The PNC Financial Services Group, Inc. (PNC) Q4 2011 Earnings Report, Transcript and Summary

Good morning, my name is Carlos, and I will be your conference operator today. At this time, I would like to welcome everyone to the PNC Financial Services Group Earnings Conference Call. [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 of future events could differ possibly materially from those anticipated in our statements and from historical performance due to a variety of risks and other factors. Information about such factors as well as GAAP reconcilements and other information on non-GAAP financial measures we may discuss is included in today's conference call, earnings release, related presentation materials and in our 10-K, 10-Q and various other SEC filings and investor materials. These are all available on our corporate website at pnc.com under the Investor Relations section. These statements speak only as of January 18, 2012, and PNC undertakes no obligation to update them. And now I'd like to turn the call over to Jim Rohr.

Thank you, Bill, and good morning, everyone. Thank you for joining us. In today's presentation, I will focus on PNC's full year achievements and financial highlights, which included strong growth in clients, loans and deposits. Looking ahead, we believe we're well positioned to deliver strong results again in 2012. Rick will take you through a more in-depth review of the fourth quarter results and our outlook for the full year. Looking back 12 months, when 2011 began, it was predicted that banks would be facing an operating environment dominated by low interest rates, slow economic growth and new and challenging regulations. Well, as it turned out, 2000, in fact -- 2011 was, in fact, all that it was advertised to be and then some. In spite of that, overall, PNC had a good year of solid accomplishments, focusing on what we do best: serving customers, cross-selling products and services and managing risk and expenses. Let me share some highlights. For the year, we earned $3.1 billion in net income or $5.64 per diluted common share. With our recognized brand, innovative product offerings and strong cross-selling ability, we saw remarkable growth in the number of customers we served. In fact, our retail checking relationships and corporate business clients are at record levels. All of our markets, all of our markets, we're ahead of their sales goals in 2011. And due to our success in adding new clients, we saw a strong full year loan growth of $8.4 billion or 6%. Fourth quarter loan growth was $4.5 billion or 12% on an annualized basis. An important item, full year net interest income, was driven by stable core net interest income due to higher spot loan balances and the impact of actions that we took to reduce our funding costs. These were good results in the current low interest rate environment. Our fee income in 2011 was solid despite a series of regulatory changes. We see good opportunities for fee income growth this year as we continue to expand our franchise. Overall, our credit metrics showed significant improvement on a year-over-year basis. Our balance sheet remained highly liquid and core funded with an 85% loan-to-deposit ratio. Our Tier 1 common capital ratio remained strong and it is estimated to be 10.3% as of December 31, and we believe that we are well positioned for the Basel III capital requirements. And by leveraging our strong capital position, we were able to announce plans for a number of strategic acquisitions last year, which will expand our presence in very attractive markets in the Southeast. We received regulatory approvals to acquire RBC Bank (USA). We expect to close in March subject to the remaining customary closing conditions. And when we do, we expect that acquisition to be accretive to our 2012 earnings excluding integration costs. And last but not least, part of our regular assessment of contingencies and commitments includes residential mortgage foreclosure-related matters, including ongoing governmental ones. As a result of some recent discussions, we increased our accrual for these matters in the fourth quarter to $240 million or $324 million for the year. And in spite of these usual -- unusual items taken in the fourth quarter, we believe that 2011 was yet another good year for PNC. Now turning to our business segments. A key test is the ability to acquire and retain customers. For PNC, 2011 was an excellent year for customer growth, our best ever actually. Let me begin with Retail Banking. We recognize there are significant changes in the consumer behavior taking place today. Check-writing continues to decline, branch utilization is lower and electronic transactions are increasing. And we took a number of steps last year to position us to have additional growth in 2012. Our Asset Management Group had a solid full year earnings in 2011 despite volatile markets. Hang on a second. Excuse me, one second. Let's go back. Looking ahead for the Retail Bank, we'll be focused on 3 issues: One, reducing the costs to serve our Retail Banking customers; second, branch optimization; and third, growing our higher valued client base. Moving to the Corporate & Institutional Bank. They had a very good year last year with increased earnings compared to 2010. We saw average loans increase for the full year led by growth in commercial and asset-based lending. In the fourth quarter, we saw lending increase in every loan category and across nearly all of our markets. We added primary clients in our corporate bank at a record pace. For the full year, new primary client growth was 1,165, an increase of 15% over 2010, which was a record year itself. In terms of customer growth, these were primarily commercial and middle market customers. I should add that this marks the second consecutive year that we have added more than 1,000 new primary clients. Turning to Asset Management. They reported a solid full year earnings in 2011 despite volatile markets. New primary client acquisition grew by 26% for the year, reflecting strong referral activity from Retail and Corporate and Institutional Banking. For the year, nearly 1/3 of sales came from these referral channels. The customer growth helped to drive dramatic change in asset inflows. We've made significant investments in this business in 2011 in terms of people and technology as we seek to expand our abilities to serve our growing retirement and investment market. We added 290 employees, primarily in the front lines, most of these deployed in our higher-potential markets such as Chicago, Florida, Milwaukee and D.C. And we have plans to hire additional staff in 2012. In terms of technology, we launched PNC Wealth Insight in September. This tool is clearly giving us competitive advantage. Some 12,000 clients have now access to it and more than 50% of them are active users. We'll continue to invest in this business as we see opportunities to capture a greater share of the current customers' investable assets, which we estimate to be more than $1 trillion in our market. And residential mortgage had a good year in terms of loan production. Mortgage loan applications were $11.4 billion for the year, up 9% from 2010. Overall, this was a very good year for customer growth and that paves the way for additional success in 2012. Now beyond our current year returns, I think it's important to take a longer view of PNC's performance. Since the economic downturn began in mid-2007, it's clear that PNC's management team has navigated this environment well and delivered long-term value to the shareholders. As you can see on Slide 6, our tangible book value per share has more than doubled during the period. And our pretax pre-provision earnings per share have increased by 40%. When we compare both of these metrics to our peers, you can see we dramatically outperformed them during this period and we're very optimistic about the long-term value that we will provide to our shareholders. Now as I reflect on the year, we took a number of significant actions in 2011, many of which are listed on Slide 7, to help or manage risk. Overall, we've been able to return to a moderate risk profile. Now clearly, challenges remain but I believe adherence to the risk management principles we have established will continue to serve us well. In terms of our earnings outlook for the year, Rick will give you some more detail, but we continue to assume a continuation of the current slow growth, low interest-rate economy in a dynamic regulatory environment. I believe that we will continue to grow customer relationships and loans to drive revenue, manage credit costs and expenses and maintain strong liquidity and capital levels this year. With that background, there are 2 key items I see for 2012: First, we expect legacy PNC full year earnings to improve next year because we believe we will grow loans, cross-sell our customers and focus on managing our costs and expenses -- credit costs and expenses. Second, we expect our planned acquisition of RBC to be accretive to 2012 earnings, excluding the integration costs. With that discussion about 2012 behind us, Rick will give you more detail about our fourth quarter results and our full year outlook for 2012. Rick?

Thank you, Jim, and good morning, everyone. Our fourth quarter net income was $493 million or $0.85 per diluted common share. Now before we get started with the details, let me walk you through a couple of adjustments included in the fourth quarter results. Let's start with expenses. We had a charge of $240 million or $0.30 per share related to residential mortgage foreclosure-related activities, primarily as a result of ongoing governmental matters. We also had a noncash charge of approximately $198 million or $0.24 per share associated with redeeming $750 million of our trust preferred securities. As this was high-cost, long-term paper, this should reduce future funding costs by $30 million annually. We also had an increase of $103 million or $0.13 per share in personnel costs, primarily driven by increases in stock market prices including PNC stock price and PNC's higher business production in the fourth quarter. Given these unusual fourth quarter items, I should add that we expect total expenses in the first quarter of 2012 to be substantially lower and more consistent with expenses in the third quarter of 2011. On the revenue side, regulatory changes on debit card transactions reduced consumer service fees by $75 million or $0.09 per share. When considering all these adjustments, our fourth quarter results reflect a solid earnings performance. Now let's talk about the fundamentals of our business performance beginning with our balance sheet on Slide 9. Starting with assets, loans increased by $4.5 billion or 3% linked quarter or 12% on an annualized basis. Core commercial loans increased by $3.6 billion on a linked-quarter basis with gains in virtually every client segment and market. For the full year, core commercial loans were up by $9.6 billion. Core consumer loans increased $1.4 billion, primarily due to higher indirect auto and education lending. You will notice that we renamed our Distressed Asset segment to the Non-strategic Assets segment. This segment includes portfolios we do not intend to grow and the vast majority of the assets are performing. We believe the new name is more appropriate. And looking at our loan book, we see strong origination trends and a solid pipeline of business. Given our improved credit metrics, we are well positioned for future loan growth. Turning to liabilities. Transaction deposits were up by approximately $4.6 billion or 3% linked quarter, and higher cost retail CDs were lower by $2.9 billion as we continue to reposition this book to lower our cost of funds. As a result of our efforts, our deposit cost declined 42 basis points for the quarter, a decline -- deposit costs declined to 42 basis points for the quarter, a decline of 9 basis points on a linked-quarter basis. For the full year, deposit costs were 51 basis points, which was 19 basis points lower than in 2010. Now as you can see on Slide 10, we had another strong quarter in terms of asset quality as our overall credit metrics continued to improve. Excluding the impact of government-guaranteed loans, delinquencies, nonperforming loans and charge-offs all declined linked quarter. Given the overall improvement in our credit metrics, our provision for the quarter decreased to $190 million from $261 million last quarter. Now let's turn to net interest income on Slide 11. Net interest income of $2.2 billion increased by $24 million linked quarter and the net interest margin of 3.86% was in line with third quarter results. In this environment, we see a $60 million linked-quarter increase in core net interest income as a very good outcome. For the fourth quarter, this performance was aided by our ability to grow loans, reprice CDs at much lower rates and reduce overall funding costs. Provision-adjusted net interest income was also up 12% on a full year basis. The full year improvement was due to significantly lower provisioning, which was more than -- which more than offset the expected decline in purchase accounting accretion. Looking ahead, we have about $12.5 billion in higher-cost CDs scheduled to mature in the first half of 2012. This book has a weighted average rate of about 2.5%. Given the non-relationship nature of many of these accounts, we only expect to retain about 1/2 of the maturing CDs and we expect those to reprice on average to approximately 33 basis points. The interest expense impact of repricing this tranche of CDs is expected to be approximately $175 million in 2012. And on an annual basis, we expect the benefit will increase to about $275 million. As you can see on Slide 12, we reported approximately $1.4 billion of noninterest income, which was essentially flat linked quarter. While our Asset Management Group continued to deliver solid results, asset management fees were lower in the fourth quarter, partially due to a noncash tax benefit that BlackRock reported in the third quarter. Consumer service fees decreased $61 million linked quarter. This was driven by debit card interchange fees, which were down by approximately $75 million due to regulatory changes. This decline was partially offset by higher transaction volumes. Corporate service fees increased $79 million for the linked quarter, primarily due to the impact of a valuation impairment of commercial mortgage servicing rights in the third quarter of 2011. Residential mortgage fees declined mainly from lower hedge gains on mortgage servicing rights. Deposit service charges held steady with the third quarter, which was better than expected as the third quarter results were due to seasonally high customer activity. And Other increased $56 million for a variety of reasons, including an increase in the value of the hedges on deferred compensation obligations related to the higher stock market prices. The diversity of our revenue streams enabled us to achieve a solid performance in an environment that will continue to be affected by regulatory reform headwinds and implementation challenges. At the same time, we see opportunities for growth as a result of our larger franchise, our ability to cross-sell our products and services to existing clients and our excellent progress in adding new customers. Turning to Slide 13. For the full year, expenses were up 6%. However, when you exclude the fourth quarter charges for residential mortgage foreclosure-related matters and the cost of the trust preferred securities redemption, expenses continued to be essentially flat year-over-year. As I mentioned, fourth quarter expenses were unusually high due to $240 million of expenses related to residential mortgage foreclosure-related matters; the redemption of trust preferred securities, which resulted in a noncash charge of approximately $198 million; and a higher personnel expense of $103 million, most of which was driven by higher stock market prices and by PNC's higher business production in the fourth quarter. We do not expect quarterly expenses to remain at this level. In fact, excluding the anticipated RBC Bank first quarter integration cost of $172 million and any legal and regulatory-related contingencies that may be incurred, we expect first quarter 2012 expenses to be relatively consistent with our third quarter 2011 expenses. As shown on Slide 14, our Tier 1 common ratio at the end of the fourth quarter is estimated to be 10.3%. That's down 20 basis points since the end of the third quarter due to strong customer loan growth. Our Tier 1 common ratio is up 50 basis points from the end of last year. Let me give you an update on our Basel III outlook. As we've said before, we are targeting a Basel III Tier 1 common ratio of 8% to 8.5%, which is above the regulatory minimum of 7% to provide a buffer for economic uncertainty. We currently estimate that our Basel III Tier 1 common ratio should be in an operating range of 8% to 8.5% during 2013. We have revised our previous forecast to be in our operating range by year-end 2012 due to the strong loan growth we have been experiencing. However, if the rules on sub-investment grade securities are adjusted to be more risk sensitive, we may be able to get to our operating range sooner. We will have 3 capital priorities for 2012: First, build capital so that we continue to support our clients, grow new relationships and invest in our businesses; second, continue to maintain appropriate capital in light of the uncertainty in the global economic environment; and third, return excess capital to our shareholders. Obviously, we will seek to achieve these priorities and which will be subject to review by our regulators. Now let's take a look at our outlook for 2012 on Slide 15, which assumes the economic outlook for the year will be a continuation of the current environment. As Jim stated earlier, we expect full year PNC stand-alone financial results will improve in 2012 and RBC Bank will be accretive in 2012, excluding integration costs. So let me give you some of the combined company expectations. 2012 loan growth for legacy PNC is expected to be in the mid- to high-single digits -- yes, mid- to high-single digits. When RBC Bank’s $16 billion loan portfolio is added, we should see loan increases in the mid- to high teens. We are looking for full year revenue growth in the mid- to high-single digits. Net interest income should increase by mid- to high-single digits. Noninterest income should increase by mid-single digits despite further regulatory impacts on debit card interchange fees. 2011 core expenses of $8.7 billion are expected to increase by mid-single digits, reflecting flat to down expenses for PNC stand-alone and 10 months of RBC Bank expenses. Let me explain. 2011 expenses were $9.1 billion. If you back out the unusual fourth quarter charges for mortgage foreclosure costs and the TPS redemption, 2011 core PNC expenses were $8.7 billion. After adding RBC expenses of $600 million, core 2012 expenses will increase by mid-single digits over 2011. Of course, this is apart from any legal and regulatory-related contingencies, noncash charges on further TPS redemptions and RBC Bank integration expenses. And we believe our provision will remain stable in 2012 versus 2011. This forecast gives us confidence that 2012 will be a strong year for PNC. And with that, I'll hand it back to Jim.

Thank you very much, Rick. In spite of a couple of unusual items in the fourth quarter, 2011 was a solid year for PNC. We continue to grow customers and loans, we manage the challenges of the current operating and risk environment and with the pending acquisition of RBC Bank, we're well positioned for future growth. PNC's management team continues to deliver on its promises to customers, employees, communities and shareholders. Taken together, we have positive expectations as well for 2012. And with that, I'll be pleased to answer your questions. Operator, if you'd give our participants the instructions, please? Operator?

[Operator Instructions] Our first question comes from the line of Brian Foran from Nomura.

I guess given the change in the way the guidance is -- prior quarter was legacy PNC, and the current quarter now the guidance is combined, even qualitatively is it just possible to give us a sense for apples-to-apples where things -- the guidance is better for 2012 for legacy PNC and where it might be worse?

You know, the net interest income guidance is basically the same as we gave you before embedded in that. We believe that'll be essentially flat year-over-year. We believe fee income will be up despite the regulatory impact. We expect that credit costs will improve, but we're going to incur probably additional credit costs with RBC. That's why we're saying stable. And then on the expense side, clearly, if you back out some of the adjustments we had in the fourth quarter, we're pretty comfortable that we're going to manage those expenses flat to down year-over-year. That's that $8.7 billion number and -- but again I do want to qualify that to the extent that we could have further redemptions of trust preferred securities and we could have further -- potentially further litigation and other regulatory charges that we can't anticipate at the moment.

Okay, and then I guess not the biggest issue in the world for you, but just given the increase in government-guaranteed loans that are delinquent on the balance sheet and a lot of them being FHA mortgages, FHA and VA mortgages, I mean I guess on the one hand most of this stuff was underwritten post the crisis so hopefully the underwriting’s better. But on the other hand, the government hasn't been a great counterparty for the banks this cycle. So what risk, if any, do you see of potential problems or losses emerging from government-guaranteed loans?

Well, we don't -- obviously, we would reserve for some if we perceived that there was additional risk in that portfolio. So obviously, the FHA can change their minds about things, but we would expect that these -- they would live up to their government guarantee.

Our next question comes from the line of John McDonald with Sanford Bernstein. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Rick, did you give an outlook for purchase accounting accretion in 2012? I'm not sure if I missed it or if you weren't that specific.

No, I didn't, John. Reason being is we're pretty confident what we think the PNC stand-alone decline is going to be, which is probably about $0.5 billion year-over-year. But remember, when we do RBC, we're going to pick up some purchase accounting accretion with that transaction, so there's an estimate embedded in there. But we're not going to know until we close and get a look at the valuation on the books and all that and we'll have a better idea of that. But I'm very comfortable with the overall net interest income guidance that I gave for the combined company as well as the fact that I think PNC stand-alone will be flat year-over-year. And the reason for that, John, is even though there's a $0.5 billion decline in purchase accounting accretion, the way we are growing core net interest income, because of the reduction in funding costs and the increase in loans, is going to make up for that full decline in purchase accounting accretion from 2011 to 2012. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And could you remind us what are the integration costs you expect to take in 2012 related to RBC?

Yes, it's about $300 million in total. It's $170 million in the first quarter. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. Do you happen to have an estimate of how much Tier 1 common the RBC acquisition cost you, or what that does to your capital ratios as it comes out of the first quarter?

Yes, I would look at that as 1 point. Given we're not issuing any equity related to the transaction, it would probably -- I estimate it'll drop our Tier 1 common ratio by 1 percentage point. That's a combination of the goodwill we'll record as well as the new risk-weighted assets we'll put on our balance sheet.

Our next question comes from the line of Erika Penala with Bank of America Merrill Lynch.

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

That's a great question and we really look at the RBC franchise as a great opportunity. As you know, we're acquiring RBC at a discount to tangible book with a negative premium on deposits. And to a great extent, it's positioning us very well across the franchise and we don't think that we have to do a great deal of acquisition at all in order to fill out what we think is a good branch franchise with the exception of just hiring people. And I'll give you an example. In Atlanta where the expectation was that we might need 100 branches in Atlanta, because of the decline in utilization of branches, 100 would probably suffice. That was our number as well as RBC's. Well, we'll get 55 with the RBC transaction, we acquired 27 with the Flagstar and so we're basically there already. We'll build a number of them in the right locations. So we really don't have to do a lot of additional acquisitions to build out the RBC franchise in the Southeast. So I think you'll see us be very judicious in terms of considering acquisitions in the future. If there's something remarkably cheap that fits our risk profile and is wonderfully accretive that you would be very happy with [Audio Gap] now, I think we're particularly focused on just executing around the RBC transaction.

Okay, and I just wanted to ask a follow-up question on the CD repricing that you mentioned that will occur in the first half of the year. The 2.5% rate that you gave us, is that the effective rate, taking into account any purchase accounting discount? So if we're doing the math, is it 2.5 to 33 basis points on the $750 billion that you wish to retain or is the effective rate already lower than 2.5%?

No, the 2.5% is the actual rate of the CD itself. It is not adjusted for purchase accounting. The adjustment for purchase accounting is why the purchase accounting is coming down year-over-year. So that's embedded in that $500 million I spoke about. This is the contractual rate and these will be repriced under 33. But what I would say is the benefit we're getting from the repricing here given rates have dropped so dramatically is much greater than the runoff of the purchase accounting related to these deposits.

Got it. And my last question is just a follow-up to John's question. The net interest income guidance is mid- to high-single digits, it includes that runoff in that CD purchase accounting benefit and includes some estimate of purchase accounting from RBC?

That's correct.

The next question comes from the line of Matt O'Connor with Deutsche Bank.

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

Well, we've been interested in doing that, as you know. With an 85% loan-to-deposit ratio and interest rates being so low, clearly we would have an appetite for that. We’ve bought a few things, I would say modest. What we've found is that most of the things being offered are either bid -- are plain vanilla assets that are bid to a point where the return on risk is not attractive or they're just items that we wouldn't be particularly interested in. So there are some opportunities. I think there’s going to continue to be more opportunities in the future as a number of these things appear to be surfacing at an increasing pace. And so I think there'll be opportunities for us to buy things at good yields. So far our purchase activity has been modest, but I would guess it would increase.

And I think, Matt, we're also focused on where we can get the customers and actually grow the business from there as well, so both of those will be important to us.

Okay, that's helpful. And then just coming back to the pending RBC deal, can you just remind us, I think on the fee revenue side, you've talked about some low-hanging fruit. How quickly does that come onto the revenue platform? And then the cost savings, remind us how much and the timing of that?

The low-hanging fruit, I think, is across-the-board. I mean this is really a retail franchise. It was a franchise that was put together by the Royal community banks primarily and then they were all placed on a community bank platform. And as a result, they had a retail community bank product set. When we acquire them in the first week of March, we will convert the entire franchise that weekend. And so all of the electronic products that we have, Virtual Wallet, Wealth Insights, myCFO will all be available to them and those are products that they have not had at all. So I think there'll be a terrific uptick in that space. Also we're in the process of hiring C&IB personnel. I think we're -- we have identified a regional president for all but one of the markets. Some of them are RBC folks, some of them are PNC people that will be moving. And so I think the C&IB opportunity will get underway rather quickly because I think the calling effort will be beginning prior to the closing. So I think you'll see an uptick in business coming out of the Southeast right off the bat.

Okay, and the cost savings side then, too?

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

Yes, and $150 million of that will be this year.

$150 million of that will be the first year. A lot of the $150 million will be front-ended. As we do the conversion, the payments to the Royal for processing will stop so that's a big part of the cost saves that'll start in the second quarter.

Our next question comes from the line of Ed Najarian with ISI Group.

My main question was already asked, but I just wanted to make sure I was clear on the guidance for noninterest expense. You're starting with the $8.7 billion and you're saying that, that number mostly due to flat or down expenses at legacy PNC plus expenses at RBC will cause a full year '12 number to be up mid-single digits from that $8.7 billion, is that correct?

You got it, Ed. Exactly.

Our next question comes from the line of Paul Miller with FBR Capital Markets. Paul J. Miller - FBR Capital Markets & Co., Research Division: My question relates to the $240 million residential mortgage foreclosure expenses, and can you just elaborate that more. That's a higher number than we expected. Is that related to either the robo-signing litigation or is this related to the SEC consent letter? Can you just give us some background to this?

I wish I could, but unfortunately this is a governmental relations matter. We've talked to a number of regulators. And most recently, we've been contacted by additional regulators who gave us some information that we believe that we needed to accrue for in the fourth quarter. We accrued for it as best we know how. And I think that, that's about all I can say about the discussion. The 2 items that the accountants always say is something probable or estimable. We believe that there was something that was going to come from the mortgage arena in the servicing side, but we didn't -- we never could figure out how to estimate it. But the additional -- the recent conversations we had gave us some additional information, which we accrued for in the quarter. Paul J. Miller - FBR Capital Markets & Co., Research Division: I mean when you talk about the additional regulator, is that the Consumer Financial Protection Bureau?

I think we just have to say the additional regulators. We're restricted in discussing our relationship with our regulators. Paul J. Miller - FBR Capital Markets & Co., Research Division: Okay, I mean -- yes, okay. It's just a confusing number because usually, is this a litigation expense. So this is the regulators coming to you and your accountant saying that you got to have a better handle on what these future expenses are going to be basically. That's what this number is?

Yes.

[Operator Instructions] Our next question comes from the line of Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: Just maybe that kind of 3-stage priorities on capital management, could you maybe amplify that a little bit? I mean you did say that the RBC deal would cause a 100 basis point reduction, is that the amount that you would be expected to kind of recapture before starting capital management? Or is it a different number? I mean how should we think about that?

I think the capital management issues are really we would like to invest in our customers first. The loan growth side, I think, is very pleasing indeed. I mean the idea that we were able to grow loans 12% in the fourth quarter, if that kind of loan growth continues, I think we would both be very, very happy that we will be using our capital for that. I would guess the -- from my guess, M&A -- the utilization of capital for M&A is probably very limited and so we would look to support our customers and then we would look to return any excess capital. We would need to build capital, obviously, to get to the Basel numbers that we talked about. Rick mentioned that we expect to be in our range, 8% to 8.5%, sometime in '13. If we get some more reasonable interpretations of how they apply capital to the sub-investment grade securities, I think we would be there much earlier. And then -- and obviously in that would be a consideration of whether increases in dividend or share buyback would be appropriate during that time as well. So we look at all 3 of those things and obviously the regulators look at them as well, as well as our board.

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

That's right. The RBC -- I mean in all of our forecasts that we give to the regulators as well as our own include the RBC transaction.

Our next question comes from the line of Todd Hagerman with Sterne Agee. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Couple of questions. Just Rick, going back to the expenses in the outlook. You mentioned in this particular quarter foreclosure-related matters, I think, for the year have now exceeded $300 million. I'm just curious, your assumption for next year kind of the flat legacy PNC, how should we think about, again, kind of this tough regulatory environment, ever going changes, what gives you that confidence that the legal regulatory matters won't continue to increase? Or said another way, how should we think about how much is embedded within that expense guidance on the regulatory mortgage-related matters?

Well, we’ve had these costs in each of the quarters through the year. What's unusual is the increase in that in the fourth quarter. I expect we'll continue to have costs similar to what we've seen in previous quarters. I don't expect to have items as large as we've incurred in this quarter. I don't expect that. Now that's still possible. It could occur. But I think at least for the moment, we think at least with what we know we've estimated and accrued for what we think this will cost us, but there's always a risk that we'll get more information that will change that estimate. But I think we're going to have some costs as we go into the next year and I would say that right now I've estimated that more consistent with what you saw in the first 3 quarters. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Okay, that's helpful. And then just to again remind us, just on the funding side, the outlook was roughly $550 million, I think, for the year in terms of cost saves. Was that inclusive of the RBC cost savings expectation, just as a reminder?

Yes, it was.

Yes, it was. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Okay. And then, just last...

There's $150 million coming from RBC in the first year and so another $80 million would come in '13.

And $400 million from PNC.

$400 million from PNC. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Right, got you. And then just finally, just in terms of Durbin, again the outlook very positive in terms of the fee income for 2012. Could you just talk a little bit in terms of you had the impact this quarter on Durbin, how do we think about kind of the mitigation efforts and how you're thinking about overcome that shortfall in the coming year, again thinking in terms of kind of legacy PNC?

I think the -- obviously, we have a $75 million impact in the quarter. There will be -- when you look at '12, there will be an additional $175 million that we didn't incur this year. That will be partially offset by the fact that we're growing that business rather dramatically in terms of new customers so the net impact of the debit interchange won't look like $175 million additional next year because of the additional volume coming through the customers. The real issue for the whole consumer bank is that we have to reprice our relationships with the consumers. And as you've seen, we came out with a new product set in March of this year. We've grown 300,000 households, including 40,000 with acquisition. But 260,000 households that we grew over the course of the year is a really remarkable process. I think we just have to keep repricing our products and looking at products and services and also bringing down the cost to serve. So I think it's not a case -- I think some people have learned that you just don't say, okay, we'll make it up with one new fee. I think you just have to look at the whole consumer relation. To be honest about it, if interest rates were at 5%, we were making a lot of money on the deposits that we have with the consumer, it wouldn't be quite the issue that it is. But clearly, with interest rates being so low, obviously you have to use different types of pricing, including different kinds of fees in order to make the relationship more profitable.

Our next question comes from the line of Nancy Bush with NAB Research.

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

I think that's correct, Nancy, yes.

Yes, Wells Fargo gave their cost of funds, I think yesterday, at about 22 bps and I am assuming that, that's probably the lower end of your peer group. Can you tell me where the 42 bps sort of lies within the peer group and how much lower you guys can or want to go?

Well, a lot of it's going to be the repricing of the CDs that you're going to continue to see in 2012, which is going to lead to a reduction in funding costs of almost $175 million in 2012 and $275 million going into '13. Now some of that'll be offset by purchase accounting coming down and the benefit there. But overall, that'll drive that rate down lower. So right now, we're probably a little bit inflated given we have a lot of these CDs still to reprice.

Do you guys have -- I mean, do you want to stay sort of in the middle of the pack in terms of deposit pricing or sort of what is the philosophy of deposit pricing right now?

Deposit pricing, I think when you think about what the opportunity for the deposits are, we've been running off high-cost CDs. You can see it easily in the balance sheet. We've been growing customers and growing transaction accounts dramatically. So I think we're really looking at growing transaction accounts and growing time deposits in this interest rate environment is really not a very attractive endeavor. We do it on a relationship basis, not on a hot lending basis.

And secondly, I believe you mentioned that there might be further TruP redemptions this year. Can you just remind us where you stand in TruPS still on the balance sheet at this point and what the triggering event or what the thought process about future redemptions might be?

Well, we -- after -- obviously, we redeemed $750 million in the fourth quarter. We have about $1.5 billion of redemptions primarily in the second, third and fourth quarters of this year and the average rates on those are between about 6.5% to 12%. So I think with each one of them we'll have to see where rates are and make an economic call at that decision as to whether it's appropriate to refinance it. And obviously at 12%, I think it's highly likely. At 6%, maybe it's a little bit more of a question mark. So we've going to have to see where rates are at that time.

The next question comes from the line of Ken Usdin with Jefferies. Ian Foley - Jefferies & Company, Inc., Research Division: It's actually Ian Foley for Ken. Quick question on security deals. They've generally hung in better than expected. We're wondering if you could give some color on what the new go-to rates are and what, if any, your investment strategy has changed given the current rate environment.

Well, we remain very, very short in terms of the current rate environment. I mean we've spent a lot of time building capital and we're not about to give it away in a bond trade. So we'll remain very short in the securities book for the time being. Ian Foley - Jefferies & Company, Inc., Research Division: Got you, okay. And then just a general housekeeping question. Did you guys take an impairment on the commercial mortgage servicing rate this quarter? I think you had given that number in the past, but I couldn’t find it in the earnings release.

It's less than $10 million, a pretty small number.

Our final question comes from the line of Mike Mayo with CLSA. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: I'm going to start with the -- put you on the defense a little bit, I think. If I take out those first 2 charges, then your earnings go up to $1.39 and that's $0.02 above consensus. But then if you take out the tax rate impact, you now go down to $1.31 which would be $0.06 below consensus. So you sound as though you're pretty positive and you thought it was a good quarter, but how do you help reconcile the $1.31 that I get with consensus of $1.37 or are there other noise or onetime charges or am I missing something?

Well, you have a couple of things. One is -- I assume what you meant is that we're getting the benefit because of the lower tax -- effective tax rate, correct, Mike? Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: Right.

Yes, well, a lot of the reason for the lower effective tax rate is because of the lower earnings, which obviously the tax credits don't go as far, and so that's part of the effect. They go further, I should say, against the lower earnings. The other thing that we're missing here is if you look at the personnel line. Clearly, we've had $100 million increase in that line. A lot of that is just simply driven by stock market prices and PNC stock price where was at a very low point at the end of September and obviously a lot of improvement by the end of December. And a lot of that number, at least the majority of that number, is driven by the change in stock market prices. So unless the markets go up, which is a good thing, we don't expect to have those costs in the future, and that's over half of that. So I think that's something which isn't necessarily repeatable. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: Okay, that's clear from what...

And if it doesn't repeat, it's a good thing. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: I don't understand that though. In other words, this is your fifth bullet point in your press release: Increase from personnel expense of $103 million dollars primarily driven by higher stock market prices and higher business production. So higher business production you're simply paying more incentive comp, I understand that. But how do higher stock market prices increase personnel expense?

Well, we have a lot of stock-based plans, which are based upon performance and so the expense is variable in some cases. So to the extent that the market goes up, the value of that stock goes up and that's an expense impact when that occurs. And these would be those that have been awarded in the past year or in prior years.

We've moved away from options in the recent years and moved towards performance-based restricted shares. And so the accounting on an option would be fully accrued at the beginning. It's not the same accounting treatment for the performance shares.

And the other impact, Mike, is on deferred compensation where obviously the stock market prices go up and that hasn't increased in the cost to us of that deferred comp. Now, we hedge some of that through other income and you see that on the other side in the revenue. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: And you also had some integration charges of $0.03, is that correct?

That's correct, yes. We were not getting -- absolutely. I can give you a whole list of things probably. We had some -- you look at the occupancy and equipment, we had some facility write-offs in the quarter related to one of our buildings in one of our markets, which was about $16 million to $18 million. Wrote off some software pretax. We've wrote off some software and some other items as well. So there's a whole litany of things in the expense line, Mike. That's kind of where I'm leaning back and saying, I'm very confident we've been through the first quarter and obviously I've got to qualify everything I say as subject to, subject to and subject to. The first quarter expenses will be very close to what we reported in the third quarter of 2011. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: Okay. Can I ask a separate question? Commercial loan growth, what was the change in loan utilization? And is the loan growth coming from increased borrower demand or from market share?

The majority of it came -- we did not have a meaningful increase in the utilization rate. And so we had loan growth. You could see it in the chart across-the-board in terms of industries and across-the-board in terms of markets. And I think that actually is the reason we're a little bullish on loan growth going into '12 because it wasn't one segment. It wasn't one market or one region. It was really across-the-board, diversified growth in all of the various loan categories. So we were very pleased about that. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: And so you're bullish on PNC's loan growth, not necessarily the industry's loan growth because -- why -- how are you getting this loan growth if demand's not picking up?

It appears -- from what I've read, it appears as if loan growth is picking up across the country. But I think our 12% loan growth in the fourth quarter and the supplement that we set out on Page 6, I mean you can see that retail and wholesale was up, manufacturing was up, service providers were up, real estate-related was up, financial services. So we have more activity, healthcare. We had activity, increased activity, in virtually every different segment that we measure. And we really -- I mean, that's very exciting. When we look at the accounting, Mike, obviously housing -- the residential housing is still massively challenged and there's going to be some more challenges for another year or 2 in that space. But the rest of the country is doing better and when you look at the earnings reports that have come out, retail sales, unemployment coming down, the rest of the country is doing better now. It's not great. And it would be nice to have some residential housing because that has all the spinoffs with washers and dryers and refrigerators and the rest. But the national economy is doing better than it was a year ago and I think there's a number of signs that you can point to where we're making a comeback.

And Mike, we probably don't have as many headwinds as we had in the past from the loan growth. The Non-strategic Assets Portfolio is much smaller. The commercial real estate business has hit an inflection point in terms of its ability to grow loans as it's not running down as much the previous loans that were impaired or otherwise having credit problems, so we're not having as much headwind. And I think as a result there, you're seeing some good growth.

All right, operator, are there any other questions?

There are no further questions, sir.

All right. Thank you very much. Well, thank you, everyone, for joining us this morning.

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