsolidated subsidiaries, and therefore is in the corresponding deduction approach.

And so to the extent that goes beyond the 10% and 15% limits on that, we'd have to provide dollar-for-dollar capital.

I would estimate that today that's probably about $2 billion, $2.2 billion of capital that we are providing today on BlackRock in our calculations.

Now, if we were to get a treatment to allow it to move, then obviously -- and consider it under Basel II or 2.5, we would be much happier with that, and be happy to get it out of the corresponding deduction approach, but we haven't able been able to accomplish that yet.

Right.

Thanks very much.

That's helpful.

(Operator Instructions).

Paul Miller, FBR.

Yes, thank you very much.

I know, because of your RBC acquisition, there's a lot of noise in your NIM discussion.

But on your Residential mortgage portfolios, could you talk about what you're seeing on the repricing front?

In other words, what type of runoff are you getting an where are you reinvesting that?

The average life of the book is about three years, the average life of the securities book more generally I should say and the duration of it is about two, 2.25.

So clearly we are seeing some runoff on that.

But to the extent we can, we are trying to replace that with loan growth.

And you can see, if you look at the trend of what's been happening in our book, it's been coming down but it's been coming down pretty gradually because I think the group has done a nice job of focusing on securities which don't -- aren't subject as much prepayment risk.

So for example, if you look at the Ginnie Maes, what do we have?

About $5 billion in Ginnies?

I would tell you $1 billion of that is pass-throughs where you're going to end up with a big prepayment risk, whereas a lot of the others are reverse mortgages and so on which are less susceptible to low rates and prepayments.

And then you made a comment earlier in the call.

I don't know if it was -- I think it was in one of the earlier questions about you thought Ohio was being unreasonable on pricing on loans.

Is that coming from the smaller shops?

If I heard you miss -- if I didn't hear it right, please correct me.

But is that coming from the smaller shops or the bigger shops in the Ohio market?

I would just say that Ohio is a little more competitive in the pricing space for us.

By the way, in a marketplace, nobody is ever the person who leads the price down.

Everyone is just competing with the other guy who went low first.

So, it's hard to say whether it would be the small banks or larger banks, but I would just like to generally say I think the pricing and Ohio is a little more competitive than it is in Chicago or Florida (inaudible) Pennsylvania or New Jersey or much of (multiple speakers) Kentucky, California.

I think you said six months ago you're starting to see small businesses reinvest in their businesses mainly because they were sitting on the sidelines for so long.

Are you still seeing that or is some of the headlines from Europe and the fiscal cliff, is that driving some people back to the sidelines?

I would say that it softened -- I would say it softened a little bit in the last 60 days.

We continue to grow loans, but when we talk to our customers, their business is still good, they're still making a lot of money, but they are a little more nervous about things in general, and I think they backed off some of their more aggressive repurchase.

Although they never really got aggressive, most of them still have an awful lot of cash.

I think when you -- as you said, it was (inaudible) squawk box about a week ago where businesses which two years ago said their biggest concern was weak sales.

That weak sales number is not anywhere near as important to them as it was in the past.

But back to your question, the government, and I think it's not just regulation and policy, but it's also fiscal cliff and the rest in terms -- became the number one concern.

I think that just has -- it's had a pall a little bit over the market the last couple of months.

Thanks a lot gentlemen.

I'm interested to see our survey.

Our survey that we do of commercial and small business which we completed in March showed everybody more optimistic.

It's a semiannual piece that comes out in September and then March.

The March numbers show that everyone was much more upbeat than they were six months prior.

It will be interesting to see what happens in the September review this time.

Gerard Cassidy, RBC.

Good morning guys.

A question, Rick, I wanted to make sure I heard you correctly.

Did you say that, under the Basel III with NPRs, that the Tier 1 common ratio would be 90 basis points higher?

That's correct.

Under Basel III, the NPR, I said that the impact of the sub-investment grade securities would be 90 basis points better than we had previously anticipated it to be.

And we've yet to find anything in the NPR which would cause our previous expectations to be any different.

Okay.

Circling back to the Fannie Mae and Freddie Mac put-back issue, I think you mentioned something about the ongoing quarterly number that we should expect is $5 million to $10 million.

Is that correct, or was it slightly higher since you were running it around $30 million in prior quarters on the quarterly expense, the provision?

The $30 million you were saying is we are starting to see some activity coming in that was unexpected, and so we were trying to anticipate that and project it out into the future.

So when was saw that activity modestly changing, we keep updating the reserve thinking we caught it all until we found out that there was a complete change in demand patterns and that's when we set up this reserve.

The amount that we did for new originations was only, like I said, $5 million to $10 million of that number.

I see.

I know this is hard to quantify and you've been asked repeatedly throughout this call about this question of being conservative, I think when you guys first announced that you're building the reserves for this issue, was it only one GSE that you identified at that time but now this is for both GSEs, that's why the number is a little bit higher than your originally thought?

I think that's exactly right.

We announced the $350 million and we have only seen a change in behavior in one GSE.

Obviously, you asked and other people asked after the Morgan Stanley conference what about the other GSE?

And obviously we have had conversations with other GSE now and so what we did is we went back, and prior to this reserve announcement we went back and continued to analyze the relationship with the GSE that we had included in the $350 million, and then included the other GSE to come up with the number that we came out with this quarter.

We didn't want to come out with -- at the end of the quarter without an answer to the other GSE.

And so I think that obviously takes the vast majority of the portfolio into consideration.

We have other people who haven't really changed their behavior, a smaller portion of the overall servicing book, the private people, some other smaller agencies.

I think that's the number that Rick talks about as possible.

Those are dramatically smaller and what we believe we have done is set up the appropriate reserve for the two GSEs under the circumstances that we now understand.

Right.

And Rick, I know you gave us a number of qualitative factors of how you became conservative in assessing what the potential loss could be.

Economically speaking, would we need to see some sort of recession or downturn in the economy for your worst-case scenario to come through along with what you've already given us on the qualitative factors of how people behave?

No, I did not do what I would call an adverse case stress test.

That is not what I went through.

What I went through was a stress test in terms of what might happen to demand rates, what might happen to severity rates, what might happen to repurchase rates and things of that sort, what might happen to future defaults in terms of the potential for variation around the estimates we made.

And that's how we set up the reserve.

That's how we set up the potential exposure, but we did not try to do a seek or kind of adverse scenario or anything like that.

I see.

Yes.

And Jim, just one final question.

Philosophically, if the mergers and acquisition market stays this way and there's just not a lot of activity, and we are now in the summer of 2013 and things are going well for you folks, what type of return -- you mentioned it in your comments earlier about returning capital to shareholders.

What level of earnings are you comfortable with, a share repurchase and a dividend payout ratio?

If there is no imminent M&A on the horizon, what type of number would you be comfortable with in giving back to shareholders?

I think, first of all, we've got some regulators that control the -- that have control of that number.

But I think, over the year to two years, the BASEL numbers, although some of them are still moving, I think the BASEL numbers will solidify.

We've had discussions about what the -- what a [6%] might have in terms of a buffer and what have you.

So I think the 7% number will end up becoming a number that we can manage around, 7% -- given what else we might have to add on to that number.

So I think you'll see us return a great deal of the earnings to the shareholder, because the M&A market just isn't going to be there, and I would presume we'd continue to have loan growth, but the earnings capability of this company in an environment that has no interest rates.

Remember, with a normal interest rate environment, the retail bank makes $1.5 billion to $2 billion after-tax just with a normal interest rate environment.

So this company has the ability -- does now generate a significant amount of income after tax and capital that we just won't need.

And if we are able to take customers the way we are growing customers today, there's really no need to buy anything else.

So I think you'll see us return a great deal of capital to the shareholder, certainly if the government permits it.

Chris Mutascio, Stifel Nicolaus.

Good morning.

Rick, I'm sorry I'm beating a dead horse again but I want to make sure I get a comfort level here.

I don't know if you're making me more comfortable or less comfortable with the reserve repurchase issues.

It was -- as Jim just said, it was announced at $350 million a couple weeks ago.

And it goes to $440 million on this announcement and I think it's because you've had more discussions with the second GSE.

If I look at those two different pieces, $350 million for one GSE, $90 million for the other GSE, is there disproportion of loans sold to the one GSE that would lead you to $350 million or do you have more conversations with the second GSE that would make that $90 million go higher?

There's no question that the one GSE is a larger portion of the book than the other GSE.

But both of our reserves were based upon direct conversations with each and what they had told us was going to be the demand file -- the final demand with respect to defaults and demands.

So yes, is a totally proportional?

No.

But is it consistent with what they told us?

Yes.

And the follow-up, you're talking to analysts and investors and of course we want certainty.

But if you think there could be a possible $0 to $350 million range if things go against you in any way, shape, or form, in addition to what you just took, why not take more reserve build just to get it out of the way?

Because it's not probable yet and we can't book it until -- the question is is it probable?

At the moment, it's possible.

We can put some range of estimates around it.

We are no different than any other institution out there who all have this disclosure out there around reasonably possible.

Given the fact that we are only 1.5% of the servicing market, I think the reserves we have taken and the recently possible that we have out there is pretty consistent with the rest of the marketplace.

The reasonably possible data, should other behaviors change, after tax, this takes place over time, so we would think that would be certainly manageable on an ongoing basis.

Thank you very much.

Mike Mayo, CLSA.

Good morning.

I want to make a question that makes bad news out of good news.

So on the one hand, you have the National City cost savings; you have the repricing of the National City deposits; you've achieved most of the savings through RBC and continuous PNC if you combine them.

So where do we go from here?

You've had some clearly identifiable benefits, and they have run most of their course.

So over the next year or two, what should we look to to differentiate PNC?

I think really customer growth and taking continuous cost improvement is what we have to do.

I think the customer growth is now showing up in the revenue side.

That revenue side I think has differentiated itself pretty well, and it takes time before you add customers and get the revenues.

So I think that's going very well and we can see -- we can see we are continuing to grow the old PNC markets.

National City markets are now growing faster than the old PNC markets on a percentage basis because we've been there longer, the staffing is more familiar with the products and services, and they have been calling longer and now the RBC I think is a tremendous opportunity.

And actually the employees -- we just did a survey.

The employees in the Southeast are more excited I think the employees in the rest of the Company.

So that's really a great place to be.

So I think just growing customers -- I think the environment really feeds us as we see companies looking -- going to quality.

I think that fuels a lot of our customer growth and the technology we put in I think really differentiates us in a world where technology is becoming more important and a lot of people don't have it.

And so that really gives us a great opportunity.

So I think customer growth continues, and I think this Morgan stuff and a lot of the expenses in the mortgage operations get cut back.

I think taking cost out of that business should be very significant over the next 18 months.

Then the Retail side, you and I have talked to Mike about how the retail model really has to change.

Even if rates would go back up, which would take some of the pressure off of the profitability of the business, I think the business is going to continue to move towards a lower cost operation.

Think of it -- an image ATM for example, where a deposit customer in the branch costs about $4 a transaction, and the image ATM costs $0.50.

And so that's a dramatic reduction.

We are now putting image ATMs in convenience stores, so we are turning convenience stores into semi-branches, if you will, given the technology that's in a full-service ATM.

So I just think you'll see a lot of costs coming out of the operation as we add customers.

That's really blocking and tackling and running the business and we are good at that.

On follow-up.

Any metrics that you think about in comparing legacy PNC versus National City versus RBC, whether it's revenues per customer or cross-sales per customer or revenues per branch or we can go down a whole list.

Anything you are focused on that shows that RBC and the old National City is behind old PNC?

You know, Mike, the factor we have looked is I recall if you went back four or five years ago, we were looking at $1 per share as a company every single quarter.

I think with the National City coming on board, we've gone to $1.50 per share.

I think with RBC on board, we are up to somewhere in the $1.60 plus per share.

So I think that's a metric when you think of the returns we've given back to shareholders that we think is a pretty good sign for how we have leveraged the shares we have outstanding, and its distribution platforms that we have acquired.

When you think about it, that -- we used to -- I hate to say we used to struggle with this $1 -- $1 a share per quarter right through 2004, 2005, 2006, 2007.

The $1.50, $1.60, $1.70 where -- that we are moving to today is in an environment where the interest rates have been declining during the same period of time.

So the declining interest rates have hurt us, but the acquisitions and mostly the execution has helped us.

The other factor, Mike, if you look at our tangible book value per share over that same time horizon, we've gone from about $17 a share to well into the $40s now.

So you've had a pretty significant improvement overall in the tangible book value per share of the Company.

We get all these statistics from your report.

That was crystal clear, but really my question was on the customers themselves.

I think you pride yourselves on having some good bells and whistles in the wholesale banking business.

And for example some other banks say, well, the Wells Fargo, fine.

You have the West versus the East and they have the metrics of the East and they're trying to bring them up to the level -- the West level.

So I was thinking more at the customer level if you -- even if you don't have the metrics, what are you thinking about in terms of bringing up those newer franchises up to legacy PNC?

We have -- it's interesting.

We have metrics with -- some of them fool us.

You would think, with the market share that we have in Pittsburgh, that we wouldn't do any new business in Pittsburgh, and yet the same thing with Philadelphia and Pittsburgh and Philadelphia are two of the largest growth markets that we have.

But generally speaking, if you took, in terms of dollars, generally speaking, if you looked at the National City markets, their customer growth numbers are growing more rapidly than the older markets on a percentage basis.

And then the Southeast obviously has just come out of the box.

So, I think it's maturity in the marketplace, and we basically leverage our employee base based upon productivity.

I think we added those employees, and the growth comes, but it takes two or three years.

That's just market share through linking and leveraging.

Yes, I think that's the plan.

Thank you.

Peter Ganucheau, Carlson Capital.

Hey guys.

You said you want a clear path to '13, and so do I. The noise needs to be cleaned up.

So -- and I understand the hedging on the rev and warranty, so I'm still unclear so I'll try it another way.

Have you taken a good hard whack at both GSEs now, or not?

Yes.

Okay.

Thank you.

Good question, good answer.

Look, yes.

Concise is good.

Thank you.

Matt Burnell, Wells Fargo Securities.

Good morning guys.

I just have I guess a bigger picture question for Rick, trying to pull together a lot of the themes that you've been talking about today.

We saw 8% growth quarter-over-quarter in core net interest income in the quarter.

You're starting to get the benefits of the lower -- of repricing your CDs and other high-cost debt.

Presumably, that should offset some of the -- most of the pressure in the loan yields going forward.

If I understand you correctly, future costs for mortgage repurchases will be in the mid single-digit range relative to much higher numbers in the past.

That should offset your higher guidance in terms of non-interest expenses.

Provisions you say are going to continue to decline, and presumably fees will stay relatively stable, maybe a little bit higher over the next couple of quarters, given the strength in mortgages.

So I guess my question is, given relative to your $1.60 estimate of sort of where you stand today, that sounds like a somewhat better -- somewhat better trajectory than perhaps you're guiding to.

Have I missed anything in that?

No.

I think the net interest income number through the remainder of the year I think is going to hold pretty firm with where is with core net interest income going up and losing some of the benefit of purchase accounting, which you do over time.

I think fee income has been a great story.

I think the fact that we have been able to grow customers and add non-interest income in all of the buckets, with the exception of the mortgage repurchase, I think is a good story.

We are starting to see the lift in non-interest income that we expected from two or three years of good investments in customers, which I hope to see continue.

I think credit costs I did not say we're going to improve.

I think they will probably stay in that range for the next couple of quarters.

They'll improve from last year.

They'll improve from last year in total, but renumber last year we had a couple 300 quarters in there, so we are saying year-over-year (technical difficulty) for the remainder of the year stays relatively in a range $150 million to $250 million.

And then I think expenses, subject to the qualifications we've made, I think they are going to remain pretty consistent with where they are now through the remainder of the year.

So that being said, I think we've got a very, very good performance for the second half of the year.

Specific to the mortgage side of the business, could you provide an estimate as to what the HARP originations were as a percentage of your total originations this quarter?

I'm trying to get a sense to the -- it's about 30%?

30%

And is your assumption that that will largely peter out by year-end, or does it extend into 2013?

I think the estimates are that it will peter out probably right by year-end.

But we look at the next two quarters as being pretty solid.

And then just finally, Rick, could you provide a little more color in terms of the commercial or commercial loan growth, breaking out what's happening in legacy PNC, Nat City, versus what's happening in RBC?

You are not seeing yet a lot of commercial loan growth in RBC.

Clearly, we're just getting the people on the ground from that point of view.

So what you're seeing is clearly PNC and Nat City.

We are seeing that pretty much in, what, 20 some of 34 markets in total?

So you're seeing it across the board, which I think is -- that diversification gives us a lot of comfort.

Okay.

So presumably the RBC benefit is going to be realized in '13.

We are seeing customer growth already in the Southeast, and we will recognize (inaudible) but we are seeing customer growth but you won't see that show up in revenue growth for another 12 to 18 months in any meaningful way.

Thank you very much.

Marty Mosby, Guggenheim Securities.

Good morning.

Ask about the growth in the CRE line.

You've got really strong growth in Commercial, just the plain C&I, but with the CMBS maturities and y'all's focus and kind of look into that market because of your servicing activities, there's another piece of traction that eventually things are going to try to hit.

I wanted to know what you all thought if that was more of a 2013 kind of event, maybe we will start the season growth in that line item as well.

I think you will see some growth in that line item.

We've seen growth and the real estate numbers bring in lots of different kinds of companies.

For example, you'll see -- you'll see a lot of different REITs that are in there that basically move to quality.

A lot of the foreign banks have moved away from that market and clearly the quality that our bank and calling effort and the history I think it has worked very well for us in that space.

For multi-family.

Multi-family has been a big construction play so far this year; that's been big for us.

There's been some CMBS refinancing and I think that's going to continue for the next two or three years.

Actually, you'll find that, in some cases, you will find healthcare companies who have real estate subsidiaries who build a facility and lease it to a group of doctors or what have you.

That shows up as real estate but actually it's occupied, not owner-occupied but occupied by a financial institution.

So, we've seen a lot of movement.

A lot of it moves towards quality.

And I think that's worked out very well for us in the real estate space.

I guess, more specifically, I was wondering about the upcoming maturities over the next 12 months in the CMBS market, and what kind of impact that could have.

Are we kind of through with the runoff of some of the land or construction and actually going to see that begin to take over so you start to move up to the same kind of growth rates we see in the C&I line?

It's hard to say, but there will be a lot of refinancing in that space.

Obviously, we have a window into that that's relatively unique.

And I think, in some cases, we'll place it and in other cases, other cases we'll put it on the balance sheet.

So, I think you're exactly right.

I think it would be a good opportunity for us to do business.

I think it will show up in the fee line as well as in the loan balance line.

Rick, I had one question.

I wanted to be a little more specific.

You said we'd have a $95 million hit with trups repayment in the third quarter, $67 million in the fourth quarter.

When you're looking at the benefit, just take the $95 million first, as you pay that off, you said something about a $27 million positive.

Is that like annual positive?

What's the return that you get off the $95 million hit?

What we talked about is the fact that some of these we had called early.

About $1 billion worth we moved up from earlier in the third quarter and one from 2013 actually into announcing it actually before the end of the second quarter.

Just accelerating that is going to give us about $25 million of additional net interest income benefit, given the decline in rates as we replace that but the annualized impact of that is about $75 million a year.

(multiple speakers)

How many years did you have left?

$75 million per year and then you had how many years left to maturity?

(multiple speakers)

They're long dated paper.

(multiple speakers) 20, 30 for 40 years, things like that (multiple speakers)

So the lifetime benefit of being able to pay off is pretty extraordinary then.

It is.

Absolutely.

Think about it, they changed the rules.

These instruments were no longer capital -- they just basically turned into very expensive debt.

And so we could refinance this in very, very nominal numbers in the debt market and have no impact on the capital ratios and dramatically reduce the expense.

So Marty, the items -- the $1 billion that we are calling in the third quarter, that is on an average rate of 8%, so you can imagine the refinancing on that is going to very cheap.

The ones we are considering calling in the fourth quarter is actually at 12%, so while that actually still does qualify as capital, the cost of that capital is very, very high and we will have to consider whether we want to call that as well.

That's what I thought.

I just heard the $27 million number and I thought that had to be too low relative to the accrued benefit you're going to get.

Yes.

That's exactly right.

That's exactly right.

That was only the acceleration of the cost.

That's correct.

Got you, perfect.

Thank you.

Mike Turner, Compass Point.

Good morning.

Just really sort of some follow-ups to prior questions.

As you look out over the next several years, your accretion income this year is about $1 billion, say, compared to last year -- or it should come in around $1 billion according to your guidance.

What's your confidence or thoughts if we stay in this low rate environment, sort of sluggish growth, to be able to grow through that, and out-earn that money as that runs off over the next several years?

Because I guess it's really kind of a 20% of your pretax income.

I don't feel -- we are studying it all the time, but I feel reasonably good about our ability to maintain where we are at going into 2013.

Clearly, not the growth rate but maintaining the level of net interest income that's out there.

I think the real pressure comes in '14.

I think that's when you start to see the impact of low rates and what that might mean to, as we said before, securities portfolio repricing, loan balances repricing, and so on, and without a lot of levers remaining on the liability side of the balance sheet.

I think, if you take that low rate environment and extrapolate it out another two or three years, you will see a massive change in the banking industry.

First of all, the small thanks, the only business they're in is in funds brokering.

The small banks also don't have the technology to lower their costs to serve for the customers, so I think you'll see a radical change in small banking.

The other part is you're just going to see changes in fees as we change the revenue mix from net interest income to fees.

We'll still generate net interest income from loans and securities, but over time there will be some pressure on that, so the fee part I think will be the part that you would say, assuming interest rates stay where they are for the next three years, which is --

Not to mention that low rate environment has got to help credit quality across the board in terms of the ability to refinance some of the activities that are out there and so that may help credit costs potentially.

Thanks, that's very helpful.

Also just kind of two other follow-ups.

Where -- as far as pricing, I think you talked about it earlier, but I don't know, I may have missed the answer.

Where are sort of gross loan yields right now on average for new -- for loans you're putting on the books today?

It's all over the lot, as you can imagine.

If you think about loan yields for our asset-based lending group, you're looking at rates that are 350 or 400 basis points over LIBOR, depending on the customer of course, to the extent it's a higher-quality credit that comes in from there.

And then you have a trade finance that is less than 1%.

So you really -- it really depends on what kind of a customer you're talking about.

Okay, thanks.

If I can sneak in one more in.

On the repurchase, what are the thoughts about potentially looking at the settlement one day and really inking this whole issue and putting it behind everyone?

It seems like the GSEs are aware of the issue, it is for banks.

And I don't know where they are on the issue, but any thoughts there?

There is only so much of this book for them to go through and put back.

And I think the big issues are really, if you look at it, to be honest about it, the stuff, a lot of stuff that was done before 2008 was refinanced, and so those books are smaller than they used to be.

In the 2005 to 2008, there was the timetable for probably the most aggressive lending, if you will, and processing errors.

The volumes were through the roof.

We bought the mortgage company.

It came along with National City, so we are just in the process of working our way through it.

We'll get through it, as will the GSEs, as they finalize their reviews of the quality of the underwriting as well in the process.

So I think -- I think we are a long way towards getting through this.

By the way, they want to get through it too, so I think it's -- and as we know it now, as we know it now, we've set up a reserve to deal with the GSE issue as we know it.

So --

Thank you.

Thank you for joining us this morning.

It was a very, very good operating quarter for PNC, and we dealt with the repurchase issue that I think we reviewed rather thoroughly this morning.

Thanks everyone.

This concludes today's conference call.

You may now disconnect.