PNC Financial Services Group Inc (PNC) 2012 Q4 法說會逐字稿

Good morning.

My name is Charlene, 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 our historical performance due to a variety of risk and other factors.

Our forward-looking statements regarding PNC's performance assume a condition of the current economic environment and do not take into account the impact of potential legal and regulatory contingencies.

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 and related presentation materials, and in our 10-K, 10-Qs 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 January 17, 2013, and PNC undertakes no obligation to update them.

And now I would like to turn the call over to Jim Rohr.

Thank you, Bill.

Good morning everyone and thank you for joining us.

As we began 2012 we knew the year would provide our industry with some significant challenges.

We were faced with slow economic growth and historically low interest rates, along with a dynamic regulatory environment.

I am pleased, but certainly not entirely satisfied, as there were clearly some pluses and minuses in our year.

On the plus side, 2012 provided PNC with some of the highest levels of customer growth we have ever seen.

Both through organic gains and economic acquisitions we added customers across our businesses, creating opportunities to deepen relationships and further increase our revenue.

By increasing customers, we were able to grow loans and deposits.

Full-year loans increased $27 billion or 17%, and fourth quarter loan growth was $4 billion or 2%.

Similarly, full year deposits grew by $25 billion or 13%, and fourth quarter deposits were up $6.8 billion or 3% on a linked quarter basis.

Thirdly, we expanded our presence in the Southeast in the first quarter of 2012 with the successful acquisition and integration of RBC Bank USA.

With this transaction we added nearly 1 million accounts and gained access to some of the fastest-growing markets in the US.

Overall credit metrics improved on a year-over-year basis, but clearly those trends are slowing, but continuing.

Our balance sheet remained highly liquid and core funded with an 87% loan-to-deposit ratio.

Our tier 1 common capital ratio was an -- estimated to be 9.6% as of December 31.

And our Basel III Tier 1 common ratio on a pro forma basis as of that date was estimated to be 7.3%.

Of course, that is based on our current understandings of the Basel rules and other estimates.

However, there were minuses as well, several of which were highlighted in our recent 8-K filing.

Residential mortgage repurchase provision, primarily related to the loans which were acquired from National City, totaled $760 million for the year and had a significant impact on revenue.

On the expense side residential mortgage foreclosure-related expenses were $225 million for the year.

And we are pleased that we resolved the foreclosure look-back issue with our regulators.

Other expense impacts in 2012 included nearly $300 million of non-cash charges related to redeeming a total of $2.3 billion in Trust Preferred securities that had a weighted average rate of more than 8.3%.

On the upside, redeeming these securities is lowering our funding costs.

And full year integration costs related to RBC primarily were more than $260 million.

Now, on balance, this was a good year for PNC, but because of these minuses, especially those related to residential mortgage, our results did not fully reflect the investments we've made and the potential we believe PNC can create for our shareholders.

As we look forward to 2013, I should add that we expect no additional integration charges, substantially lower trust preferred securities redemption charges and mortgage -- and lower also mortgage foreclosure-related compliance expenses.

We also continue to expect modest economic growth at a sustained low interest-rate environment.

But in this environment, our goal is to continue to leverage the growth we have seen in customer relationships to increase revenue while also reducing expenses, and we will get into that in some detail.

Now we talk about customer growth because we believe that customers are the foundation of the revenue potential.

Our innovative products set, coupled with our go to market strategy and strong brands, have helped us increase the number of customers we see or serve, as you can see on slide 4.

In Retail Banking our focus is on improving the profitability of our checking relationships, serving them efficiently, which is critically important in today's economic environment.

And we need to continue to deepen our relationships with those customers through cross-selling.

We added 254,000 net new organic checking relationships during the year.

Checking relationships grew organically in 2012 by 4% from year-end 2011, or more than double the population growth rate in our footprint.

We also acquired 460,000 checking account relationships through our acquisition of RBC Bank USA in the first quarter of this year, bringing our total checking relationships to approximately 6.5 million at year-end.

These relationships provide us with significant deposits, and in the current low interest rate environment, now these aren't as valuable as they were at higher rates.

But they still provide us with a stable source of liquidity along with low-cost funding that supports lending activities across our businesses.

For the full year, 65% of our new checking accounts were relationship-priced account, as more customers are seeing the value of having a deeper relationship with us as opposed to just having a free checking account.

In Corporate & Institutional Banking we continue to build client relationships and added more than 1000 new primary clients in Corporate Banking during the year.

And we remain focused at earning appropriate risk-adjusted returns from these relationships.

We also added another 282 clients in business credit and commercial real estate.

New clients in Corporate Bank continued strong growth in public finance, healthcare, commercial real estate, and our asset-based groups which helped us drive strong loan growth and C&IB during the year.

We are also deepening our relationships with these clients and adding fee-based products and services.

Full-year Treasury Management revenue increased by 9% over last year and capital markets revenue was up 14% during the same period.

New primary client acquisitions in our Asset Management Group were 37% higher in 2012 compared to 2011.

Referral sales for the first 12 months were up more than 39% on a year-over-year basis, reflecting strong referral activity from Retail and Corporate & Institutional Banking.

This client activity, along with the improved performance of the equity markets, helped assets under administration increase to $224 billion as of December 31, a 7% increase from the same time a year ago.

AMG's fee income for the year was up 4% compared to 2011.

And we saw a strong loan production in the residential mortgage area.

Originations were up 33%, and spreads were up 48% for all of 2012 compared to the previous year, primarily driven by refinancing and [ARP] activity.

We continue to make strides to enhance our purchase originations.

As refinancing activity decreases, this will drive longer-term value for the business.

And BlackRock recorded earnings this morning and had a good fourth quarter and a good year.

Overall we believe this level of client growth will lead to increased revenue next year.

At the same time, we are looking to make significant expense reductions with our goal of achieving full-year positive operating leverage.

Now Rick will provide you with more detail on our fourth-quarter results.

Thank you, Jim, and good morning everyone.

Our fourth-quarter net income was $719 million or $1.24 per diluted common share.

As you're well aware, we announced several items impacting these results in our recent 8-K filing.

Taken together, these items resulted in a reduction of earnings per diluted common share of $0.47.

After adjusting for these items, our return on average assets would have been 1.28%.

Now let me provide you with a few highlights of our fourth-quarter results.

We saw linked quarter loan growth of $4 billion, primarily due to gains in several categories of commercial lending and automobile lending.

This helped support a modest increase in net interest income.

On the fee side, excluding the impact of the residential mortgage repurchase provision, noninterest income on an adjusted basis grew by $173 million or 10%.

As result, fourth-quarter total revenue increased on an adjusted basis by $198 million or 5% compared to the third quarter.

Our provision was elevated compared to the third quarter, primarily due to a larger loan portfolio and a reduced reserve release in commercial banking.

Expenses were higher linked quarter, primarily as a result of residential mortgage related charges, contributions to the PNC Foundation, and adjustments to accruals primarily for deferred loan origination expenses.

Finally, we ended the year with strong capital ratios and strong liquidity.

Let me take a moment to discuss the impact of loan growth on our net interest income.

As you can see on slide 6, average interest-earning assets increased $1 billion on a linked quarter basis due to average loan growth of $2.5 billion or 1%.

Compared to the same quarter a year ago, average interest-earning assets were up $25 billion or 11% as a result of a $27 billion or 17% increase in average loans.

Commercial loan growth was the primary driver of our increase in total loans.

Commercial loans on a spot basis increased $3.7 billion or 4% linked quarter due to gains in asset-based lending, healthcare, public finance and real estate.

For the full year, commercial loans were up by $20.6 billion or 23%.

On the consumer side, we saw loan growth of $300 million in the fourth quarter compared to third-quarter results.

On a full-year basis, consumer loans were up $6.3 billion or 9% for both periods.

The primary driver was higher automobile lending.

Comparing the fourth quarter to the third, net interest income increased by 1% as a result of a stable core net interest income and better than expected cash recoveries, primarily on commercial loans.

Looking to the first quarter of 2013, we are expecting a 2% to 3% decline in net interest income compared to the fourth quarter due to a decrease in purchase accounting accretion of up to $50 million to $60 million, including lower expected cash recoveries.

As we have said before, we expect purchase accounting accretion to decline by $400 million for the full year of 2013 versus 2012, while core net interest income is expected to increase.

As you can see on slide 7, fourth-quarter noninterest income reflected good performances in several fee categories.

However, overall results were affected by a higher provision for residential mortgage repurchases, which I will comment on later.

Excluding the impact of the mortgage repurchase provision from both periods, fees would have been up by $173 million or 10% linked quarter.

Consumer service fees increased by $6 million or 2% linked quarter due to customer growth, partially offset by the impact of Hurricane Sandy on customer volume and activity.

Corporate service fees were up $54 million or 18% on a linked quarter basis, primarily due to strong merger and acquisition advisory fees and higher loan syndications.

Deposit service charges were down $2 million compared to the third quarter, reflecting fees waived related to Hurricane Sandy of $7 million.

Other fee income increased by $114 million primarily due to higher revenue associated with commercial, mortgage banking activity and private equity investments and asset sales.

In the third quarter we sold 5 million of our Visa common shares resulting in a pretax gain of $137 million.

In the fourth quarter we sold 4 million of our Visa shares for a pretax gain of $130 million.

We continue to hold approximately 14 million shares of Visa class B common stock with an estimated fair value of approximately $900 million as of December 31, 2012.

These shares are recorded on our books at $250 million, resulting in an unrecognized value of approximately $650 million pretax.

As you can see at the bottom of the chart the percentage of fee income to total revenue is moving from the high 30s to the low 40s.

At the same time, we have been growing net interest income.

As we continue to cross-sell in our new markets, we expect to see this percentage increase as we deepen our relationships with the growing number of customers we serve.

In 2013 we expect noninterest income to increase and total reported revenue to increase compared to 2012.

Turning to residential mortgage repurchase obligations on slide 8, we recently received additional residential mortgage file requests from both GSEs, Freddie Mac and Fannie Mae.

The majority of the increase was from the 2004 to 2005 vintage of loans that were sold into agency securitizations.

In the fourth quarter we recorded a residential mortgage repurchase provision of $254 million.

This reflects expected elevated levels of demands related to discussions with both GSEs, our future expectations for GSE harmonization of demands, and the new originations in the fourth quarter.

This additional provision brought the reserve for residential mortgage repurchase claims, reflected on our balance sheet to approximately $614 million as of December 31, 2012.

This brings our coverage for expected lifetime losses on our total portfolio to $2 billion.

We believe our reserves are consistent with our peers, and if the industry has further demands, PNC will as well.

Turning to slide 9, expenses in the fourth quarter increased by $179 million compared to the third quarter, primarily as result of residential mortgage foreclosure-related charges of approximately $91 million versus $53 million last quarter, and a $45 million goodwill impairment charge related to the residential mortgage business segment.

In addition, we had a $28 million contribution to the PNC Foundation, and a $38 million charge as we adjusted accruals primarily related to deferred loan origination costs.

As we look to the first quarter of 2013, I expect a significant reduction in the compliance-related mortgage foreclosure charges and do not anticipate charges for goodwill impairment, integration costs, Trust Preferred securities redemptions, foundation contributions or deferred loan origination cost accrual adjustments.

As a result, I expect first-quarter expenses to decreased by approximately $300 million or 11% compared for fourth quarter of 2012.

For 2013 we have increased our continuous improvement goal to $700 million, which represents 7% of our 2012 expense base and includes the expected decline in mortgage foreclosure compliance costs.

That amount will be offset by investments in our businesses and our infrastructure, including the full-year cost of the RBC acquisition.

However, we are not expecting integration charges in 2013.

And we believe the charges for any trust preferred securities redemptions in 2013 should be $60 million or less.

Those two items totaled $562 million in 2012.

As a result, I expect reported expenses to decline by mid-single-digits on a percentage basis, while I expect core expenses, which exclude integration and trust preferred security redemption charges, to be flat in 2013 versus 2012.

Regarding income taxes, we would expect our 2013 full-year effective tax rate to be between 25% and 26%.

Overall credit quality continued to improve in the fourth quarter.

Criticized commercial loans, nonperforming loans and delinquencies all decreased on a linked quarter basis.

Our provision for the fourth quarter of $318 million was higher than the previous guidance of $150 million to $250 million, primarily due to the completion of our implementation of regulatory guidance for loans discharged from bankruptcy.

A provision of $53 million was recorded in the fourth quarter related to this guidance.

Charge-offs in the fourth quarter were $310 million, down $20 million -- $21 million linked quarter.

This includes $45 million in the fourth quarter compared to $83 million in the third quarter as we completed our work related to loans discharged from bankruptcy.

Looking ahead to the first quarter, we expect the provision to be between $200 million and $300 million.

This is slightly higher than last year's quarterly guidance as we expect the benefit of commercial loan reserve releases to be lower in 2013 versus 2012.

Turning to capital, slide 11 reflects our capital position as well as our Basel III goal and our capital priorities.

Our Tier 1 common ratio at the end of the fourth quarter is estimated to be 9.6%.

That is up 10 basis points since the end of the third quarter, primarily due to the growth in retained earnings.

With regard to our Basel III Tier 1 pro forma common capital ratio, based on our current understanding of Basel II and III rules and other estimates, our Basel III Tier 1 common ratio on a pro forma basis was estimated to be 7.3% as of December 31, 2012.

It remains our goal to be within the range of 8% to 8.5% by the end of 2013 without benefit of [phase-ins].

We believe we can get there primarily based on increased retained earnings in 2013.

Overall, this quarter provided PNC with a good foundation for future growth.

And with that, I will hand it back to Jim.

Thanks, Rick.

Overall 2012 provided PNC with a tremendous opportunity to grow our businesses.

Interest rates won't always be this low, and we believe there has never been a better time to invest in growing the number of customers we serve.

Our plans for 2013 are to focus on revenue growth with an emphasis on deepening customer relationships and increasing fee income while reducing expenses.

Our goal in 2013 is to deliver positive operating leverage.

To the extent that we don't achieve revenue growth that outpaces our expenses, we will take further actions to reduce expenses which should improve 2013 results and, importantly, create momentum going into 2014.

Given those expectations, we currently believe that we will be in the range of the First Call estimates for 2013.

That assumes the economic outlook for the year will be a continuation of the current environment.

Of course, if we get a little help in the form of enhanced economic growth or higher interest rates, our results would be even better.

And with that, we will look forward to your questions.

Operator, if you could give our participants the instructions, please?

(Operator Instructions).

John McDonald, Sanford Bernstein.

I was wondering on the loan growth number for the quarter, the $4 billion.

Did you see some acceleration later in the quarter?

And also in the commercial side, any improvement in the utilization there?

No improvement in utilization, John, but what we did see is certainly a lot of growth towards the tail end of the quarter.

And you can see that because the average didn't go up as much.

So we should see a pretty good lift in the average loans going into the first quarter.

And any other color -- sectors or areas that were driving that improvement?

I think the sectors that Rick mentioned, and I have mentioned, with the asset-based lending and the healthcare business, and somewhat in the energy space.

Public finance and a little bit of real estate as well, yes.

Across the board.

Rick, I don't know if you mention this, on the mortgage put-backs with the additional provisioning you did this quarter, what kind of expectations do you have for that going forward?

Do you have to just add for newer originations?

How are you thinking about that?

Yes, that is my plan, John.

That is for new originations.

(laughter) Okay.

And how are you guys thinking?

I see the slide about the capital, and you obviously -- this is a year about building capital.

With that mindset, how are you going into thinking about the CCAR?

Do you want to increase the dividend a little bit?

What are your hopes for this year?

And then as you look out further next year, how should we think about your philosophy around capital return?

We submitted our CCAR, and we are hopeful that we will be able to return some additional capital to the shareholders this year.

But we don't expect a buyback, because this is a capital-building here for us because of the cash we spent last year buying RBC.

But we fully expect to be in the range of our goal for Basel III by the end of the year.

Okay, great.

Thanks very much, guys.

Erika Penala, Bank of America Merrill Lynch.

My first question is just clarity on the expense side.

I just wanted to make sure that I got the message that you were conveying.

So if we take your guidance for the first quarter, are we taking this $300 million off of the GAAP number of [$2.829 billion]?

And, if so, is the message here that this year you're going to keep the core expense levels flat to that quarterly run rate of $2.529 billion?

And to Jim's comments, if the revenue outlook falls short, you could dial that back?

You hit it perfectly.

Exactly right.

Okay, great.

And on your guidance for core NII growth, if you look back over time, except for one blip, one quarter, your core margin is actually quite stable over the past five quarters, varying from the low [3.4] to the high [3.3] level.

I guess, Rick, is the main message there you can continue to keep the core margin relatively stable?

And if so, could you give us a sense of what is happening on both sides of the balance sheet to keep it that way in this rate environment?

Now I wouldn't -- would never give you guidance on the NIM.

I don't think we can give you guidance on the NIM, given the change in the mix of the book and what might happen.

What is important to us is the fact that we are growing loans and we'll continue to grow loans.

I think to the extent there is compression on the yields in the industry, we will try to offset that to the best we can with loan growth.

And as a result, that is where we feel core net interest income will continue to go up, although what happens with the calculation of NIM is going to be subject to the mix.

And just to follow up on that, on slide 4 of your presentation to showed us your new primary client growth, and it was pretty significant and 2011.

Is the main message there we are going to see that come through on the revenue side, either on the fees and on the loan growth side in 2013?

That is -- you are exactly right again.

In this environment, as we said, even a year ago, in this kind of environment we can't drive up economic growth.

We can't drive up interest rates, unfortunately.

We would like to do both.

But given that they are both where they are, I think the answer is you grow clients.

You deepen your relationship with clients, and you manage your expenses down.

And I think if you look at 2012, 2012 was a year where we grew clients significantly.

We had a very, very successful integration and we obviously had charges on the mortgage side.

Going into this year, we fully expect that we're going to be able to continue to drive more revenue from those customers and from new customers, and take the expenses down.

And we don't expect the mortgage charges to recur the way they were in 2012.

So that is exactly what we are going to do for this year.

Okay, thank you for taking my questions.

Ken Usdin, Jefferies & Company.

I was wondering if you could just also give a little bit more color on the fee side.

Obviously, it is real good strength this quarter on the mortgage side, and most notably the corporate services.

In the fall you guys were talking about, and you just mentioned again, Jim, the desire and ability to grow these fees.

But I was wondering if you could help us understand how do you overcome some of these tough comps in the fee growth?

And what gives you the confidence that you can actually grow fees when you take out, Dan, all the charges and stuff?

One of the things that we are doing, as you know, is if you look at the fee income growth and the western half of the franchise, on the C&IB side it is growing more rapidly there than it is in the East, although it is growing in the East.

But, you know, we put the -- we only put those products in anywhere from a year to two years ago in terms of staffing.

Obviously, in the Southeast, basically we acquired a franchise that had de minimis fee income.

They didn't have capital markets.

They had a very modest treasury management business.

They didn't have university banking, a lot of the things that we have; they didn't really have a purchase card.

So, a lot of the products that we put in right away in the Southeast are starting to take off.

So I think the comment that the -- or the last question about how do we see revenue growth, we see revenue growth a lot on the fee side coming from these new customers and newer markets.

And could you elaborate that on -- specifically you guys talk about mortgage, another great -- that it was another up quarter for mortgage.

Can you talk about the pipeline gain on sale?

And where do you think the mortgage banking business trends as we look ahead?

We feel good about it.

We see the volume continuing to increase in the New Year.

We think spreads are going to get a little bit tighter than where we were this year.

Gains on sales spreads are about 3%.

We think they will come down a little bit.

So we are actually thinking that we will see an increase in the revenue on originations going into 2013.

The other thing we are pleased about, if you look at the chart, long-term revenue potential -- we had a 25% increase in purchased mortgages.

And that has been our focus, because at some point in time a lot of the refinance will go away, and it is the relationships that we have in the marketplace with the purchase originations will continue to carry the profitability forward.

So you can see the focus of 2012 on those, and that market is coming back too.

So that focus should have a good reward.

Okay, last thing for me is on the expense side and the incremental couple hundred million you're finding -- the incremental you are finding on the -- and continuous improvement, can you talk about how much further you are reaching?

Meaning -- and I know you made the point that if the revenues don't show, then you will adjust again.

But just can you talk about how hard -- how much harder you are pushing versus how much more still might be around underneath the surface?

Yes, as you recall prior, we had $500 million in there, and we have upped it to $700 million.

Half of that is on the reduction and the compliance costs related to foreclosure.

The other half is the finishing the budget process and identifying more opportunities.

But there is certainly room to grow if we -- or room to reduce, excuse me, if we don't see the revenue show up.

So we think it is a reasonable target for us -- $700 million.

It is more than we have done in any of the last couple of years and think it is going to help us to keep expenses, core expenses flat and reported expenses down about 5%.

Okay, thanks guys.

Moshe Orenbuch, Credit Suisse.

Just a couple of things on the fee income.

The commercial Mortgage Banking, I am assuming that is a business where -- I don't know how long of a pipeline you have got, but that is business where you expect activity to remain strong at least in the short to intermediate term into 2013, right?

That was a particularly strong quarter for us.

We had about $30 million in revenue in that category for the quarter.

We will still have good volumes next year, so I think year-over-year it will be a higher revenue production.

But the fourth quarter was a bit higher than we typically get.

Got it, and the same idea with respect to the M&A fees.

Is that something where you have taken market share, or is it just related to transactions that were unique to the fourth-quarter?

Great finish of the year.

Great fourth quarter.

Yes.

It is really a middle-market business, as you know.

Right, right.

Okay.

And as it relates to the commentary about fee income, rolling that out through the RBC franchise, is there a way that we could [round] the amount?

They have roughly, what, about $200 million of net interest income quarterly?

Is that about right?

So is it (multiple speakers) do think it could be (multiple speakers)

We integrated it immediately so we really don't -- the one thing we do know is it was certainly accretive, and we think about $0.40 for the year accretive.

But we don't have a lot of details we are trying to track throughout.

So, can't (multiple speakers)

Right, but I guess -- I am just trying to bound what it might -- what might be a reasonable number over some two-year to three-year period.

Is it $50 million a quarter, you think, out of that, or is it $75 million?

Is there any way we could put some parameters around that?

I would say we are running at about $50 million a quarter right now, so I think you can see the increase from there.

Increases, got it.

Into deeper relationships.

Okay, thank you very much.

Mike Turner, Compass Point.

On the credit quality, it seems like with the level a loan growth you're getting, the amount of potential reserve releases going forward may be few and far between.

Is that correct?

And what kind of downside can we see in charge-offs?

It looks like the uptick this quarter, mainly due to home-equity loans when I strip out about the noise from last quarter, but can we get down to 30 basis points of losses?

Or how much more upside on the loss side do you see?

The challenge right now is because of this implementation of the loans that have been discharged in bankruptcies.

We had a couple of one-time items in the third and fourth quarter, which added $100 million in the third quarter to our nonperforming loans and added $200 million in the fourth quarter.

So that is why some of our trends there are not coming down as quickly as we would like to see them happening.

But all I was saying on the reserve releasing, we are still going to have commercial loan reserve releases.

They just won't be as large as they were in 2012.

At the moment, we are not releasing any reserves on the consumer side, as we are continuing to watch the charge-offs in that space.

Okay, great.

And then, also, maybe if you could talk about the M&A environment versus a quarter ago; are you seeing any change and seller attitudes or increased interest?

Or any color there would be helpful.

That, I think -- I think it has been relatively quiet in some small banks, I think, have been selling to other small banks, and mostly those are some kind of distress sale.

But we are really more focused on just growing our customers in the markets that we already in.

I think there is a tremendous opportunity to do that, and so we are not spending a lot of time looking around in the M&A space.

But we don't see a lot of it, either.

Thanks, and one last one, sorry, on the Mortgage Banking, how much pickup are you getting incrementally from the RBC platform?

Are you seeing it as a percentage of those originations each quarter?

Is that growing rapidly?

Or -- color there would be helpful.

The mortgage company was already in the Southeast.

So, the addition of RBC is an enhancement to the existing distribution system.

So I don't think it is a big lift at this point.

Okay, thank you.

Mike Mayo, CLSA.

Just a little more color on the reserve build, which stands out versus some of your peers.

So, how do we on the outside know the reserve build is due to more aggressive underwriting by PNC, or more conservatism by PNC?

Well, you had a couple of things, Mike.

You had about $50 million that we provided in the quarter related to this bankruptcy.

We had a lower impact related to releasing reserves on commercial loans of about $40 million, and we had an increase in our portfolio.

So, I think collectively, we have added some reserves related to those, and that is part of the reason why we have an increase this quarter of a provision and not a lot of releasing overall.

It sounds like you are just being (multiple speakers)

Mike, I do expect that next year, as I said, I expect in the first quarter that the provision levels would be between $200 million and $300 million.

And I expect charge-offs not to remain at this elevated level unless there is more changes in how we provided by the regulators on how to do our charge-off procedures.

All right, so it is kind of a one-time year-end bump up in the provision?

Yes, that is correct, Mike.

And, then, as it relates to loan growth, can you give any additional color?

So, loan utilization is not improving, but you're seeing growth in asset-based lending, healthcare, energy.

Are these syndicated loans?

I know you have been doing this for a long time, but some of your peers have been getting more aggressive with their pursuit of syndicated loans, sometimes out of market.

So I guess I'm asking what is the competitive landscape when you're getting this additional loan growth?

The additional loan growth -- we are not simply buying syndications.

We won a number of syndications where we are the agent.

But the way we manage the business, the individual relationship manager has to get the right risk-adjusted return on the relationship.

So, if they're not getting some kind of fee income, in many cases it is difficult to add the relationship, and so we are spending a lot of time becoming the agent bank.

In many cases we are generating new relationships that has fee income associated with it, rather than just buy a piece of somebody else's syndication.

That doesn't work very well for us.

Jim, I think you mentioned before, Ohio had been getting pretty competitive.

It might have been a quarter or two ago.

Is Ohio still very competitive, or when you're negotiating these new loans do you have to give concessions on price?

Or what is your -- what is the temperature?

I would say there is obviously a very competitive landscape.

We just did a heat map, and it is kind of funny; we run it at different competitors in different markets.

Ohio is particularly competitive, because of a few of the banks over there.

The spreads are still good.

And terms have softened a little bit, in terms of increased tenor by the year and a half or something like that.

We're trying not to go out that long.

But in any event, there is a little more competition in Ohio.

But in different markets we have different competitors that distinguish themselves from time to time.

But we are being very successful in growing new customers, and a lot of it is tied to new products and because of our presence and our brand in the marketplace, and the good job our folks have done.

So I don't think it is a pricing issue for us.

All right, thank you.

Nancy Bush, NAB Research.

A couple of regulatory related questions here.

Jim, could you just give us some insight into how the regulators are guiding the larger banks about acquisitions?

We know that they basically said to them the largest banks don't even think about doing a deal.

But when you go into the tier of the large regional banks, is there any sort of explicit guidance about your ability to do deals?

I read that in the newspaper a few weeks ago, and a couple of people called me.

And somebody called and asked if we were told not to bid on something.

And that just really isn't true.

We have not been looking for things to buy lately, so it is not like we have gone down to Washington with a bunch of requests.

But, no, I don't think that is the case.

I think they are much more -- now for the really big banks I can't -- certainly can't speak on their behalf.

But I think in our case, the discussions that we have with the regulators regularly are all about getting to the capital requirements that we are focused on, and making sure that we have our risks covered off and the implementation of new regulations, and so we have not heard anything about coming to us and saying, no, don't do a deal.

Okay, and Rick, I would ask you a similar question about loan loss reserve methodology.

Because we have heard this commentary or read this commentary from the OCC saying we are not pleased with loan loss reserves drawdowns et cetera, et cetera.

Is there any implicit or explicit guidance about what you should do with reserves going into 2013?

No.

There is always a very active dialogue on the subject, as you can imagine, but we have our models we run.

We sit down and review it with the regulators, but in the end -- and our accounts as well, right -- and in the end, it is what we think we need to provide.

Other than some of the challenges to the charge-off policies that you have seen during the course of the year, it is just -- it is more of a dialogue than it is a directive.

Do you guys have any thoughts about this proposal, this FASB possibility of proposing life-of-loan reserves, et cetera?

Yes, it is an early days, obviously; the proposal is out there.

We had a chance to look at it before it came out.

Comments are due by April, I think it is.

But I think this is something you're not going to see implemented until 2015 or 2016.

And if it is implemented, it probably means more of a one-time charge to equity, and then higher capital -- or higher allowance coverage ratios going forward.

And in my mind it just means everyone to have more capital set-aside for the challenges in the future.

Okay, thank you.

(Operator Instructions).

Matt Burnell, Wells Fargo.

Thanks for taking my questions.

Just, first of all, just back on the issue of the GSE put-backs, your level of outstanding put-back requests at the end of the third quarter was up about 37% from the end of 2011.

Could you update us on what the dollar amount of those outstanding requests were at the end of 2012?

I don't have that.

Matt, I would have to call you back.

I don't have that level of detail here with me.

Okay.

It is usually in the Q. I was just curious if you had it now.

Matt, the only thing I would comment on is if you look at the bottom of the page, you look at the losses, based upon what we did in the second quarter, based on demands, that has actually played out as expected.

You can see that some of the demands are coming down, and the losses are starting to either flatten out or ease.

So, based upon what they have told us, that is being managed pretty well.

I think what has changed is they have made additional requests, and so obviously we have had to reflect that in the current quarter.

Yes.

And how do you get comfortable, given what you have heard from the GSEs, now that they have gone even further back into history, in terms of getting comfortable that they are not going to further put more requests above what you are currently estimating?

I guess I'm just trying to get the sense of -- this is now the second time you have done this.

And I appreciate that the circumstances are different the second time, but how do investors get more comfortable that you and the GSEs are on the same page?

Well, the only thing I can say is we have got very strong reserves against this exposure.

And if the industry gets hit with more of these, we will probably get hit with more as well.

We don't have a lot of risk in -- from 2000 to 2003, or a smaller amount of risk.

So I don't expect a huge impact from that.

And then one final question on your increased savings guidance, and I just want to make sure I heard you correctly that the new target for the $700 million in continuous improvement savings is also going to be met with higher investments back into the business.

So that extra $200 million is not necessarily going to flow to the pretax bottom line.

Is that correct?

That is the current estimate.

And what I would say is, of that $700 million, $550 million is basically reinvesting back into our businesses, which includes $150 million-plus related to the full-year impact of the RBC acquisition.

The other $150 million is basically what we have set-aside at the moment for unanticipated charges, and we are not sure whether they will come or they won't.

So we have a little cushion here there, but things happen.

And we felt we ought to be prepared for that in our forecast.

Okay, thank you very much.

Terry McEvoy, Oppenheimer.

There was an article in early January talking about some of the challenges that PNC was facing in their move into the Southeast, and I was wondering if you could talk about maybe customer acceptance to the (technical difficulty) product mix.

And as I look at slide 4, anyway you can break out within any of those areas specifically the Southeast to maybe counter that argument -- or that article a bit.

I wish we had more markets like that where we had trouble breaking in.

As I think we have discussed before, we had 270 jobs that we wanted to fill.

We had over 10,000 job applications, coming mostly from other bankers.

We filled those quite rapidly.

I would say that, as Rick said, that it was -- the transaction was $0.40 accretive for the year.

And each market we're in has exceeded our expectations.

So, when you look at it as a whole, what we did, as we always do, is we integrated it right into the Company.

And each market has its own regional president or has its own goals and objectives.

And so we don't maintain it as a separate company or a separate market, because we have individual markets that the regional presidents manage.

Each one of them has a goal for this year, which is substantially in excess of last year, and I think everybody feels good about our meeting it.

So we're very happy to be in the Southeast.

And as you know, we paid meaningfully less than book for that franchise in the fastest-growing market in the United States.

So we're very pleased.

And then just to follow up.

You have been there three quarters now.

Could you talk about the competitive landscape, specifically on the Corporate Banking side in the Southeast versus some of your legacy markets -- any noticeable difference at all?

Well, the growth has been quite nice, quite frankly.

And there has been a lot of disruption in the Southeast, as you might imagine.

Over the last three or four years, a lot of customers have had interesting experiences with their banks.

There has been a lot of changes change in personnel; there has been a lot of layoffs.

Obviously, the Southeast was dramatically impacted by the downturn, and their banks were as well.

And what we are seeing is that our brand, which brings to bear a Company with high-quality products and a legacy of being able to take care of customers through the cycle, is selling very, very well.

So I think it is good news for us.

Great, thank you.

Gerard Cassidy, PNC Bank (sic).

Rick, coming back to your comments about the put-backs, can you give us a little more color on what the GSEs changed on you?

Besides maybe going back deeper into further years, meaning 2004 and 2005, were there any other changes that from the original requests that are different than this write-down or this reserve build?

We had specific requests, clearly on the 2004 to 2005, and that was about half of the overall charge.

We then had additional requests on the 2006 to 2008 on modifications from the other regulator.

And then what we decided to do was to say let's harmonize the demands so that we know they have the same regulator.

They will be back for the rest.

And then we talk up the reserve for that, assuming what one is asking for the other will eventually ask for.

And so that got us to about $250 million, and then we had current production of $4 million and that is the charge at $254 million.

Good.

Another question just regarding -- and maybe this is for you, Jim.

Looking at your efficiency ratio, when things subside and we get back to normalization on credit costs, and your integration of RBC is completed, where do you think PNC will be on an ongoing efficiency ratio?

What is a good target that you think you guys can get to?

We would like to get into the [50s], but one of the things that happens with us, because of our tax-free lending business, and also because of some of the states that we are in that have share stacks, which count as expenses as opposed to tax, we have a different -- we will have a somewhat higher overhead ratio than others.

I think it is worth about 4 percentage points.

The two together, that is correct.

Two together.

By the way, that is okay.

We get it back, as you see.

And Rick just gave guidance this morning that we expect our tax rate to be between 25% and 26%, which is lower than other people.

So that impacts the expense ratio.

But I think we have to continue to take expenses down.

I don't think there is any question about it.

This interest-rate environment, expenses just have to go down.

And Rick mentioned that we have a target of $700 million this year, and if interest rates stay low, we are just going to have to continue to grind them down.

That is how it is.

So, we will do that by remaking, and I think we have made a couple of presentations about remaking the retail business, because over 50% of our expenses are tied up in the retail business and operations and technology.

And a lot of that is driven there.

But I think there is -- as the customer evolves, I think you'll see a lot of expense come out of the consumer business, because they are using more efficient distribution services.

We have talked about that when our branch transaction costs $4 and we have now got -- we have got -- I don't know what the number is anymore, but it is well over 10,000 items a day that are coming to us on deposit through a picture with a cell phone.

And we haven't incented anybody to do that financially yet.

But that is an opportunity, clearly.

So I think you will see us continue to drive the number down.

But it will be higher than some others because of our business mix.

Okay.

And, Rick, coming back to you, on your securities portfolio, what is the duration of that now?

It is about 1.8 years and we have got about a weighted average life about 3.2 years.

And then, finally, just a technical question on CCAR.

When the assumption on the capital markets or the equities market falling, I think, it was 50% again is what you guys had to bake into your numbers, did you have to write down the BlackRock investment by that amount as part of the CCAR process?

No, we didn't.

No.

But we did look at the BlackRock stake and look at that as idiosyncratic risk, and assumed what might happen to that if we had significant impact in their overall earnings or in their goodwill and what that might mean to us.

Okay.

And how about that Visa position that you mentioned?

Was that -- were you required to -- again, just in the CCAR stress test analysis?

Yes, we had to look at that market value.

But remember, the book value is only $250 million, so the likelihood of having impairment would be pretty slim.

Sure, no, no, I agree.

All right, thank you.

Paul Miller, FBR Capital Markets.

A follow-up on the RBC stuff down South.

Have you seen any decent loan growth yet?

Have you gotten any penetrations in the commercial side?

Yes (laughter).

I think we are.

Can you talk about it a little bit?

What percentage of your growth is coming from down there?

Not a lot yet, and the reason being is remember when we acquired them, we ran off -- we are running off some balances related to the book.

So, with what we are able to originate, we are keeping the balances reasonably flat.

So you're not seeing a net lift yet related to that book.

With the kinds of customers we are looking for and the kinds of quality customers we are looking for, we are seeing a meaningful uptick.

I know that knock on RBC, they never really put any effort down there.

Have you been able to expand, say, your retail bank?

And I know there is other fees that you're expanding down there, but is there a mortgage bank out there getting any loans from those areas?

The most interesting thing is the fee income side.

We saw, when we looked at RBC, is we saw a company that really didn't have much of a platform at all in terms of products.

The Royal really never build a product set for the US.

As you know, it goes back to really a community bank platform, and so when we put in capital markets, we put in treasury management, we put in university banking, the lift has come from that.

Also, we go around and call on corporate customers that they really didn't have the ability to service at all.

And that has been a lift for us.

Now there is a lot of -- there were a number of smaller customers with higher risk profiles that we have allowed to run off.

And so that is why you don't see the big net lift, as Rick said, but the fee income lift and the customer growth has been well in excess of our expectation.

Okay, thanks a lot, guys.

Betsy Graseck, Morgan Stanley.

Two questions, one on the NIM; but maybe you could just give us a sense as to how much more flexibility is there on the liability side?

Just wanted to understand what more you could do on bringing cost of funds down.

If you look at page 6 of the supplement, now you're probably aware we put in a new chart there to try to help people to understand what we look like without the purchase accounting on rates and yields.

Now I think when you look at that you'll see borrowed funds are down 1.23% and deposits at [31], so probably not a lot of room on the deposit side -- some, but not a lot.

And we do have a few more opportunities on the borrowed funds, and we actually have some $200 million of Trust Preferred securities that we will have to consider whether we are going to call them in the second quarter of this year.

So there is still an opportunity to bring the borrowed funds down a bit.

But the real -- most of what we could do on the liability side we have done.

Sure.

In the first half we will, as you know, have the full year effect of the CDs that were repriced in the first half of last year.

And then, of course, we have the trust preferred redemptions that took place over the course of the year.

And we will have that reduction on a full-year basis in 2013 as well.

Right.

And then battling the loan pressure is really a drive, I would think, on mix shift going from securities into loans, because your loan-to-deposit ratio is still relatively light.

Is that fair?

That is why in page 6 we wanted to break that out for you, because as you look at it, we have had loan yields coming down.

They've stabilized a bit.

And right there, if you take out the purchase accounting at a 4% loan yield, we can replace that anywhere between high 2%'s up to the mid-4%'s depending on the mix of products we have.

And where you're really going to see the drop is going to be on the securities side.

But the more we can replace those security yields with loan yields, we have an opportunity to keep the overall asset yields, hopefully, pretty stable to down.

Sure.

Okay, and then just -- the other question is on operating leverage.

As you have already described quite a bit in the prepared remarks and Q&A, based on what you're highlighting, you're going to see a pretty significant, positive operating leverage in 1Q 2013 versus 4Q 2012.

So, then, the question really is do you sit back and watch how things go and we see some activity if you need to true up towards the end of the year?

Or do you have a sense of targeted revenue run rate that, if you're not hitting, you might end up doing more in the expense side before we necessarily see that you have slipped potentially in the operating leverage targets?

Your former point, I think, is correct.

This is a continuous improvement process.

We're going to have to continue to work on taking expenses down, as I mentioned in my comments, because until the interest rates rise or we get a 4% or 5% economic growth, neither of which we are projecting, I think we just have to keep working on expenses and growing customers so that we have a good run rate going into 2014.

And that is a continuous improvement process for us, and I think there is a lot of opportunity for us to keep -- just to keep working on it.

So I don't think this is -- if need be, this could be -- okay, we're going to take some expenses down in fourth quarter.

I don't think that is the way we are approaching the year.

We are approaching the year that we want to have expenses lower at the end -- core expenses lower at the end of the year than they are at the beginning of the year, and then we will have a lower run rate going into 2014.

Right, okay, thanks.

Eric Wasserstrom, PNC Bank (sic).

Two questions, please.

The first is in the middle of the fourth quarter you guys disclosed in a presentation your Corporate Banking and AMG sales at RBC Bank, which at that point for 2012 year-to-date was $48 million.

I was wondering if you had a year-end statistic for that figure.

We would have to get back to you.

I don't have -- we don't have it with us.

They are compiling that data now.

Okay.

And then my second question is several other institutions have indicated that, with particular exposure to real estate in the Southeast as home price values stabilize or improve, it will facilitate reserve release in the related portfolios.

I wonder if that is true for you is well, or if that is somehow captured somewhere else with respect to your RBC acquisition, and how it might manifest itself in your P&L.

At the moment we haven't anticipated that in the guidance we have provided.

What I would tell you is that we do expect our OREO-related cost to come down a result of that.

This year it was roughly $120 million and we think next year it will be below $100 million.

Yes, okay.

But to the extent, for example -- (multiple speakers)

When you see real estate prices increase it will be a lovely thing, for a lot of reasons.

Yes, certainly.

But just so I understand, with specific respect to the provision, would it result in release or did you -- in your markets did you capture that some other way?

I don't see any release on the consumer side in the near term, and the guidance we have given so far is for the first quarter, to say that it will be about $200 million to $300 million of provision.

And I don't see a lot of consumer releases.

I do expect to continue to see releases on the corporate side.

All right, thanks very much.

And we will update that guidance after afterwards as we start to see where those trends set.

Great, thank you.

And there are no further questions at this time.

Okay, thank you very much everyone.

Thanks for being with us this morning.

As I mentioned earlier, we were very, very pleased with a number of things last year, and obviously there were a couple of things we were less pleased with.

We look forward to a much -- a much quieter 2013 as integration costs and a lot of the TRUP charges and the redemptions will be behind us.

And hopefully we don't have these same mortgage issues in 2013, and we can just grow customers and grow income and reduce expenses.

Thank you very much everyone.

This concludes today's conference call.

You may now disconnect.