The PNC Financial Services Group, Inc. Presents at Barclay's Americas Select Franchise Conference, May-21-2013 09:15 AM

Seeking Alpha

Pnc Financial Services Group,The (PNC)

May 21, 2013 4:15 am ET

Executives

Richard J. Johnson

Robert Q. Reilly - Chief Financial Officer and Executive Vice President

Analysts

Jason M. Goldberg - Barclays Capital, Research Division

Presentation

Jason M. Goldberg - Barclays Capital, Research Division

Also present is Rob Reilly, who's the incoming Chief Financial Officer, who will take over later this year; as well as long-term Investor Relations Head, Bill Callihan. With that, let me turn it over to Rick.

Richard J. Johnson

Good morning, everyone, and Jason, thank you very much, and congratulations on a very successful conference here. I can probably skip my first 15 slides. Jason did such a good job covering it there. But anyway, I'll repeat it for you, nonetheless. With me today, as Jason said, is Rob Reilly. Rob is going to take over in the third quarter. Rob is running our Asset Management business, member of the executive committee, so a lot of good transition on how we're doing this, and obviously, Bill Callihan, Director of Investor Relations. And before I get started, I have to give you the prerequisite cautionary statement. As you can see on this slide, the presentation materials and information in the Investor Relations section of our website, pnc.com, includes cautionary statements regarding forward-looking adjusted information, and I urge you to read them. Our forward-looking statements regarding PNC's performance assume a continuation of the current economic environment and do not take into account the impact of potential legal and regulatory contingencies.

If I can get started this morning with my remarks, I want to cover 3 things for you today. Right, first, I will provide the overview of PNC's franchise, which has delivered strong growth in tangible book value during a very challenging period. Second, I'd like to take you through our great start for 2013. We had really good results in the first quarter and I think, most importantly, a very clean performance so you can see the true earnings potential of the company. And third, I'll discuss our strategic priorities for growth despite the economic challenges that exist in today's operating environment.

Now let me begin with an overview of the franchise. You can see this on Slide 4. We have more than $300 billion in total assets made up of our Retail Bank, which covers about $6.5 million checking relationships and looks to build on those relationships by enhancing customer loyalty with the goal of cross-selling loan, investment and money management products. This Retail Banking footprint covers over half the U.S. population.

Our Corporate & Institutional Bank segment is a leader in serving middle-market clients in our Retail footprint. And on a national basis, we offer credit for commercial real estate, corporate finance and asset-based lending. We also provide fee-based products and services, such as Treasury Management and Capital Market solutions for our clients. Our goal here is to deepen client relationships that meet our risk return criteria.

Our Asset Management Group is one of the top 10 U.S. bank-held wealth managers. We have seen strong growth in this business segment as a result of our investment in talent and our internal referral capabilities. I'll say more about that later in the presentation. Residential Mortgage is also a national business. Buying a home is the single most important financial transaction most of our customers will make, and it's our goal to expand our market share in this business across our expanded footprint. And as I'm sure you're also aware, we also hold a 22% stake in BlackRock. With our scale and competitive product offerings, PNC is one of the leading financial services companies in the U.S.

Now at PNC, we remain focused on executing on our strategies and delivering shareholder value, and as Slide 5 shows you, the value we have created throughout the economic cycle. We entered the financial crisis with a strong balance sheet and a diverse revenue mix. As of December 31, 2007, our tangible book value per share was approximately $18. Our relative strength at that time enabled us to acquire National City at the end of 2008 and double our size at a very attractive price. By the end of 2009, with the U.S. economy headed toward a modest recovery, we had increased our tangible book value per share by 40%, the best in our peer group. Since that time, the banking industry has been faced with a period of sustained low interest rates, slow economic growth and increased regulation. Despite these challenges, we delivered tangible book value per share growth of more than 80%, again, the best in our peer group as our tangible book value per share at the end of last year had grown to nearly $49 a share.

This also provided PNC with another opportunity to expand our franchise through the acquisition of RBC (USA), this time into the Southeast. And as you can see, we remain committed to growing tangible book value, which we believe is a good proxy for growing intrinsic value over time.

Now let's talk about our strong first quarter performance. If you haven't seen our results, here are the highlights on Slide 6. We reported first quarter net income of $1 billion or $1.76 per share, with a return on average assets of 1.34%. Most importantly, it was a relatively clean quarter, which made our earnings potential far more obvious. Our diversified business has delivered solid revenue despite weaker lending on the quarter. We grew customers and loans. We also posted a more than $400 million, 15% reduction in expenses compared to the linked quarter. And we strengthened our capital levels, which I'll talk more about in a few minutes. I'd also like to add that our tangible book value at quarter end increased to nearly $50 a share. And in early April, we announced a 10% increase in our dividend to $0.44 per share, effective with the May dividend.

Now Slide 7 compares our first quarter performance to that of our peers. As you can see, most of the banks in our group experienced top line revenue pressure on a linked quarter basis. For PNC, we believe our diversified businesses delivered solid revenue in a tough environment. We're among the leaders in our peer group in reducing the expenses, and this resulted in a pretax pre-provision earnings of approximately $1.6 billion, an increase of 26% compared to the fourth quarter of last year, putting us near the top of our peers. Overall, this was a terrific way to start the year, but I will say this level of earnings for PNC may not be sustainable in this challenging environment. For the second quarter compared to the first, we currently expect 2% to 3% decline in net interest income and a 2% to 3% increase in expenses. However, we continue to expect that full year total reported revenues will increase in 2013 compared to 2012, and reported expenses will be down by mid-single digits.

Now let me spend just a moment on credit. We continue to extend credit on a risk-adjusted basis and we believe we're adequately reserved. And as you can see on Slide 8, our first quarter reserves to loan losses to total loans is greater than 2%, and that puts us in the top -- middle of the peer group. Now when you add in the marks we had in our purchased impaired loans, you can see that, that puts us up in the top quartile. At the same time, our underlying credit trends continued to improve, and while still early, early in the quarter, we believe our provision for the second quarter will be in the range of $200 million to $300 million.

Now our first quarter capital ratios and our capital priorities are laid out on Slide 9. Our Basel I Tier 1 common capital ratio as of March 31, 2013 was 9.8%, and our Basel III Tier 1 pro forma common capital ratio reached 8%. I will point out that that's 3 quarters faster than when we expected it to get there. Both ratios reflect strong growth in retained earnings and our Basel III ratio also benefited from an accelerated reduction in risk-weighted assets.

Our capital priorities for 2013 remain unchanged. We'll continue to support client growth and business investment. We'll continue to maintain the appropriate capital relative to the economy and the Basel III, and we will return excess capital to shareholders, subject to regulatory approval. We continue to believe we will be well-positioned to return additional capital to shareholders in 2014.

Now I'd like to spend a few moments talking about the strategic priorities we believe will drive further growth in PNC, and they're listed on Slide 10. We believe these priorities provide us with a unique opportunity to dramatically increase our franchise over time without additional acquisitions. Let me start with the opportunities we see for deeper penetration and cross-selling in our underpenetrated markets. PNC's model has been fully in place in our Midwest market for about 3 years following the successful acquisition and integration of National City. Slide 11 reflects the growth for Corporate Banking and Wealth Management that we have seen as a result of applying our business model in the Midwest markets. We believe we have achieved this growth, in part, by using local market Regional Presidents. This helps bring the capabilities of a large bank to the local market, and we believe it differentiates PNC from the peer group.

This chart shows the sales growth we have seen in Corporate Banking and Asset Management during the last 3 years, during a period of approximately 2% GDP growth. The 3-year compound annual sales growth rate in the legacy Northeast markets was 4%, and in the newer Midwest markets, it was 17%. On the cross-sell side, the growth rate in our Midwest markets is even higher at 24%. These trends give us confidence that -- in our ability to achieve similar levels of sales growth in the Southeast markets.

Now turning to the Southeast, we closed and converted on the acquisition of RBC Bank (USA) in March of last year. We bought a Retail Banking franchise. Since then, we've attracted talent, many from regional competitors, and bought in a culture of carriers from PNC markets to build out all of our businesses. We believe this is a very compelling organic growth opportunity, as you can see from the demographics that we've laid out here on Slide 12. I'm not going to go through all the numbers with you, but these statistics reflect the opportunities we see. Our recent results reflect our optimism. In the first quarter in the Southeast, we added 9,000 DDA households in retail and more than 100 new primary clients in our Corporate Bank and our Asset Management Group, which we believe is significant growth. Our Southeast loan book in Corporate Banking grew at nearly 20% annualized rate in the first quarter despite continued runoff of noncore loans we acquired, clearly, a faster pace than we had expected. We have the right people in place and we're investing our marketing and sponsorship dollars carefully to achieve the greatest possible penetration and brand recognition levels across these new markets.

Now thanks to Rob's leadership, our Asset Management Group has recorded stronger results in recent years, as you can see here on Slide 13. Last year marked the seventh straight year of record new client acquisition for our Asset Management Group. Client satisfaction and retention have been consistently strong in each of the last several years throughout the crisis and recently finished 2012 at record-high levels. And we believe we have one of the highest internal referral rates in the industry. With sales growth in excess of 30% for each of the last 2 years and particularly strong growth in referral sales, we have great confidence in our ability to capture more of our customers' investable assets as we strive to make retirement and investment a part of every customer conversation. As a result, AMG achieved all-time high assets under administration of $236 billion and assets under management of $118 billion as of March 31, 2013.

Within our current footprint, our existing clients alone have an estimated $1.9 trillion of investable personal assets, and our current share of those assets is in the single digits, which is typical in this fragmented market. However, we have made this significant growth opportunity an organizational focus. In fact, every customer-facing employee in the company has goals for 2013 related to our investment and retirement cross-sell effort. This is a low-capital business which we expect to be a much bigger contributor to PNC over time.

Now turning to our Residential Mortgage business, we're building a highly integrated origination and servicing engine. Our strategic focus in this business is to gain market share in this area of home purchase transactions across a larger footprint and provide a differentiated customer experience. We believe this is a key driver of long-term value and we'll be utilizing marketing campaigns to leverage our enhanced capabilities.

As you can see on Slide 14, our purchase volume increased 25% in 2012 compared to 2011. With mortgage interest rates hitting new lows in the second quarter, we are seeing solid refinancing activity. At the same time, our purchase volume is reflecting the strengthening of the housing market. Now one of the greatest strategic challenges facing any bank today is in the retail space. Customers are changing how they interact with us, and given the interest rates in the United States at historic lows, the value of the deposits are also at historic lows. The current Retail Banking model is built on giving away services, free checking, free online banking and free deposits. All banks are in the process of rethinking the fair value exchange we have with our customers. And PNC is no exception. We're beginning a long-term process of repositioning our retail bank to meet the needs of both our customers and our shareholders. Our goal is to enhance customer loyalty and increase share of wallet, even as we work to lower our cost to serve.

Let me start with the changes in customer behaviors. As you can see on the pie chart on Slide 15, only 18% of PNC's current customers are using our traditional branch as their predominant channel for interacting with us, and that number continues to decline. Some 37% are primarily virtual for a majority of their transactions, and nearly half of our customers use a multichannel approach. As a result, we are working to leverage new distribution and transaction channels that better align our customer preferences. For example, we're already seeing success in migrating customers to self-service channels. Mobile and ATM deposits represented 20% of total deposits in the first quarter of 2013, up from 14% in the first quarter of last year. Our most mature markets, Southwestern Pennsylvania where Pittsburgh, obviously, our headquarters, where we piloted these capabilities. In that region, our mobile and ATM deposits grew to 35% in the first quarter of this year. That compares to 20% to the same period a year ago. We also saw an 11% gain in overall number of customers using online banking since the first quarter of 2012. In response to these changes in preferences, we also plan to close approximately 200 branches this year. I'll tell you that's about 4x greater than any branches we've closed in the past. So you can see we're really picking up the pace of getting the cost equation of this in line.

To meet customers' product needs on the product side, we recently launched a new offering for small business customers. Cash Flow Insight is a suite of tools that is designed to help business -- small businesses manage their cash flow more effectively. During the next 5 years, we believe this product has the potential to generate annual revenue of $100 million. And we're rolling our new technology in our branches that will help retailers to spend more time talking to clients about their needs and selling financial products and less time with routine deposit transactions. Ultimately, our goal in Retail Banking is to deliver the services our customers want at a cost our shareholders can accept.

As you can see on Slide 16, our final strategic priority is expense management. As you know, we have set a goal of achieving a total of $700 million in cost savings in 2013. These dollars are being used to offset investments we're making in our businesses and our infrastructure. PNC's long been good at continuous improvement, but we are seeing a new attitude across the organization about expenses and the realization that we still have room for improvement. Through the end of the first quarter, we've captured approximately $500 million of annualized savings towards that $700 million goal, and this gives us confidence that we will meet our full year cost savings target for the year.

On a full year basis, I continue to expect reported expense to decline by mid-single digits on a percentage basis, and we expect core expenses, which exclude integration and trust preferred security redemption charges to be flat to down in 2013 versus 2012 due to our strong first quarter performance.

In closing, we believe PNC has the business model, the execution capabilities, the culture and the people to win in this environment. You saw that in our first quarter results, which reflected our focus on strategic priorities along with effective expense management. We believe we are well-positioned to deliver improved earnings for the full year of 2013 compared to 2012, and our capital position should provide us with greater flexibility in 2014.

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

Question-and-Answer Session

Unknown Analyst

Thank you for your presentation. May I ask a back-to-basics question. Since the financial crisis, how has the mortgage business changed? Are you -- in terms of origination of mortgages, are they being taken onto your bank's balance sheet or are they being securitized? And how does that affect your business and how has it changed?

Richard J. Johnson

We've taken very little onto our -- onto the balance sheet. We've -- with some -- maybe for some of the advisory customers, wealth customers, we might keep it on the balance sheet, but the majority of what we have goes back to the GSEs, securitized and into the market. So we're not changing, fundamentally, how we do that. I would say, that the mortgage company we acquired through the National City acquisition had some problem, okay, and we probably spent the last 3 to 4 years trying to work through how to make sure that the origination and underwriting practices were independent so that you got good quality product; second, working through the mortgage repurchase issue that existed and obviously, in this environment looking at foreclosure and other practices like that. But we think we are probably 2/3 of the way through all the heavy lifting that we have to do. We're in a great position now to begin to grow this business as we move forward. But clearly, there was a lot of work to be done to try to put this in the kind of shape we felt was appropriate going forward. And we still have a lot of regulation in the U.S. to come out on mortgage and I don't think until that's get fully clear, we can understand how much we can grow it and how quickly we can grow it. We think it's going to be really important to understand what kind of role the government's going to play in the mortgage business as we go forward.

Unknown Analyst

Can you help us understand the strategic importance of the BlackRock stake?

Richard J. Johnson

Yes, it's a great stake. Actually, just a couple of things. Obviously, the BlackRock stake for PNC has been long-term, very valuable relationship with that company and clearly, the value of what we hold is worth a lot more than it sits in our books today. That being said, we do still generate a lot of income even with the Basel III capital rules and the sin bucket and all that, we're still earning 15% to 20% accounting ROE, if you like, on that investment. So that's not a bad deal. There's still a lot of regulation left to be determined, both from a PNC and a BlackRock side, to decide how both companies move forward in this environment. And so I think at some point, we have to clearly recognize the value of doing something and when we do it. I think we'd like to do it in the most tax efficient manner possible, but we clearly have to wait for a time when both parties are ready to sit down and actually make that happen. And we're not there today.

Jason M. Goldberg - Barclays Capital, Research Division

The prior 2 companies that spoke talked about a very competitive lending environment. Can you just maybe talk to both the competitive landscape, as well as opportunities to growth in -- to obviously -- to grow loans in a relatively subdued economic landscape?

Richard J. Johnson

Rob, do you want to address this one? Yes, go ahead.

Robert Q. Reilly

Good morning, I can answer that, Jason. I will -- we would concur that it's very competitive and loan growth is mitigated by the current economy and the competition and the demand for loans, of course. At PNC, we see most of our loan growth coming on the commercial side and the specialty lending areas, the verticals, so to speak, around energy, business credit, commercial finance, real estate, et cetera, which we've seen strong growth there and we expect that to continue. The general corporate loan book is soft in terms of demand. That's been flat for a while, and we see that sort of continuing and that sort of mirrors the overall economy. What I would add to that, though, is that we are in the Southeast now. Southeast United States in a big way, bringing Corporate Banking and these verticals to those markets. We were there in some of the verticals anyway but now having a presence in that regard, we see that contributing to our loan growth prospects.

Richard J. Johnson

I would add to Rob's point just around the fact that we think, year-over-year, we're talking about a mid-single-digit growth rate in lending. Clearly, a pretty soft first quarter for everybody, given the activity that was pushed forward into the fourth quarter, as well as a lot of the bank lending went into the capital markets, we didn't see as much go on the bank balance sheet. But we think, as we move forward from here, we see reasonable growth. Certainly not 2012 level of growth, but reasonable growth throughout the remainder of the year.

Jason M. Goldberg - Barclays Capital, Research Division

PNC has been very successful in terms of acquisitions. You talked about National City, you talked about RBC. Can you talk about your appetite for, kind of, future deals? I know you kind of looked at some of these kind of organic strategic priorities. But in -- one of the things a prior presenter noted is, he expected the banking industry to consolidate further, but they were too big to participate. You guys are of the right size where you can, just maybe give your thoughts around that?

Richard J. Johnson

Well, a couple of things. I don't believe the value you have to pay today for a Retail Banking franchise adds up, I think the 1.5x, 2x tangible book being the prices that are out there for branches which today, in deposits today, which are at historical low values, doesn't seem to add up to us in this environment. The other side of it is, as you mentioned, Jason, we have so many good growth opportunities on our plate already, whether it's finishing out the new markets, fixing the retail bank, reestablishing the mortgage business and also, the retirement and investment opportunity that we see out there, we've got a lot of wood to chop internally, and I think just executing on that and focusing on the bottom line of expenses is something that can deliver a lot of good returns for PNC for many years to come, without acquisition.

Unknown Analyst

Could I ask about SMEs and whether you think, compared to the financial crisis, it's now more difficult for them to get loans, whether it's the standard of rates or whether it is lack of demand? I mean, you've talked about -- both you and Wells Fargo talked about lack of demand for loans.

Richard J. Johnson

You might want to clarify SME?

Unknown Analyst

Small and medium enterprises.

Richard J. Johnson

Okay, thank you. Thank you, okay. If there is competition that we're seeing, which is irrational, it's typically coming from smaller banks, right? When we talk about their model, we talk about the Retail Banking model, the challenges it has with rates and fees and so on. There isn't a lot left for those small banks to do and so they get very competitive, as you would imagine. Both in terms of price and structure to maintain the relationships they have, and so you'll see, obviously, real challenging pricing going on in that space. The larger institutions understand risk and return, and they focus on the risk and return and we haven't seen that cause overall ability to generate loans to drop. I don't know, Rob, do you have anything to add to that?

Robert Q. Reilly

No, I think that's very fair.

Unknown Analyst

[indiscernible] being difficult for rural companies to get finance now, to get -- borrow money from a bank.

Richard J. Johnson

No, I suggest that it's not so much a difficult in getting the financing, many of them don't need it because they've got so much cash that they've built up over time that they've been concerned about the environment and they're keeping the cash on the balance sheet. I'd say the confidence levels of them to borrow is not exactly high. They're probably not going to do a lot for capital expenditures and M&A and things like that. Maybe finance a little bit of working capital, but for the most part, the demand's not there. And that's -- most of those small business to middle-market customers -- and they're just waiting for a lot of the rules, tax rules, health care rules, a lot of other rules in the U.S. to level out and enable them and the consumer to build their confidence back up to levels which will cause them to take a little more risk.

Unknown Analyst

Just on the ROE. So PNC is definitely one of the better banks. You talked about the BlackRock accounting ROE on that. Now you look at some of the key businesses, high ROE businesses, I'm just thinking about you must be a little bit disappointed of the ROE. I mean, in terms of, can you size up the things that are maybe holding that back and in terms of the things that could help you get that to the level that you want it to get to?

Richard J. Johnson

That's a very good question. Obviously, the biggest thing holding it back is we've doubled our capital levels, right? So you would imagine with just the regulatory demands for higher capital in the current environment, obviously, are almost knocking our lease in half in the industry. The other thing, too, is we're not fully mature, in my view, on the fees that we can generate from the customers we've added over the last 3 years. The customers we've added through acquisition, the customers we've added organically. And in the corporate bank alone, we've added 3,000 customers in the last 3 years, primary customers. So while we may have the lending relationships today, we don't quite have the cross-sell into Treasury Management, Capital Markets and some of the other products that we have. Today, we're about 39% fee income to total revenue. Prior to the crisis, we were probably closer to -- we're over 50%, actually, to be honest with you. Whether we get to 50% or not is not the goal, but the point is, I think we're in a period now where we can generate more fee income in order to supplement the obvious pressure that will hit net interest income in a low-rate environment. The other thing, too, is our efficiency ratio in a very good quarter, in the first quarter, was 63%. That's not good enough, and I think we get that. But a lot of that is because of the bets we have on the table, the maturity of those bets, the investments were made and how long it's going to take to get a return on those. That's one of the reasons we focused so hard on expenses in the first quarter, is because we didn't feel the efficiency was where it should be, and even at 63%, we're still not comfortable with where it is. I think we need to be in the high 50s, and I think the business model will generate, over time, mid-teen return on common equity, tangible equity. I think that's a reasonable expectation. And I think if we execute on everything we have on the table today, we can deliver that over time.

Jason M. Goldberg - Barclays Capital, Research Division

With a new CEO just started at PNC, a new CFO coming on board, can you talk to, just -- at least, maybe for Rob, just talk to kind of what expected changes, if any, we may be seeing?

Robert Q. Reilly

That's a fair question, Jason. Not a lot of changes. We -- this has been long planned and long in the works. You're familiar with the Bill Demchak, that's been very clear for a number of years. On the CFO side, I've been with the bank for 26 years on the Corporate Banking side of the Asset Management side, been on the Executive Committee, as Rick mentioned, for a number of years. So it's been a team sport, and it'll continue to be a team sport in that regard. So I wouldn't expect any major strategic shifts.

Richard J. Johnson

I agree.

Unknown Analyst

RBC in Canada is a fantastic bank, a very, very profitable bank and yet, didn't do very well in the Southeast. Is that purely because of the asset crisis that it hit or are there other lessons to be learned from that?

Richard J. Johnson

Well, there were a few things that happened to them. Obviously, the credit changes and the credit market and the real estate market and then, you have the regulators come in, Canadian showed up, a lot of things happened to them. But I wouldn't try to take what we did there -- what they did to the PNC strategy. And I'm going to ask Rob to talk about this because he's been very involved, particularly, in the Asset Management side, Corporate Banking side, to work through how different we're going to approach the Southeast than the way RBC approached the Southeast.

Robert Q. Reilly

Yes, it's a good question. In regard to RBC and their specifics, you'd have to talk to them. But for us, the whole strategy is around the cross-sell that Rick talked about. So in the Southeast U.S., the ability to bring in wealth products, institutional investment products, higher end Corporate Banking credit and noncredit services, those were products that RBC was not delivering into those markets. So in a slow interest rate environment, where the retail franchise is challenged, the returns are going to be driven by the addition of these products that we have, that we know how to sell and that we do in many markets in the United States, and we're now starting in the Southeast.

Richard J. Johnson

I think it's fair to say in the retail bank -- because they only had a few products to compete. When we did the close, we converted everything on that date so they had the full access to all the retail products that PNC had to put on the table. And obviously, we've added a lot of people in the Asset Management and Corporate Bank to put the full group of people there. And we're pretty much done on investment. We've got that done almost entirely in 2012, so now we're actually more in execution than we are in building.

Unknown Analyst

And just on that, I mean culturally, so taking the lessons you've learned with National City, I mean, how long does it take to sort of convince the client-facing people of any stock cross-selling and I know you mentioned, I think, your intent to do it and just exactly how you're doing that as well?

Robert Q. Reilly

Sure, another very good question. We've been very pleased in terms of how quickly the troops have picked up the ball and are running the plays. We have learned a lot through the acquisition of National City, before that, Mercantile and Riggs. So we know how to do that. In regard to the Corporate Banking and the Wealth Management, because that wasn't part of the purchase, those have been outside hires, so we were de novo in Wealth and much of Corporate Banking. The next question is, where did those hires come from? A lot of in-market competitors, also a number of PNC folks that have moved. So we have a nice blend in terms of culture carriers as well as people who know the markets. And we're running the play, as Rick showed on one of his slides, it's productive. We are already out of the gates in a strong way and in some ways better than we expected. We still have challenges but we feel very good about sort of the cultural mix, to your question.

Richard J. Johnson

Right behind you, Jason.

Unknown Analyst

You talked about closing branches. Could you talk about potential tipping points on accelerating that and the risk you're forced to make decisions too soon given the low rate environment challenging the retail franchise?

Richard J. Johnson

Yes, it should be clear it's -- we're consolidating branches, which means obviously, 2 branches moving the customers to 1. And obviously, the most important thing in that execution is to make sure you retain the customers that you had in the other branch. And those conversion rates are in the high 90s. I mean, when we were doing 40 a year, right, we are doing 200 a year. So that's something we're watching very carefully. So if we see some of that conversion rates slipping because of the volume we're doing, then, we're going to have to readjust our strategy. But at the moment, everything that we've executed, we've got 30 branches in the first quarter, is still consistent with what we've seen in the past in our ability to -- excuse me, execute in and move the customers without losing them. So -- but we'll have to keep a close eye on that, that's a very important point.

Jason M. Goldberg - Barclays Capital, Research Division

Rick, if you could talk about the increase on capital redeployment in 2014. How should we think about it in terms of dividend versus buyback or how do you think about that or is it Rob's turn to think about it?

Richard J. Johnson

Well, you know the rules, right, 30% on the common. We'll play to the rule, right? And obviously, try to maximize what we can under that landscape and add the 30% rule, the CCAR. And whatever is excess beyond that, we'll have to consider to provide that. But I really couldn't give any guidance out to '14, it'll be way too soon for that.

Robert Q. Reilly

I agree.

Richard J. Johnson

We've been practicing that.

Jason M. Goldberg - Barclays Capital, Research Division

Question in the back.

Unknown Analyst

Can you just elaborate on your last answer there, just your philosophy around stock buyback because earlier in your presentation you mentioned 1.5x tangible book value, you're doing fine, Retail Banking, attractive and I think your own stock's up around there. So do you actually have a concept of what you think your company's worth from an intrinsic value perspective or did you say -- and you just said that it's a balancing item of what cash have left your deploying stock repurchase?

Richard J. Johnson

It's the latter. I think we have to wait and see what's available. A lot of those metrics can change between now and those decisions, which don't get made for another 6 months to a year. So we'll have to evaluate it as we go forward. But at the moment, I don't have a way to view that. It would be a decision as we go forward.

Jason M. Goldberg - Barclays Capital, Research Division

With that, please join me in thanking Rick, Rob and Bill for their presentation.

Robert Q. Reilly

Thank you.

Richard J. Johnson

Thank you.



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