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Edited Transcript of PNC earnings conference call or presentation 13-Apr-17 1:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 PNC Financial Services Group Inc Earnings Call

PITTSBURGH Apr 13, 2017 (Thomson StreetEvents) -- Edited Transcript of PNC Financial Services Group Inc earnings conference call or presentation Thursday, April 13, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan K. Gill

The PNC Financial Services Group, Inc. - EVP and Director of IR

* Robert Q. Reilly

The PNC Financial Services Group, Inc. - CFO and EVP

* William S. Demchak

The PNC Financial Services Group, Inc. - Chairman, CEO and President

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Conference Call Participants

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* Brian Klock

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Erika Najarian

BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research

* Gerard S. Cassidy

RBC Capital Markets, LLC, Research Division - Analyst

* John Eamon McDonald

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* John G. Pancari

Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst

* Kenneth Michael Usdin

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Kevin James Barker

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Matthew Hart Burnell

Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst

* Terence James McEvoy

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning. My name is Nelson, 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 would now like to turn the call over to the Director of Investor Relations, Mr. Bryan Gill. Please go ahead, sir.

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Bryan K. Gill, The PNC Financial Services Group, Inc. - EVP and Director of IR [2]

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Well, 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, 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 performance assume a continuation of the current economic trends 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 statements and from historical performance due to a variety of risks and other factors. Information about such factors as well as GAAP reconciliations and other information on non-GAAP financial measures we discuss is included in today's conference call, earnings release and related presentation materials and in our 10-K and various other SEC filings and investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of April 13, 2017, and PNC undertakes no obligation to update them.

Now I'd like to turn it over -- the call over to Bill Demchak.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [3]

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Thank you, Bryan, and good morning, everybody. As you have all seen this morning, PNC reported net income of $1.1 billion or $1.96 per diluted common share in the first quarter. All in all, it was a pretty good quarter for us. We grew loans and revenue. And net interest income was up 1% on the back of higher loan and security yields that benefited from higher interest rates in the quarter. As you saw, we continued to manage expenses well, which has been a long-running theme for us even if -- even as we have invested significantly across our lines of business, and credit quality remained stable in the quarter.

We were pleased and, frankly, a little bit surprised to see another interest rate hike by the Fed in March. Of course, we welcome news of economic indicators that seem to suggest a confidence among consumers and business leaders. Now as I said before, PNC is positioned to benefit should environmental factors turn more favorable. But still, we remain focused on execution against our strategic priorities.

To that end, building on the progress we've made over the last 3 years on technology and infrastructure, we've recently realigned our tech innovation and operations functions, which will have both near- and long-term benefits. Now near term, we would expect that this effort will help us accelerate the pace and quality of innovation across the company. Think about that in terms of delivery of some of the digital products at a faster pace. And long term, we believe it will help us achieve greater efficiency across back-office functions. It will enable us to further improve the customer experience.

Now before I turn it over to Rob, who's going to go through the results in greater detail, there's a few things -- few items that I would like to comment on that might have jumped out at you from the earnings release. Now the first of these are the elevated cash balances at the Fed and the relatively flat quarter-to-quarter security balances, you'd think despite the higher interest rates and the opportunity to put more money to work.

Now to be clear, we did in fact, put more duration on this quarter. However, we did it through the use of interest rate swaps, where we saw relative value given the increase in swap spreads. And inside our securities book, the book yields and related NII increased appreciably as we were able to replace runoff at attractive yields. The 22% of the securities book that is, in fact, floating rate repriced higher. And importantly, the amortization expense of certain mortgages decreased as prepayments slowed. Now the balances themselves inside the Fed, in fact, our total cash balances were driven a bit by deposit growth, but frankly, also by some opportunistic borrowing that we did in bank notes just at really attractive levels.

Now the other comment I'd like to make is related to loan growth. You would've seen that we grew average loans around 1% in the quarter, once again driven by commercial loans. Although I'd like to mention as well that consumer is holding its own and did manage to grow on an average basis, reflecting significant efforts that we're making in this space.

Now within commercial, this has been a fairly consistent growth rate for us, and it's likely to continue. Interestingly, however, there's been a significant shift in where this growth is coming from. This time last year, growth was dominated by real estate. This quarter, real estate loans are actually down but have been replaced by growth in the rest of C&I, which seems to run counter to recent industry data. The C&I growth was very broad-based across equipment finance, ABL, large corporate, middle market and for the first time in 7 years, straight commercial loans, which we categorize as loans declines within the $10 million to $15 million range in revenue. Now you'll recall for some time, this bucket has kind of been running off based on acquired loans that largely came through the RBC acquisition. Now we've managed all of this by growing clients, particularly in our expansion markets like the Southeast and Chicago, and we've done this without changing pricing. Spreads were actually flat quarter-to-quarter as was utilization. And I point this out because I think it highlights the power and consistency of our franchise and the opportunities we have in front of us, including the new markets we just opened in Dallas, Kansas City and Minneapolis.

Now I know it's going to be a pretty busy day for everybody, so -- and we like to leave time for questions. So with that, I will turn it over to Rob, who will run through the results of the quarter in greater detail, and then we'll open it up for Q&A. Rob?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [4]

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Thanks, Bill, and good morning, everyone. As Bill just highlighted, our first quarter net income was $1.1 billion or $1.96 per diluted common share. Our balance sheet is on Slide 4 and is presented on an average basis.

Total loans grew by $1.4 billion or 1% linked quarter. Commercial lending was up $1.2 billion or 1% from the fourth quarter, primarily reflecting growth in our specialty lending verticals, large corporate and our equipment finance business. Consumer lending increased by approximately $200 million linked quarter, driven by increases in residential mortgage, auto and credit card. And this was partially offset by declines in home equity and education lending.

Investment securities increased by approximately $200 million linked quarter and $6 billion or 9% compared to the same quarter a year ago. As Bill just mentioned, we added to our duration this quarter with interest rate swaps at higher spreads and replaced securities runoff at attractive yields, primarily through the purchase of agency residential mortgage-backed securities and treasuries.

On the liability side, total deposits declined by $2.1 billion or 1% when compared to the fourth quarter reflecting seasonal activity as growth in consumer deposits was more than offset by declines in commercial deposits. However, on a spot basis, deposits increased $3.5 billion or 1% reflecting the timing of deposit inflows.

Average common shareholders' equity decreased by approximately $300 million or 1% linked quarter, primarily due to higher share repurchases and a decline in average accumulated other comprehensive income. During the quarter, we returned $884 million of capital to shareholders or 92% of net income, with repurchases of 5 million common shares for $612 million and common dividends of $272 million. This includes the impact of the increase to our share repurchase program that we announced in January.

Turning to capital. As of March 31, 2017, our fully phased-in Basel III common equity Tier 1 ratio was estimated to be 10%, which was unchanged from December 31, 2016. Our tangible book value reached $67.47 per common share as of March 31. Our return on average assets for the first quarter was 1.19%, an increase of 6 basis points, and our return on tangible common equity was 12.15%, an increase of 25 basis points.

As I've already mentioned, and you can see on Slide 5, net income was $1.1 billion. And we achieved positive operating leverage on both a linked-quarter and year-over-year basis. Revenue was up $10 million over the fourth quarter. This was driven by net interest income, which benefited from higher interest rates, partially offset by a lower day count. Noninterest income reflected seasonally lower fee income, predominantly on the consumer side, offset by higher other noninterest income of $322 million, which included a $47 million positive valuation adjustment associated with the 5-year extension to conform certain equity investments subject to the Volcker Rule. Noninterest expense decreased by $39 million or 2% compared to the fourth quarter. Expenses continue to be well managed, due in part to our continuous improvement program. Provision for credit losses in the first quarter was $88 million, an increase of $21 million, and overall credit quality remained stable.

Our effective tax rate in the first quarter was 23%, and included the impact of higher deductions for stock-based compensation related to stock activity and a higher common share price. For the full year 2017, we continue to expect the effective tax rate to be approximately 25%.

Finally, diluted earnings per common share were negatively impacted by $0.04 this quarter due to recognition of deferred issuance costs of $19 million related to the redemption in March of all of our REIT preferred securities, which totaled $1 billion.

Now let's discuss the key drivers of this performance in more detail. Turning to Slide 6. Net interest income increased by $30 million or 1% linked quarter, primarily driven by higher loan and securities yields that resulted from higher interest rates, somewhat offset by an increase in borrowing and deposit costs. Additionally, the first quarter was impacted by 2 fewer days. Net interest margin was 2.77%, an increase of 8 basis points compared to the fourth quarter primarily due to higher interest rates.

As you can see on Slide 7, noninterest income decreased by $20 million or 1% linked quarter as seasonally lower fee income was partially offset by higher other noninterest income. Compared to the first quarter of last year, total noninterest income was up by $157 million or 10%, and fee income increased by $141 million or 11%. This reflects the challenging environment during the first quarter 2016 but also our continued progress toward growing fee income.

Looking at the various categories. Asset management fees, which includes earnings from our equity investment in BlackRock, were up $4 million or 1% on a linked-quarter basis, primarily driven by higher equity marks. Compared to the same quarter last year, asset management fees increased by $62 million or 18% reflecting stronger performance in the equity markets and net new business activity.

Consumer services fees were down $17 million, or 5% compared to fourth quarter results, reflecting seasonally lower client activity. Compared to the same quarter a year ago, Consumer services fees were down $5 million or 1%. We continue to increase debit and credit card penetration, and those fees were up approximately 10%. However, this was offset by higher credit card reward activity and an adjustment to our reward usage estimate.

Corporate services fees increased by $6 million or 2% compared to fourth quarter results, which was somewhat more than expected due to higher merger and acquisition advisory fees. Compared to the same quarter a year ago, Corporate services fees increased $68 million or 21% due to higher merger and acquisition advisory and other capital markets revenue as well as growth in treasury management.

Residential mortgage noninterest income decreased $29 million or 20% linked quarter reflecting seasonally lower activity as well as lower net hedging gains on mortgage servicing rights. Compared to the same quarter a year ago, residential mortgage noninterest income increased $13 million or 13%, primarily driven by higher net hedging gains on mortgage servicing rights.

Service charges on deposits decreased by $11 million or 6% compared to the fourth quarter and again, driven by seasonally lower customer activity. Other noninterest income increased $27 million or 9% and as I mentioned earlier, benefited from the $47 million Volcker Rule-related valuation adjustment. Going forward, we continue to expect this year's quarterly run rate for other noninterest income to be in the range of $225 million to $275 million.

Turning to Slide 8. First quarter expenses decreased by $39 million or 2% reflecting our continued focus on disciplined expense management. The linked-quarter decline reflected the impact of our fourth quarter contribution to the PNC Foundation and was partially offset by higher variable compensation related to business activity and seasonally higher occupancy costs.

As we previously stated, our continuous improvement program has a goal to reduce expenses by $350 million in 2017. Based on first quarter results, we are on track and confident we will achieve our annual target. As you know, this program funds a significant portion of our ongoing business and technology investments.

Turning to Slide 9. Overall credit quality remained stable in the first quarter. Total nonperforming loans were down $146 million or 7% linked quarter with improvements in both commercial and consumer loans. Total delinquencies decreased by $192 million or 12% reflecting improvements in all past due categories.

Provision for credit losses of $88 million increased by $21 million linked quarter attributable to loan growth and normalizing trends in our commercial loan book. Net charge-offs increased $12 million to $118 million in the first quarter, largely driven by seasonal increases in home equity and credit card loans. The annualized net charge-off ratio was 23 basis points, up 3 basis points linked quarter. Our credit quality metrics remain near historical lows, and these results fully reflect the outcome of the recently completed Shared National Credit examinations.

In summary, PNC posted a solid first quarter driven by growth in loans, higher net interest income and strong expense management. For the remainder of the year, we expect continued steady growth in GDP and a corresponding increase in short-term interest rates 2 more times this year, in June and December, with each increase being 25 basis points. We are also assuming that long rates remain relatively stable.

Based on these assumptions, our updated full year 2017 guidance compared to 2016 full year results is as follows: we continue to expect mid-single-digit loan growth; given the March rate hike, we now expect revenue to grow in the upper end of the mid-single-digit range; and we continue to expect a low single-digit increase in expenses, which will allow us to post positive operating leverage for the year.

I should add that our guidance includes the acquisition of ECN Capital Corp., which closed earlier this month. However, the impact of this acquisition will be nominal to our overall full year results.

Looking ahead to the second quarter of 2017 compared to the first quarter of 2017 reported results. We expect modest loan growth. We expect total net interest income to be up low single digits. We expect fee income to be up mid-single digits. We expect expenses to be up low single digits. And we expect provision to be between $75 million and $125 million. The second quarter provision will include an initial allowance in reserve for the ECN acquisition, which could result in total provision being at the higher end of this range.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of John Pancari with Evercore.

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John G. Pancari, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [2]

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Just regarding the loan growth, wanted to get a little bit more color there in terms of your mid-single-digit expectation. I mean, what's really helping you buck the trend that we're seeing here in the industry? Are you seeing some of that softening at all in certain areas where it's definitely evident? And is it that you're able to hold up your guidance here mainly because you're -- expect continued progress in your newer market strategy?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [3]

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So what has changed, and I mentioned this, is that in a somewhat purposeful way, our growth in real estate has declined to basically 0. That drove us before. What hasn't changed is our growth in loans coming from growth in new clients. And yes, you're right, the new markets are outpacing our legacy markets in terms of new clients. So if you think about that, the generic stock of C&I loans in the market can decline. But if we're taking share by growing clients, we can continue to grow. And our pace of growth with new clients and, therefore, loans, across these categories has been pretty consistent. We think we can keep doing it, particularly with the new markets we just opened in Dallas, Kansas City and Minneapolis.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [4]

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And hey, John, this is Rob. I'll just add to that. I think that's the key point. This steady pace that we've been on for some time, we expect to continue.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [5]

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Yes, and as you know, that's on the C&I side. On the consumer side, we continue to see opportunities just through execution of our existing base products without really changing risk profile. And we're seeing evidence of success at that at the margin in the fourth quarter and then again in the first quarter versus kind of where we were for the last couple of years.

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John G. Pancari, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [6]

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Okay, got it. Thanks, Bill. And then separately, on credit. Just on a couple areas there. Auto, just want to see if you can comment a little bit on what you're seeing on auto, and if you are tempering growth there. It looks like also that your NPAs in the auto book were up. I know it's off of low numbers, but want to see if you can comment there. And then on the retail side, wanted to see if you can help quantify any exposure to retail commercial real estate you have as well as to the actual retailers in your C&I book.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [7]

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Yes. Hey, sure, John. This is Rob. So on auto first, we have a high-quality book, as you know. Total outstanding is $12.3 billion. Our book is comprised of -- the majority of FICO Scores well above 700, and average tenor is 68 months. And importantly, we're not in the leasing business. So we feel pretty good. We feel pretty good about that book. On the retail-related exposure, particularly looking at it through the lens of sort of this e-commerce encroachment that is in the news, we take a look at that really in sort of 3 buckets, and we feel good about it. The traditional retail number in terms of outstanding, so taking out grocery stores, auto dealers, convenience stores, just focusing on the traditional retail, our outstandings are just below $8 billion, $7.8 billion, and are in 3 buckets, primarily 3 buckets. The first and the largest, $4.7 billion is in our commercial real estate book. Feel good about that portfolio. It supports over 400 projects, diversified geographically. The vast majority are stabilized, and feel good about that. 10% is construction. And there's a handful of malls in there, all of which are Class A or A-plus superregional malls and, of course, secured in all these facilities. The other 2 categories are actually outside of commercial real estate and in our commercial book. The first of that is to equity REITs, real estate investment trusts. We have -- we lend to 30 REITs and feel good about that. They're all high credit quality, very low leverage. Our top 3 exposures are well-capitalized national developers, so feel good about that book. And then the second component of the commercial book, the third of the total, is $1 billion in loan outstandings to -- straight to retailers. The industry classification is department stores, apparel, specialty and general merchandise. And to that classification, we have $1 billion of outstandings. Of that $1 billion, $300 million is noninvestment grade or asset based. So we've got our eye on that. Pretty small in terms of numbers. All that said, the portfolio is performing well. We monitor it all the time. And where reserves need to be taken, we've taken them.

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Operator [8]

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

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [9]

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Just on the outlook on loan growth and in terms of your reply to John's question, it seems like it's PNC's consistent strategy that really drove the outperformance, especially in commercial this quarter. And I'm wondering if we could -- if the log jam in Washington breaks and we do finally get some progression on some of the pro-growth policies that we expect this administration to adapt, is PNC then positioned to potentially do a little bit better than the mid-single-digit number that you have given us?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [10]

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Well, sure. I mean, you would see, generically, off of our base, where we're kind of saying low single-digit growth in C&I. That's under the presumption we're basically just getting new clients. At the point where existing clients start to borrow more because they've become bullish on the economy and capital expenditures increase and, therefore, VHA [ph] data increases, we would benefit from that as well. And I would expect we'd accelerate. But we're not relying on that in our forecast.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [11]

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Got it. And a follow-up question. This was asked of your competitor earlier. Could you give us a sense of how deposit pricing competition has been progressing? And maybe separate retail and corporate, if you could?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [12]

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Yes, so starting with retail. And you have to remember that we and most other banks had our core product interest-bearing accounts paying sort of above market to begin with, right? So I think our primary relationship product pays 60 or 80 or something and basically, there was kind of 0 beta. We didn't increase at all in the course of the first quarter on the back of the December rate cut inside of retail. And in the corporate book, the beta's obviously running somewhat higher, pushing, what, I guess, 40% or something. But what's interesting to me inside of the corporate book -- and I guess we kind of expected that -- this, but we're watching it play out is, the yields in that book are driven as much by the available yield in the government money market funds as opposed to traditionally kind of being driven by LIBOR. So if you think of all the money that ran out of the prime funds into the government money market funds, a corporate who's depositing cash has 2 choices: at a bank or at the government fund. And what has, in effect, allowed us to run a lower beta on our corporate rate paid, as much as anything in my view, is their alternative inside of the government funds, which are obviously struggling with yield. Just as an aside, we obviously...

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [13]

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That's clearly a factor.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [14]

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Yes. Through time, as rate increases continue, we would expect our betas to climb. I would tell you, our business forecast on what beta will be consistently is higher than what we actually end up doing. So we'll watch this play out through time.

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Operator [15]

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Our next question comes from the line of Gerard Cassidy with RBC Capital Markets.

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Bryan K. Gill, The PNC Financial Services Group, Inc. - EVP and Director of IR [16]

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Hey, Gerard, are you there?

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Yes, Bryan. Can you hear me? I apologize. I had it on mute. You guys have shown lower inflows of nonperforming loans this quarter, and credit's quite strong, obviously. But I noticed that the #1 nonperforming loan now in Table 10 is a $51 million wholesale trade credit. Can you give us some color on that?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [18]

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Yes, yes, I can do that, Gerard. Without naming names, it's not retail related. It's actually a wholesaler grocer credit, and it is fully secured. So...

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [19]

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It's in our asset-based book.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [20]

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It's actually in our corporate... it's in our corporate book.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [21]

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Oh, is it? All right.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [22]

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But it is secured, yes. So...

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [23]

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All right. And just as a follow-up, just on underwriting standards in general, we look at the Senior Loan Officer's survey, and you can see in the industry, there's some tightening going on particularly I think in CRE. Can you guys give us some color on your underwriting standards relative to a year ago?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [24]

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We always get this question, and I actually don't even know how we fill out the survey. But as a practical matter, our credit box never really changes. So our standards are our standards. Now we will change pricing as a function of trying to protect clients and/or when we look at the potential wallet of a new client as it relates to the ability to cross-sell. But we are -- the things that we will underwrite, even in real estate, real estate growth has slowed, not because we changed our box as much as the available projects and the foreseeable projections inside of what we're seeing aren't as attractive as they were.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [25]

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Yes. And that's really true of our philosophy with all of our lending.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [26]

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Yes.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [27]

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That's why you see this cyclical differential growth rate.

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Operator [28]

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Our next question comes from the line of Terry McEvoy with Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD [29]

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Just a first question for Rob. The revenue outlook now, at the upper end of that range discussed in January, is that all a function of net interest income? Or do you feel differently at all about any of your fee businesses, either plus or minus?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [30]

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It's the former. It's a function of the March rate increase, which we blend into our guidance now. We still feel good about the fees and the non-interest income, but that's still in the mid-single-digit range.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [31]

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I mean, some of our fee businesses, particularly in C&I, I think Harris Williams had a record quarter.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [32]

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Great first quarter.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [33]

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And Solebury had a record first quarter.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [34]

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Yes, that's right.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [35]

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So probably some upside inside of the fee categories as well just given the activity in the markets.

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Terence James McEvoy, Stephens Inc., Research Division - MD [36]

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And then as a follow-up. On the consumer loan portfolio, you've had that run off, but then you've also really emphasized credit card, home equity and direct auto. Could talk about trends in 1Q? I couldn't really find any details. And what are the opportunities for growth in, specifically, those 3 areas as you think about full year '17?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [37]

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Start it.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [38]

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Sure. Well, some of it reflects some seasonality along those lines. But if you just go through the consumer categories, home equity, despite the declining balances, our originations are actually very good and as high as they've been. So we're encouraged by that. Credit card balances were sort of flattish, but we expect those to pick up. You asked about auto. I think there'll be some growth in auto but consistent with our high credit quality box. And then education is in runoff mode.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [39]

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Yes. And just a couple of other comments. In auto, you'll start seeing differentiated growth rates. In fact, you already see it between our direct product and our indirect product line, particularly as we roll out, as we will in the second quarter, our mobile application for a product we have, called Check Ready, where the consumer can fund it inside the dealership. And just a point on home equity. As Rob said, our origination volumes are actually pretty good. But we continue to deal with runoff going all the way back to National City acquisition, where they had a National business that simply started with a larger book than we would, in the ordinary course of our footprint, be able to replace. So that's why we -- notwithstanding, actually, executing pretty well, we continue to see balances drop.

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Operator [40]

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Our next question comes from the line of John McDonald with Bernstein.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [41]

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I was wondering if you could remind us where you are on the home lending transformation, combining the mortgage and home equity platforms? And the kind of time line you're seeing for that to play out and the benefits you expect from that?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [42]

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Yes. Hey, John, it's Rob. So on our home lending transformation, we're progressing well. As you know, 2017 is sort of the work year in order to get our systems in place, which will be completely front end to back end in terms of originating, servicing -- or originating, fulfilling and servicing. So we're excited about it. We're working hard on it. The financial impact of most of the benefits will be, as you know, in the outer years. So beginning in '18 and beyond. But so far so good.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [43]

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Okay. And then Rob, could you help us translate your interest rate disclosures, just to kind of turn that into a benefit of what the March rate hike? How much that would help you? And if you did get one in June, how much that might help for the second half of the year?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [44]

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Yes. Well, maybe an easier way to do it is, John, is just take our full year guidance for -- that we gave in January, which at that time, anticipated a June and December hike. You with me?

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [45]

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Yes.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [46]

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And then add to that the March increase, which I approximate $150 million -- worth $150 million.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [47]

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Over the course of the rest of the year?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [48]

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2017, yes. I never took June out. I never took June out. June, we had June in there from the start. It's the March...

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [49]

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Put March in.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [50]

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Yes.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [51]

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Great. I was wondering if Bill had a quick comment on Zelle and how that's going, as the ramp out across the bank has been a little slower than initially hoped. And what's the update there?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [52]

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Well, it actually -- it hasn't been slow as it relates to the bank's readiness to launch the product. And I don't want to get into a whole lot of detail because there'll be announcements on this. But we wanted to make sure before we launched en masse that we had the ability to service clients, who banked at a bank who wasn't directly hooked up. And I'll kind of leave the comment at that. But basically, we're all queued up and ready to go, and we're kind of ready -- waiting just to piece together a few more things and make announcements on it.

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Operator [53]

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Our next question comes from the line of Ken Usdin with Jefferies.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [54]

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Bill and Rob, I was wondering if you could follow up a little bit on Bill's -- kind of initial comments on the switchover to using swaps and -- versus securities based on kind of where the curve is, what you're seeing in terms of the incremental opportunity. So did you have a lot more capability to continue to add to the swaps book? And just in terms of, are new swaps better versus securities at this point? Just kind of help us put that better in terms of what you're using.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [55]

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Yes, I mean, a couple of simple comments. You'll recall that swap spreads had been negative kind of from 5 years out for the better part of the last year. So in effect, what that meant is you could buy treasuries and swap them to floating and earn LIBOR plus something, owning a treasury. And we, in fact, we did a lot of that inside of our securities book. So this quarter, part of our duration add was simply removing those swaps. So we just now own -- so take the gain on it, we just now own the fixed-rate treasury, and in addition, just receiving fixed on swaps now that spreads have gone positive and doing that relative to owning a treasury outright. So it's a combination of both. We have room to do a lot more. We are always sort of in the course of thinking through our available investments as it relates to what we can do inside of LCR. And swaps are obviously cash-friendly and for the first time in a long time, offer attractive carry relative to some of the other investments that are Level 1 securities.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [56]

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That's right.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [57]

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Okay. And then so, does that presume we see all of that coming still through -- do we see that coming through the securities yield? Or do we also see it coming on the liability side just in terms of how we watch that going forward, right? It's a little tricky to kind of see that forward in terms of how that shows through the NIM.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [58]

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Yes, we don't really mess around with our liability side in the sense that we kind -- we swap our issuance and leave it. You'll see it actually show up in the loan yields inside the C&I book because we point the received fixed swaps at the floating rate C&I loans. So we talk about sort of 60% of our book being floating rate. That 60% is impacted by the fact that we swap some of those loans into fixed rate.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [59]

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(inaudible)

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [60]

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Yes. And that'll move up and down through time as a function of relative value.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [61]

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And then you'll also see it in the NII from the security book.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [62]

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Yes.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [63]

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Right. So I guess just to sum all that up, is it fair to say that just from the combination of higher rates and some of that, you should still expect to see dollars of interest income generated from the securities book rise from here?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [64]

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I would say, yes. Although, I'll qualify that slightly with the notion that part of our yield increase in the securities book this quarter came from a decrease in amortization expense...

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [65]

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Right.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [66]

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As a function of the slowdown in prepayment speed on mortgages. So that may or may not continue, driven by yields in the back end of the curve, as opposed to what the front end is doing. So...

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [67]

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Yes, premium am [ph] was lower, right? Could you tell us what that delta was? And I'll stop there. Sorry for the extra.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [68]

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I don't know the answer to that off the top of my head.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [69]

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Yes, I don't know off the top of my head either.

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Bryan K. Gill, The PNC Financial Services Group, Inc. - EVP and Director of IR [70]

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We can discuss off-line.

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Operator [71]

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Our next question comes from the line of Matt Burnell with Wells Fargo Securities.

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Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [72]

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Maybe just a riff on the idea of deposit beta, and you mentioned the difference in performance between retail and commercial. But I guess, I'm curious, are you seeing any meaningful difference in the deposit beta performance in your newer markets than you are in your more legacy PNC markets? And I guess I'm asking because the market share differential there could be -- could cause you a little bit different performance in terms of deposit beta.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [73]

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It's a fair question. But the answer is we're not really seeing anything different. I mean, we compete market by market as a function of -- we try to offer in our prime relationship product an attractive rate relative to peers. But that rate is pretty consistent. One of the things we have done over the course of the last 6 or 9 months is kind of move away from promo rates we had been offering in our money market product to get ahead of this whole LCR thing. So we really -- we paid up, and we got a lot of deposits purposefully.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [74]

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Last year, yes.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [75]

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We've moved away from that. By the way, we've held on to the vast majority of those deposits, but we've moved away from that and basically, have been moving them into our core interest-bearing MMDA product that goes along with our premium accounts. And that seems to be working well for us. But there's no -- we're not going into the Southeast and saying we've got to pay 1/4 more for deposits than we're able to pay in Pittsburgh.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [76]

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Fair question, but that's not the case.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [77]

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Yes.

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Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [78]

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Fair enough. And then for my follow-up, just a question on utilization. If -- I just want to make sure I heard you correctly, Rob, in terms of the utilization rates on the commercial business have been pretty flat. And I guess I'm curious if that's just -- is that more people coming in and looking for lines as well as more people borrowing? Or can you give a little more color behind the dynamics of that, of the flat utilization rate?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [79]

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I mean, it -- it's -- not really. I mean, it's bounced around -- bounced up a little bit, I guess, through the course of last year. What is it now, 50?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [80]

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45, yes.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [81]

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45, inverting [ph] numbers.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [82]

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Right.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [83]

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That's consistent across kind of the new balances we're putting on as well. So I don't know that I'd read anything into that, other than one of the things you should see. And we've said this for years. As the economy picks up, and people start investing in capital, so you ought to see that utilization rate go up. It's still very low by historical standards.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [84]

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Yes.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [85]

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I think...

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [86]

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Yes, particularly in our core middle market business, where the utilization rates are lower than historical averages.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [87]

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Yes.

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Operator [88]

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Our next question comes from the line of Kevin Barker with Piper Jaffray.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [89]

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Regarding your auto book. I noticed that the ending balance is down slightly, but your average balance is up fairly healthy. Was there a specific movement in -- later in the quarter that would've caused auto to slow significantly in the ending balance, given your acceleration in the fourth quarter?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [90]

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I'm kind of -- I don't know the answer to that. I'm kind of surprised by that stat. So...

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [91]

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Yes, not particularly. Not particular.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [92]

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Great. Is there any changes in your underwriting standards, given what we've seen in the market for auto? Or is it still consistent, like you've said in the past?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [93]

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It's -- we've managed to continue to grow the book, albeit at a slower pace, staying within the credit bucket that we've been in the whole time.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [94]

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Yes, that's right.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [95]

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Great. And then finally in the auto. Are you seeing higher yields and spreads within your book given some of the pull back that we've seen in different pockets within auto?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [96]

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Well, we're seeing higher yields simply because rates are going up, but not higher spreads per se, risk adjusted. Again, we're playing -- I don't know what the average FICO is in that book, but it's like 740 or something.

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Bryan K. Gill, The PNC Financial Services Group, Inc. - EVP and Director of IR [97]

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It's pretty...

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [98]

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Yes...

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [99]

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It's high. And so we're playing at a very high level of prime. The place where you're hearing about people increasing spreads, not surprisingly, is in the subprime space and in some of the long daily leasing space, given pressure on used car prices. But we're not in either of those businesses, so it really hasn't affecting our peer spread...

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [100]

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That's right.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [101]

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Marketing.

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Operator [102]

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(Operator Instructions) Our next question comes from the line of Brian Klock with Keefe, Bruyette & Woods.

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Brian Klock, Keefe, Bruyette, & Woods, Inc., Research Division - MD [103]

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So Rob, I guess just a quick follow up. On the securities yields, thinking about where that first quarter of '17 yield is for total securities. I guess, with the roll-on, roll-off after the adjustments you made in the swaps, I guess, are we going to have some pressure going forward? Or are you at a point where anything you're putting on now might actually be accretive to that book yield?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [104]

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It was basically what we bought. So inside of that relatively flat number was, in fact, a whole bunch of replacement of runoff. And our yield on replacement is kind of a push to what is running off. So we're in kind of a good place to the extent the curve stays where it is. Now you'd say, "Why is a tie good?" A tie is good because for most of the last couple of years, we've been replacing at lower yields than had been running off.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [105]

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Definitely. Yes, that's right. So you saw that 2 67 now on the investment securities.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [106]

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Yes.

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Brian Klock, Keefe, Bruyette, & Woods, Inc., Research Division - MD [107]

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Yes, exactly. I guess the -- maybe another question, to follow up on that is, as you mentioned, the end-of-period balance of that, the Fed went up. So with the 10-year kind of pulling back here, is there any appetite to take some more duration with that excess liquidity?

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [108]

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Look, we're opportunistic. Some of that liquidity, as an aside was some -- what we think might be short-term money. But we'll be opportunistic, as we have been, and leg into higher rates inside of the securities book. I would tell you, in addition to some of the swap activity and replacement activity, we have some TBAs [ph] that will roll on into the second quarter and settle, that you'll see, that were purchased back at higher yields. So we'll watch it. We're at a point right now where we're in a bit of a rally in the longer end because of some geopolitical stuff and other things, notwithstanding the commentary coming out of the Fed as it relates to their -- the discussion on their balance sheet runoff. So you have kind of 2 competing factors on things that might ultimately drive the long end of the curve here.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [109]

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That's right.

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Brian Klock, Keefe, Bruyette, & Woods, Inc., Research Division - MD [110]

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I appreciate that. And then maybe just one last somewhat housekeeping question for you, Rob, on the tax, the tax rate. There was, you guys talked about in the 10-K, the change in accounting on the RSUs. I mean, what does that impact to the actual tax benefit you had in the first quarter on a dollar basis?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [111]

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Yes, approximately $25 million.

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Brian Klock, Keefe, Bruyette, & Woods, Inc., Research Division - MD [112]

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$25 million. And in theory, I mean, so that was kind of -- that benefit used to be in other comprehensive income previously but now...

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [113]

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That's right. Right.

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Brian Klock, Keefe, Bruyette, & Woods, Inc., Research Division - MD [114]

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So with -- I mean, it comes with the first quarter when you usually have more of the option grants, right, the RSU grants. So next quarter, you'd see that benefit go away?

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [115]

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Yes, yes, I think so. It's that and also the share price appreciation, obviously. That's been pretty significant.

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Operator [116]

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There are no further questions.

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Bryan K. Gill, The PNC Financial Services Group, Inc. - EVP and Director of IR [117]

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Okay. Well, thank you, operator. And thank you all for joining us on the call, and we look forward to working with you during the quarter. Thank you.

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William S. Demchak, The PNC Financial Services Group, Inc. - Chairman, CEO and President [118]

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Thanks, everybody.

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Robert Q. Reilly, The PNC Financial Services Group, Inc. - CFO and EVP [119]

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Thank you.

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Operator [120]

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