PNC Financial Services Group Inc (PNC) 2014 Q1 法說會逐字稿

Good morning, my name is Pamma 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 conference 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.

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

Participating on this call are PNC's President and Chief Executive Officer, Bill Demchak, and Rob Reilly, Executive Vice President and Chief Financial Officer.

Today's presentation contains forward-looking information.

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

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

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

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

These statements speak only as April 16, 2014 and PNC undertakes no obligation to update them.

And now I would like to turn the call over to Bill Demchak.

Thanks, Bill, and good morning, everyone.

As you have seen this morning, we reported net income of $1.1 billion or $1.82 per diluted common share with a return on average assets of 1.35%.

It was a good quarter for us highlighted by aggressive expense control and continued improvement in credit quality inside of a somewhat difficult revenue environment.

You saw that we grew loans by $2.6 billion and deposits by about $1.5 billion.

On the loan side once again the growth came from the commercial side of our business where the retail balance is actually declining slightly.

Expenses were down due to seasonality and our continued emphasis on improving efficiency throughout the organization.

And Rob is going to take you through some details on this in his comments.

It is worth noting though that expenses were down even as we are making significant investments across our Company to bolster our core infrastructure including cyber and to continue to support our ability to deliver the products and services that our customers want.

I mentioned it being a tough revenue environment and in fact revenues declined quarter over quarter.

Now some of this decline reflects seasonally lower activity and a lower day count, as well as in a lower benefit from release of residential mortgage repurchase reserves.

But beyond this, we remain in a low rate environment, fierce competition for earning -- with fierce competition for earning assets as we tried to outpace purchase accounting runoff and lower mortgage revenues with poor loan growth and fee growth across all of our lines of businesses.

While we lost that race in the first quarter I'm somewhat encouraged by the modest increases in utilization we've seen in our commercial balances, the continued success of our specialty lending areas as well as our year on year growth in core noninterest income.

We continue to make ongoing progress against our strategic priorities which I've outlined here in the past.

This quarter actually marked two years since we closed on our acquisition of RBC Bank USA.

Starting with only a retail branch network we have fully built out our asset management and corporate banking businesses across the southeast.

We now have about 4,000 front-line employees working across our markets in the southeast and we are growing the business there faster than we anticipated on the back of significantly improved brand recognition.

Now intense competition has made it somewhat more difficult to win new clients in certain segments than when we first arrived there.

But across all lines of business we are pleased with growth that is outpacing the growth in our Northeast and Midwest markets and continues to gain momentum.

To highlight another of our strategic priorities, in the retail bank customers continue to migrate to ATM online and mobile channels as their preferred vehicles for everyday transactions.

And this year we're focusing on piloting a conversion of our traditional branches to the universal branch model, which emphasizes consultation and sales.

The transformation of our Retail Banking business is being self-funded with the savings we are generating through our continuous improvement process.

As was said, our strategic priorities are long-term efforts and are intended to deliver a differentiated customer experience and to create long-term shareholder value.

To that end we continue to strengthen our capital position in the quarter and, in keeping with our previously stated intention to return more capital to our shareholders, we announced an increase in our quarterly common stock dividend of 9% to $0.48 per share beginning with the May 2014 payment.

We also announced plans to repurchase up to $1.5 billion of common stock over the next four quarters.

And with that I'll turn it over to Rob to take you through the first-quarter results.

Thanks, Bill, and good morning, everyone.

Overall we had a successful first quarter.

Our results were driven by continued loan and deposit growth, well-controlled expenses and credit quality improvement.

As is usually the case in the first quarter, seasonal factors affected revenue and expenses and I will cover that in a moment.

As Bill just discussed, these continued achievements are enabling us to return more capital to our shareholders.

Let me start with our balance sheet on slide 4. As you can see, total assets on our balance sheet increased by $3.2 billion or 1% on a linked quarter basis primarily driven by net loan growth of $2.6 billion or 1.3%.

Total commercial lending during the first quarter of 2014 grew $3.6 billion or 3% primarily in real estate, corporate banking and business credit.

And consumer lending was down by $1 billion or 1% linked quarter as increases in automobile lending were offset by declines and other consumer and residential mortgage lending.

Investment security decreased by $1.7 billion or 2.7% in the first quarter as security sales and prepayments exceeded purchases.

And lastly our balances with the Federal Reserve increased in anticipation of proposed rules on liquidity coverage standards.

Total deposits increased by $1.5 billion or 1% in the first quarter of this year.

Deposit growth in the first quarter was primarily driven by increases in transaction deposits which were up $1.7 billion or 1% related to growth in consumer transaction deposits including higher interest-bearing demand deposits.

Shareholders' equity increased by $987 million or 2.3% in the first quarter primarily due to growth and retained earnings into a lesser extent higher AOCI related to net unrealized securities gains.

This helped drive our capital ratios higher.

As a result our pro forma Basel III Tier 1 common equity ratio was estimated to be 9.7% without the benefit of phase and as of March 31, a 30 basis point increase from prior year end.

As we highlighted in our most recent 10-K, this ratio is computed using the standardized approach.

As you know, from a regulatory capital perspective our [bonding] constraint for 2014 is the transitional [B3] ratio, which was estimated to be 10.8% as of March 31.

As I mentioned, our balance sheet reflects our efforts to comply with the proposed liquidity coverage ratio.

For example, our interest-earning deposits with banks which are primarily with the federal reserve, increase by $2.7 billion on it linked quarter basis, and by more than $13 billion compared to the same time a year ago.

We increased total borrowings by $700 million or 2% linked quarter.

And a substantial portion of this supported our enhanced liquidity position as well as loan growth.

As you know, the rules on LCR are still in proposed form; however, we have a clear line of sight on reaching the final targets once they are established.

Finally, our tangible book value reached $56.33 per common share as of March 31, a 3.2% increase linked quarter and a 12% increase year over year reflecting our commitment to delivering shareholder value.

Turning to our income statement.

As you can see on slide 5, net income was $1.1 billion or $1.82 per diluted common share and our return on average assets was 1.35%.

Our first-quarter results for net interest income and non-interest income were as expected, while exceeding expectations on expenses and provision.

Let me highlight a few items in our income statement.

Net interest income declined by $71 million or 3% compared to the fourth quarter.

Virtually all of this decline was due to lower purchased accounting accretion of $28 million and fewer days in the quarter which accounted for approximately $35 million.

Importantly, core run rate NII remained relatively consistent with fourth-quarter levels as loan growth substantially offset continued modest spread compression.

Noninterest income decreased by $225 million or 12% linked quarter primarily due to the higher fourth-quarter benefit we had from the release of repurchase reserves and seasonal declines in fee income.

I will provide more detail on this in a moment.

As a result total revenue for the first quarter was $3.8 billion, a decline of $296 million or 7% compared to the fourth quarter consistent with our expectations.

With regard to expenses, we were very pleased with our first-quarter performance.

Noninterest expense declined by $250 million or 10% compared to the fourth quarter as a result of overall disciplined expense management as well as some seasonally favorable effects.

Finally, provision in the first quarter declined to $94 million due to continued overall positive credit trends.

Comparing results to the prior year quarter our net income was up $65 million or 7% primarily due to well manage expenses and lower credit costs.

Now let's discuss the key drivers of this performance in more detail.

Turning to net interest income as you can see on slide 6, total net interest income decreased by $71 million or 3% for the reasons I just highlighted.

As you can see, purchase accounting accretion declined on a linked quarter basis consistent with our expectations.

Looking ahead, we continue to expect purchase accounting accretion to be down approximately $300 million for full-year 2014 compared to 2013.

Net interest margin declined by an overall 12 basis points linked quarter.

Of that amount approximately 4 basis points was attributable to the lower purchase accounting accretion.

Of the remaining 8 basis point decline in core NIM 4 basis points was due to the increased that balances as well as other LCR related actions and the other 4 basis points was primarily due to spread compression at levels consistent with what we have been experiencing for several quarters.

In terms of interest rate sensitivity our balance sheet remains asset sensitive as we have maintained a duration of equity of approximately negative two years.

Going forward we will continue to remain disciplined with a focus on achieving appropriate risk adjusted returns.

Turning to noninterest income, consistent with our expectations our fee income declined by $158 million or 11% on a linked quarter basis primarily due to reserve releases related to our repurchase obligations and seasonal factors.

However, excluding the impact of residential mortgage, the linked quarter decline in fee income was $48 million or 4%, largely reflecting seasonality.

Year over year fee income increased $85 million or 8%.

Asset management fees held study on a linked quarter basis reflecting stable equity markets.

Compared to the same quarter a year ago asset management fees increased by $56 million or 18%.

Assets under administration were $255 billion as of March 31, an increase of $19 billion or 8% compared to the same time a year ago.

Consumer services fees and deposit services charges were both lower compared to fourth-quarter results again reflecting a seasonally lower volume of customer initiated transactions.

Compared to the first quarter of last year volumes underlying consumer services fees were up, brokerage fees increased $3 million or 6% reflecting our strategic priorities, and deposit service charges increased $11 million or 8% as a result of growth in customer activity and changes in product offering.

Corporate services fees were flat linked quarter.

Our merger and acquisition advisory fees were above typical first-quarter activity but below their record fourth-quarter volume.

This decline was partially offset by a net increase in our CMSR valuation as a result of movement in interest rates.

Compared to the first quarter of last year corporate service fees increased by $24 million or 9% driven by higher merger and acquisition advisory fees and capital markets activity.

Let me spend a few minutes discussing residential mortgage as fees declined by $110 million linked quarter.

Virtually all of that was driven by the impact of the mortgage repurchase reserve release related to our settlements with Fannie Mae and Freddie Mac which we made in the fourth quarter.

In addition, we also saw lower loan sales revenue as origination volume fell to $1.9 billion in the first quarter from $2.5 billion in the fourth quarter and from $4.2 billion in the same quarter a year ago.

While our volumes were down in both comparisons on a percentage basis we experienced less decline than the broad industry.

The gain on sale margin was 453 basis points in the first quarter.

As you know, our margins tend to be higher than the industry as we don't utilize the broker channel to originate loans.

However, this quarter our margins benefited even further due to favorable mark-to-market accounting adjustments.

We continue to expect our margin to trend closer to 300 basis points through the remainder of 2014.

In regard to expenses, as you know, we announced expense reductions in residential mortgage during the fourth quarter of last year and we have fully captured those savings.

Going forward we will continue to monitor trends in the business and proactively manage expenses in line with revenue throughout 2014.

Other noninterest income decreased by $134 million linked quarter primarily due to lower revenue from private equity investments, which had a particularly strong fourth quarter.

We also had lower credit valuations for customer related derivative activity and lower asset sales.

These decreases were partially offset by the impact of the sale of VISA stock in the first quarter.

Despite seasonal pressures noninterest income to total revenue was 42% in the first quarter, down slightly from fourth-quarter levels but up 2 percentage points from the same quarter a year ago.

Turning to expenses on slide 8, first-quarter levels were down by $250 million or 10% as a result of strong benefits from our continuous improvement program overall expense management and some seasonality.

As we previously stated, our CIP program has a goal to reduce cost by $500 million in 2014, we are one quarter of the way through the year and we've already completed actions relating to capturing more than 35% of our goal.

And as a result we are confident we will achieve our full-year target.

In addition to CIP savings we had seasonally lower costs this quarter in virtually all categories.

With these savings to date, along with further planned activities, we intend to fund the significant investments we're making in our infrastructure and in our retail bank transformation.

One last item on expenses, during the first quarter we did adopt new accounting guidance related to low income housing tax credits.

As you are aware, this change reclassifies noninterest expenses on certain tax credit investments to tax expense with minimal impact to EPS.

In line with accounting requirements, we did recap prior periods to reflect the impact of these changes.

As a result this change is year over year expense neutral and does not impact expense guidance.

It does, however, increase our effective tax rate which we now expect to be approximately 26%.

As you can see on slide 9, overall credit quality continued to improve in the first quarter, nonperforming loans were down $141 million or 5% compared to the fourth quarter as we saw continuing broad-based improvements across both commercial and consumer loan portfolios.

Past due loans decreased by $264 million or 11% on linked quarter and net charge-offs held steady.

Net charge-offs for the first quarter were 38 basis points of average loans which was consistent with the ratio for the fourth quarter.

Our provision of $94 million declined by $19 million or 17% on a linked quarter basis and this was driven by continued improvements in credit quality and increases in home values.

Finally, the allowance for loan and lease losses declined on both a linked quarter and a year-over-year basis and is now at 1.78%.

While we were pleased with this performance we continue to believe credit trends may not remain at these levels.

In summary, PNC posted a successful first quarter consistent with our expectations.

Assuming a continuation of the current economic environment we continue to expect that full-year revenue will be under some pressure and as a result could likely be down year-over-year due to further purchase accounting increasing declines as well as lower residential mortgage revenues.

In this environment we will remain focused on disciplined expense management and we continue to expect full-year expenses to be down when compared to 2013.

Looking ahead to the second quarter, we expect modest growth in loans, we expect net interest income to be down modestly due to the continued decline a purchase accounting accretion and further spread compression.

We expect fee income to increase in the low-single-digits reflecting continued focus on our strategic priorities.

We expect noninterest expense to be up by low-single-digits as second-quarter expenses typically increase compared to first quarter.

And finally, assuming a continuation of current credit trends, we expect the provision for credit losses to be between $100 million and $150 million.

And with that Bill and I are ready to take your questions.

(Operator Instructions).

Matt O'Connor, Deutsche Bank.

Just to follow up on some of the net interest income comments you made heading into 2Q.

As we look at core net interest income ex the purchase accounting accretion, do you expect that to be relatively flat or what is the outlook for core NII and core NIM?

Sure, Matt, and our guidance is for the full NII and NIM.

Obviously, when we say modestly down, if you take our purchase accounting that modestly down decreases by a bit.

But it is really going to be a function of what Bill mentioned in his comments, which is that rate so to speak between loans and yields.

So that will determine the core NII levels and, of course, the core NIM levels.

Okay.

So it sounds like it still might be under a little bit of pressure, if I am hearing you correctly, in 2Q?

Well, I think yields are certainly under pressure, and then the loan growth is, in terms of the modest growth that we expect to be seeing, will be what offsets that.

Okay.

And then on expenses, obviously better than expected this quarter.

Should we think about that as flowing through for the rest of the year, that you are going to beat some of the targets; you are at 35% already?

Or were you able to front end some of it and just stick to kind of the original expectation?

Yes, sure, Matt.

The short answer is it is too early to extrapolate our first-quarter results.

We are pleased with the level in terms of the $250 million decrease linked quarter.

So we are pleased that that performance prompts that question.

But there is seasonality involved there.

There are further investments in the business that we are going to make in the balance of the year.

So it is too early to extrapolate that, but it is safe to conclude that we are off to a good start.

Okay.

And then just lastly, at this point do you guys expect to use all of your buyback capacity that you were approved for from the Fed under CCAR?

We shall see, right?

We are going to just kick that off.

We are obviously value dependent to some point, to some extent.

We see value where we are today, so maybe I will leave it at that and we will see where we end up as we go through the year.

Okay, that is helpful.

Thank you.

Paul Miller, FBR.

Can you address a little bit on the southern -- I guess the RBC franchise, where that is and how is that growing year over year?

Just add color around those comments.

I'm sure -- just anecdotally, across virtually all of our lines of businesses, the growth in the southeast is outpacing what we are doing in our legacy franchises.

Surprisingly, to me at least, probably most pronounced on the retail side where client growth there is much higher than legacy markets.

C&IB and wealth kind of starting from scratch, continue to add good clients and loan balances and fee income inside of wealth.

So it is progressing well, largely across all of the markets that we acquired.

It is coming -- we have said this before -- it is coming certainly in terms of C&IB and wealth off of such a small base.

The percentages are massive in terms of increases.

The impact to our bottom line, it is still early days, and that will grow through time.

And then can you talk a little bit about the competitive nature, especially in the CRE book?

We're hearing a lot of -- some regional banks talk about there is more and more people at the table, be it insurance companies, smaller regional banks and whatnot.

How competitive is that CRE market out there right now; and C&I, I should say?

Well, let's just start on real estate.

I mean you have to remember the capacity that left the market post crisis with the European banks pulling back -- the slack from that and then the CMBS market shrinking, being taken up by insurance companies and new bank entrants.

The competition in the market has accelerated.

As I look at sort of our spread declines quarter on quarter or over the last six months it is probably most accelerated inside of real estate.

Structures are still good.

I think one of the things that we benefit from is because we lent straight through the crisis to our core good Class A clients.

They continue to come back to us.

So we need to be on market, we don't need to be through market.

We continue to see good growth again led by multi-family, some term stuff on balance sheet, a pickup in office properties and even a little bit in lodging.

On the C&I side it is a tough fight, it is harder and harder to pull -- certainly versus the crisis, to public a client away from a competitor.

Interestingly the spread declines seem to have slowed down relative to what we were kind of marching through last year and it varies by segment.

So, in the specialty businesses and asset based lending, certain public finance products and equipment leasing there are less providers so therefore less competition and a little bit more room on spread; the generic product is tough.

Okay, thank you very much, guys.

Erika Najarian, Bank of America.

My first question if we could just get a little bit more detail on the LCR.

I was just wondering, does your guidance for net interest income for the remainder of the year include the balance sheet actions that you plan to take for LCR?

And underneath that, how should we think about the dynamic of balance sheet growth versus loan growth as you build liquidity?

And is the 4 basis point impact from liquidity actions this quarter going to be a similar impact in the following quarters?

Okay, Erika, this is Rob.

I will try to answer most of that, remind me what I didn't answer.

In regard to the liquidity coverage ratio and our efforts to move in compliance, as you know, the rules aren't finalized yet.

So we are moving towards somewhat of an unknown target.

That said, we have done quite a bit.

And that has shown up in our net interest income and our NIM.

Last quarter you will recall 7 basis points of our NIM contraction was LCR related and this quarter, as I said in my comments, it is 4 basis points.

So where we don't know where the final stop is I think it is sufficient to say that we are more than halfway there and the bulk of what we experienced in NIM compression related to LCR activities based on what we know now is more behind us than ahead of us.

Got it.

And, bill, you have really delivered on what you had talked about last year in terms of expense management, and your efficiency ratio was 60% this quarter.

As we think about your guidance for full year and for next quarter do you think you could keep your efficiency ratio at this 60% level for the duration of the year?

And given your strong comments on RBC, does that contemplate upside -- or does it -- could we be surprised at any upside by the contribution from your Southeast franchise?

I think we have given it -- Rob has kind of given you all the guidance we are going to give you in terms of level of detail but some color commentary, first on the expenses.

I didn't deliver, the Company delivered.

And it is an important point; the franchise really has gotten its arms around the importance of saving money to reinvest money and the importance of improving our efficiency ratio.

The end result of that -- we are going to play out this year.

If we continue to see positive trends in loan growth weather from the southeast or simply from some of the utilization increase we've seen in our C&I space, maybe there is upside to it and that will roll through to the efficiency ratio.

But we are one quarter into the year, we had a strange first quarter just in terms of weather-related impact and some of the seasonality.

So I don't know exactly how to extrapolate from here and give you anything more than what Rob already gave you.

Okay, thank you for answering my questions.

Betsy Graseck, Morgan Stanley.

A couple questions.

One is on the re-investments.

I am just wondering if you feel that the re-investments that you are making into the franchise or at run rate and first quarter or are they accelerating as you go through the rest of this year.

Two answers to that question.

The investments show up in terms of cash spent not necessarily in terms of expense yet because a lot of them are capitalized and then depreciated through time.

So we will -- we are probably investing at a steady pace for a period of time with depreciation to roll on somewhere down the line as we take out further costs to fund the depreciation.

So we are early days in what we are investing in.

The end outcome of these investments, particularly as it relates to our infrastructure and operational areas, is more efficient back office and better customer service through automation and less manual process.

So we are spending the dollars steady-state, you are not necessarily seeing that inside of the expense line directly today.

Okay, got it.

And then the second question just has to do with CCAR.

I am just wondering how you felt the process went this year and looking to understand do you think that there, all other things equal, which I know is an aggressive statement, but all other things equal do you feel like there is any room for bumping up the request into 2015?

I mean because your gross pay-out ratio roughly 55%-ish now at least on our numbers and mid-40s.

Feels like there is a lot of opportunity therefore reinvesting in the franchise, maybe a lot of capital accretion.

So just wondering what you are seeing in the process this year and do you think there is room to bump it up into next year.

Too early to comment on next year.

But one of the things that happened this year if you look at our results versus the Federal reserve's results, and this was true for all of our peers, their asset growth assumption and result and risk-weighted assets, the differential between that and where we were was largely the difference between their outcome and ours.

I will remind you that we talk about the binding constraint being the obvious comment, be ending ratio not the starting ratio.

And we obviously had room on a phased in Basel III number this year where conceivably we could have done more.

We think we did a lot.

We will reevaluate next year as a function of what they are going to look at in terms of how they calculate that autumn number, vis-a-vis Basel III.

Our intention -- and I'll probably just leave it here -- our intention is to return more rather than less inside of a fairly complex framework in terms of both what we measure as to what we have available and what they think we have available.

I guess the question is essentially because you end up accreting capital otherwise unless the payout ratios go up.

And then it builds into the questions around spray compression and competition, trying to utilize asset capital.

No, look, it is the right question, right.

So whether we go from 55% to 65% to 75% to 90%, right, we are going to continue to build a capital base that inside of our own plans, given our assumptions that we are not going to be buying anything anytime soon, effectively build capital levels for us.

You guys use the term capital trap and what you do about it.

One of the things that I think we and the rest of the industry -- I should just speak for we, one of the things I think eventually happens is that we move beyond what we would do directly and share repurchase is as a way to return capital into a sort of annual special dividend as part of this process.

I don't know when that is, but it is quite clear to me that all else it will if the rules stay just the way they are, we and the rest of the industry are going to build capital levels will beyond what the required minimums are.

Yes, because you have got this hypothetical CCAR in the real world trapped capital issue, right?

Yes, yes.

And we also have inside of the earnings assumptions that are revenue assumptions in the base case of CCAR, we have some inconsistencies versus what we would actually think we could make because we don't count certain revenues and CCAR that for us are repeatable and recurring.

So there is a disconnect on that side as well.

And again, this is Rob, just to emphasize Bill's point, that issue is largely an industry issue.

Right, exactly.

Okay, thanks.

Keith Murray, ISI.

Can you just clarify, you mentioned the mark-to-market accounting adjustment that benefited gain on sale of mortgage.

Is there a dollar amount you can give or basis point impact benefit to the margin there?

Yes, yes, it is pretty straightforward, Keith, it is relatively small, 24 million basis points, [about] 125 or so.

Okay, thanks.

And then on deposit service charges and overdraft behavior, obviously there is seasonality in the first quarter.

But have you seen a meaningful change in consumer behavior on that and how does that impact your view on that line item going forward?

We have an overdraft where it is been pressured -- I don't have the numbers in front of me, but been pressured year on year largely I think because of consumer behavior.

Right.

Okay.

And then on the LCR, does that change your view on commercial deposits and have you adjusted pricing on those deposits yet or is that something that is still a work in progress given its early stages?

On the commercial side deposit pricing is pretty competitive to outright market rates, I think money market type yields that have been and we continue to be there.

Those deposit don't count for much inside of LCR though, right?

So transaction deposits are where it makes a difference or money market accounts with consumers.

And we are changing pricing at the margin as it relates to those products.

Part of the issue, Rob mentioned the rules aren't finalized yet and as we try to figure out how much of a gap we have or don't have there is two or three items that they are still working through an LCR -- through the LCR comment process related to look true on securitizations, municipal deposits, some draw rates on other products that have a material impact on our outcome.

And so we are not in a huge hurry to change what we are doing today until we know what the final rules are because we don't want to do long-term structural change to the way we fund ourselves unless we have to.

And that the rules are clear.

Yes.

And final.

Understood.

And just finally sitting on a pretty sizable unrealized gain still with VISA shares.

going forward if you were to realize some of that your thoughts around capital planning there, is that something maybe you would go and revisit with the Fed as far as doing repurchasing shares with those gains?

We have been pretty clear that we'll monetize the Visa stake through time that we will monetize the VISA stake through time as we see value, we have been doing that fairly consistency -- consistently for the last couple of years.

Given what we might do this year, I don't see us going back to the Fed I'm not even sure if we could to go back and request additional capital actions.

It obviously adds to our capital base which will come into play for next year as we take gains this year though.

Yes and just add to that the stake, at the end of the quarter about 9.5 million shares worth $850 million on our books for about $130 million.

So the unreleased gains is just north of $700 million.

Okay, thank you.

John McDonald, Sanford Bernstein.

I think Bill in the beginning mentioned some signs of modest improvement in line utilizations on the commercial side.

Could you add some color on what you are seeing there, Bill, and any hope for what might be driving that?

Yes.

So it is early days, but we have seen a decent chunk of the growth in the first quarter in C&I come through utilization increases, interestingly for the first time in a really long time in the Middle Market book.

So the plain-vanilla revolver Middle Market corporate America where it popped up I think [50] basis points plus or minus.

We've actually seen a continuation of that into the front couple of weeks of April.

Now I would tell you with all sorts of caveats that people tell me that utilizations typically does pop in the second quarter.

So maybe that is just seasonal and it is going to go away.

The bull case on this whole thing is, if you look -- if you follow the CEO confidence index and people have been showing me these charts where you kind of regress that against capital expenditures, it is -- it is highly correlated and we have seen that -- the CEO index increase.

So maybe we are finally get a pop at capital expenditures which are driving these line increases.

But we are a quarter into the year; we had a weird couple of months to the start of the year because of weather and boy I would like to continue the trend.

But I can't tell you it is going to happen yet.

Okay, thanks.

That is helpful.

And, Rob, on the fee income outlook, any color on what you are looking to as the drivers of improvement in the second quarter on the fee income side?

Yes, no, I think it is pretty straightforward, John.

There is a seasonality effect and we will get the lift there.

And then in addition to that is just returns on the investments and the strategic emphasis that we put on those businesses.

We had some weird quarter-to-quarter swings too with CVA impacting results and Harris Williams traditionally has it -- and didn't last year really strong fourth-quarter.

We saw weakness in corporate bond fees in the first quarter, we are less dependent on it, but nonetheless it impacts our number along with the rest of the large banks reporting capital markets income.

That ought to normalize out and when you get over the year end effects were pretty confident it will do well in the second quarter.

Okay.

And then last thing on the provision outlook.

Rob, can you break that down a little bit just in terms of what you are assuming for charge-offs going forward and reserve released is breaking down between those two items?

Yes, sure, sure.

So, charge-offs in the first quarter were -- net charge-offs were $186 million, our provision was $94 million which generated a $92 million release.

Going forward, assuming credit quality and credit trends all stay consistent, we see net charge-offs in a similar kind of range which is where they've been for a while.

Provision -- our provision guidance in terms of that 100 to 150 is our estimate in terms of sort of what we are seeing and if that all plays out we would have further releases although not necessarily at the same level in the first quarter.

Okay, thank you.

Ken Usdin, Jefferies.

Rob, I wanted to ask you a little bit about balance sheet efficiency; loans have been outgrowing deposits and you are also obviously doing the build for mix, I should say, shift for LCR.

And so, you have done a double dose of both banknote senior debt and FHLB.

I guess as you look out and you think about the best mix going forward, should loan growth continue to outpace deposits, how do you think about the right mix of liabilities going -- looking ahead?

That is a big part of the effort obviously, Ken, particularly in terms of the LCR.

So to the extent that the LCR is part of that, we've been pretty clear in terms of we are moving along in terms of where we think we are going but not quite sure where the final target is.

In regard to loan and deposits, we remain core funded, we plan to stay that way.

You are correct that loans, at least recently I think growing faster than deposits and that is something that we manage actively.

But that core funding is our philosophy and we continue to manage in that direction.

If you dig into the deposit growth numbers, we continue to run off sort of non-core and CD, not having as much impact on our margin as it once did.

But I believe, and somebody can correct me here if I am wrong, I think our core transaction deposits are actually outpacing loan growth, it is just the runoff in the CD balances that are causing that mix to shift.

So I think as we kind of burn through the residual of the non-core.

We are actually running a much more balanced production of deposits against loans.

Were that to change, right, the levers we have certainly on the consumer side which are more LCR friendly is to get more aggressive inside the money market space on rate paid, which probably in this environment doesn't make a huge difference but as rates begin to rise through time I think we will move flows.

Okay.

And just one more clarification on the LCR build.

You are doing the remix -- and Rob, I heard your point that you are further along towards it than further away.

But when you think about the overall size of the securities portfolio as a proportion of the balance sheet, our we also at the right spot or should we still expect there to be just net growth over time?

Net growth in the securities balances?

Yes.

Not necessarily.

So you would see the decline on spot balances --.

Yes.

-- [for it the first].

That duration was replaced largely inside of the swap book, so just received fixed on swaps.

So the other thing inside of our securities book today is a lot of the stuff that we own is floating rate and not adding duration.

So our ability to get the duration we need at a higher rate environment can be done, as you know, with some notionals and longer duration of the underlying securities and/or the swap book.

And all of that will be a function of market opportunity.

One thing we have done is inside of the securities book the percentage of that book that is level I securities has increased through time, right.

So to the extent that it is on our balance sheet in level I it is not really impacting our LCR calculation versus just having cash sit at the Fed.

Right, okay.

And then my last one -- just one the commentary about NII coming down in the second quarter is clear, but I just wondered -- we know about obviously $300 million of accretion and we know that your point about loan yields coming in and, Bill, your point to just about this remixing issue.

But how do you size for us the magnitude of core margin compression that you see as being left just given on the rollover effects of on the asset side?

So what is your question?

How low can it go?

Yes.

I mean, yes, really that is the question, right.

Because I think people are wondering why can't core grow because obviously we know NII is going to be down just because of the purchase accounting pressures.

But I guess the question [underneath] it is, how do you -- what stops or stems the bleed of the core NIM compression if I could just ask it that simply then?

I think inside of that number, right, you had the impact from loans and the impact from securities yield.

Securities yield.

And on the loan side we are kind of grinding lower on average spread across the book at a slower pace than we once were, so maybe we are approaching some neutral point.

Securities balances, we have again seen yields -- we got excited that 10 year went over 3% for a day, and now it is back down.

So a reinvestment yield in securities continues to be less than the average yield on the book by a fair margin.

And in fact if anything we continue to get shorter in that book rather than longer given the opportunity we see on where yields are.

So if you look at the end of the de we have $58 billion of securities yielding, what, 3% --?

A little over 3%.

A little over 3% and we are reinvesting to the extent we do at 2.5%, so you've got 50 basis points on $50 billion over $300 billion, you can do the math and run it through our margins.

That's down like (inaudible).

Something similar to what we saw in the first quarter of last year.

Yes.

Now that switches almost instantaneously, so if we trade again back to the top end of the range in yields that we've kind of been bouncing around, I keep talking about to the 10 year, but it is really the middle of the curve that we focus on.

Yes, got it.

All right, great, thanks for the help.

Steve Scinicariello, UBS.

Just wanted to get a little color just given really the strong one growth especially on the commercial side just kind of curious where you are seeing kind of the best risk-adjusted returns across some of those sub segments and sectors?

Yes, sure, I can answer that.

In terms of the loan growth, most of it coming from C&IB space as we mentioned.

And within that in the quarter commercial real estate -- further improvement in commercial real estate, Corporate Banking, to Bill's point, around the Middle Market book and business credit.

And I think probably those are the areas with the exception of the Middle Market where we are seeing the better spreads, the specialty businesses, commercial real estate and business credit in particular, some in equipment finance.

Just on return on raw risk asset base book is probably the best we have, but we measure return across a client not just on the credit extension.

So inside the corporate book where the returns on the loans themselves might be marginally lower, the return on the client given cross sell of treasury management and other products typically makes that really attractive.

No, it makes sense, make sense.

And then you had mentioned kind of the amount of capacity that has gone out of the system whether it is the foreign banks or the CMBS markets, etc.

How long a runway do you think you guys have should it be something we should measure in terms of years potentially or how big is this kind of market share opportunity that companies like you have?

It is probably measured in years if for no other reason than a substantial part of our growth continues to be in project loans, which fund up over the course of a couple of years --.

By definition.

-- By definition, yes.

We have seen spreads come in in that segment but risk-adjusted returns still look pretty good.

And as I said before, we have seen, that the partnerships we had and supported through the downturn continue to reward us with business in a way that isn't necessarily jump ball with the highest bidder on credit provider, which is great.

Perfect, thank you so much.

Gerard Cassidy, RBC.

Bill, I've got a question on the capital levels for PNC.

Where do you think the Tier 1 common ratio should get to, where you are comfortable to say that that is enough?

And if you can't really answer that today what do we need to see whether it is from the regulators or from you folks to where you can say at this point, okay, we are very comfortable with our capital levels we don't want them to go any higher from where they are?

Look, it is a great question but the way I'm going to answer it is a little bit backwards.

So we basically want to be able to say that in an adverse case our capital ratio won't drop below the 7% threshold, right, and in a severely adverse below the 4.5%.

Inclusive of those two things we'd also run a buffer that is a function of some of our idiosyncratic risks.

So I define my starting point as a function of my ending point and the struggle with giving you a number on the starting point is every year we get hit with a new scenario.

And even when we can expect what the scenario is we might get hit with a rule change.

So this year kind of at the 11th hour we had loan balances grow in the Fed case.

We don't necessarily think that would happen but nonetheless that is what they ran in their numbers.

So that is our challenge.

I would like to think that we are at a level today that supports, and I do think that we are at a level today that supports our needs and is above what our threshold ought to be.

We then get back to the issue of what can I actually do about it being so high given that we have constraints on how much we can return to shareholders through the capital return request.

I think we are where we need to be, I don't think we are supposed to grow from here.

Mechanically we may end up growing.

Thank you.

Regarding your comments a moment ago about the special dividend, which I concur with, have you bounced that off of the regulators yet?

Are they in that mode of thinking about it, recognizing nobody is doing it I don't think this year but is that entered into the discussion yet with the Fed?

It has -- yes, it has entered into discussion not in any formal sense.

So I brought it up in discussion.

I think of course the issue with dividends is the repeatability of it; if it is a special dividend then in affect it is a one-time request not dissimilar from the share repurchase.

The issue we will face should things trend that direction is being able to get a valuation multiple, affectively the repeatability of that special dividend, so that shareholders value it beyond just the one time.

All that needs to be worked through.

But I think at some point -- I mean if you just run through in our case the potential capital return.

At some point we are appropriately price-sensitive to where we would be buying back shares.

And at some point returning capital through dividend is I think a smarter long-term thing for our shareholders.

Sure.

On the universal branches, is there a target of where you eventually want that number to reach as a percentage of your total branch footprint, is it someday in five-plus years 100% or where do you see that number going?

Well, it is certainly going to grow; it is kind of in pilot phase, if that is the right word now and we're kind of learning from the experience and the customer experience inside those branches and tweaking it as we go.

But you have got to remember that somewhere down the road, if you think of touch points with our retail clients, we will have lots of micro-branches and traditional branch but will be a universal branch.

We will also have lots of micro branches and technology branches of effectively a smart ATM.

So our full-service branches being universal branches, I would think that most if not all of them would transform into that model or whatever that -- however we perfect that model.

But beyond that we are going to have a lot of branches that are more technology based and may have fewer, if any, employees in them.

Great.

Speaking of technology, Bank of America held their call this morning and Brian Moynihan mentioned that they are spending $3.5 billion a year on technology.

That beats us.

What are you guys -- do you guys have a number that is -- that you could share with us and what you are spending on this initiative to make these branches more in the 21st century than prior time period?

Yes, we haven't put a specific number out there, our capital spend, so across technology and just physical plant, some of this is just rolling out image enabled ATMs and some other things.

It is 20%, 30% higher than a run rate we might have had a handful of years ago and it will be elevated for a couple of years, is the best I can give you.

Again we expect on the back end of this through automation to take out manual process that largely funds it.

But it is not just -- some of this is the client facing technology, which is important but a big part of it is core infrastructure, it's cyber, it's resiliency, it is ease-of-use for our employees and customers, it is big data --.

(Multiple speakers) application.

Yes, it is all of the stuff that I think it takes to be a leading edge bank as we move into the future here.

And then just my final question, looking at my screen at your January 2010 slide deck where you put out the framework for success in your long-term goals and impressively you have met just about every one of them.

Is that kind of slide -- can we see something like that again where you put out where you had the ROA target at 130 basis points at the time you were at 62, etc., -- Something like that in the future possibly?

We get that question a lot, people asking can we kind of put aspirational targets out there.

Most of you have heard my speech on I struggle with doing that because if you tell me an interest rate environment I will tell you and ROA and ROE.

We need to do more though in terms of talking about the power and potential of this franchise and it is something we are working on and I would expect at one of the upcoming conferences we will go through that in some detail.

Appreciate it.

Thank you, Bill.

(Operator Instructions).

Matt Burnell, Wells Fargo Securities.

I guess, Bill, a question for you.

You mentioned a couple of times on the call today that you think relative to buybacks that your stock is currently -- is at a value that encourages you to think about doing the $1.5 billion in buybacks that you have been approved for.

I guess I just want to get into a little more into your thinking as to at what point does that valuation, which is currently at about 1.5 times your stated tangible book value, get a little bit dicier in terms of buying back?

And then in a related question, what type of loan growth scenario would you want to see before you started thinking about not meeting your $1.5 billion buyback target?

Just on value and the shares.

I am not going to go down the path of telling you a price target of where I am a buyer and where I am not, other than to say, as we said before, we see value where we are today and we will play it out from there.

As it relates to loan growth, independent of share price performance here, I don't see any viable scenario where loan growth will impact that.

I mean it would have to be some unachievable percentage before we would run into a constraint vis-a-vis our buyback driven just by asset growth as opposed to where we are seeing value in shares.

Okay.

And then maybe a question for Rob.

In the presentation you all made in February you mentioned about 5% of your transactions in 2013 were done via the mobile route.

And I guess I'm just curious if you are seeing a greater level of take up in mobile banking activity and products in the newer markets, i.e.

the southeast, relative to your more traditional markets or is it roughly similar across your franchise?

Just a clarification in terms of non-teller transaction or deposit activities, the numbers were more a year ago 18%, and now in the 30% range.

And in terms of the southeast, not necessarily saying a higher percentage, it is pretty much a clean double across all of our markets.

We went through that a month or so ago and it is in the 30% range in all of our legacy markets as well as the southeast.

Okay, just (multiple speakers).

Which (inaudible).

Yes.

Just for clarification, on the February deck you had -- on page 12 you have mobile transactions at about 5% of total deposit transactions, that is really the number I was (multiple speakers).

That might not have included the ATMs, yes.

(Multiple speakers) phone.

Yes, we focus on non-teller.

But the mobile are increasing commensurately as well.

Okay, thanks for taking my questions.

Brian Foran, Autonomous Research.

Bill, I know you have talked a lot about technology both on this call and really for a couple of years now and you have also been pretty consistent about deemphasizing M&A as part of that go forward strategy.

You gave an interview -- it might've been a week or two ago now where I guess you linked those more clearly than I remembered you had before, and I'm going to paraphrase it poorly, but basically saying, any deal, even if it is pretty small really slows down your ability to change technology in the franchise.

I was wondering if you could flush that out generally and maybe specifically is that a near-term change in thinking, i.e.

this year just has a lot of technology and shift and so it is a this year issue?

Or do you think that is something longer-term where technology change organically has just become more valuable than M&A and cost saves and revenue synergies?

I mean I think it is a near-term issue, that our issue is when you do an integration, particularly one that involves consumer accounts, loan accounts, you basically map the two technologies together, field to field, record to record, and you have to freeze everything because at some point you are going to move all of those files over onto the remaining system.

So any application updates that you might be doing in the ordinary course during that mapping process you have to stop.

Our particular issue is that because we had been pretty active acquirers over the last multiple years we froze changes that we probably should have made, right?

So now we are catching up, we are getting applications up to speed, we are refreshing data centers, we are improving cyber, we are doing a lot of things.

I don't want to freeze that progress to do a small bank deal even if I saw value in a small big deal, which today we don't, which is a separate issue.

Down the road it actually becomes a competitive advantage if you have a technology platform that would allow you to integrate faster, that is a good thing.

So it is kind of a near-term priority for us to get our technology agenda behind us, I don't think there's any opportunity cost associated with that because we don't see value in small deals today, that may change later.

Thank you, I appreciate it

Chris Mutascio, KBW.

Rob, just a quick question for you on the fee income guidance.

I'm going to throw a couple numbers at you but I just want to make sure I have this right.

You are expecting low single-digit type growth first quarter to second, if I use just for the sake of argument use 3% -- I'm not putting words in your mouth -- that gets you to about $1.63 billion in second quarter.

But then if I back out the visa gains and also the gain on sale margin benefit you had in first quarter -- first quarter -- I do want to call it core, but first quarter could have been more like $1.49 billion.

So the difference between your guidance and first quarter ex the gain on sale and ex the visa is about a 9% increase or about a $140 million increase.

Does that imply additional visa gains in the second quarter in your guidance for is this all made up by seasonality?

Yes.

No, that is a good question and really it is not any guidance around visa.

Your question really relates to the other noninterest income, which short answer is we average $300 million on that line.

We were down this quarter in the first quarter, what largely drives that category and there is a number of subcategories but with largely drives the category are private equity investments, credit valuation adjustments and loan or asset sales.

And in the first quarter all three of those were down linked quarter, which is unusual in our history that all three of those categories are done simultaneously they are unrelated but that is what occurred in the first quarter.

So the short answer is we still feel good in terms of our guidance at that $300 million number not including visa is a good number for the other.

Great, thank you very much.

Pamma, with that I think we have run over our allotted time.

So I think we are going to wrap up the call now.

Bill, do you have any closing remarks?

Just quickly again reiterate where we are, we continue to be focused on strategic priorities which we are making good progress on.

We're intensely focused on controlling expenses because they are the one thing we can drive here in what is a tough revenue environment.

I am pleased with the organization's progress as we go into the southeast and against our other priorities we will play the year out here.

But I think we are in pretty good shape to continue to deliver for shareholders.

I would just end there.

Great.

Thank you all for attending today's call.

Thank you.

This concludes today's conference call.

You may now disconnect.

Thank you, everyone, have a great day.