The PNC Financial Services Group, Inc. (PNC) Q3 2007 Earnings Report, Transcript and Summary

Good morning. My name is Don, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the PNC Financial Services Group Third Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be a question-and-answer period. [Operator Instructions]. As a reminder, this call is being recorded. I will now turn the call over to the Director of Investor Relations, Mr. Bill Callihan. Sir, please go ahead.

Thank you. Good morning, everyone, and welcome to today's conference call for the PNC Financial Services Group. Participating in this call will be PNC's Chairman and Chief Executive Officer, Jim Rohr; and Rick Johnson, the Company's Chief Financial Officer. In the following comments we refer to adjusted results on the current periods as well as various prior periods. We believe having these adjusted results in addition to our reported results helps provide a clear picture of PNC's results and trends. In order to put all the periods we discussed on a comparable basis, these adjustment result reports to our investment in BlackRock as if they were recorded on the equity method of accounting prior to closing the BlackRock/Merrill Lynch Investment transaction on September 29, 2006. We also adjust, as applicable, for the following items in order to help illustrate their impact: Integration cost; the net affect of our BlackRock LTIP share obligation; our third quarter 2006 gain on the BlackRock/MLIM transaction; and the cost of our third quarter 2006 securities and mortgage loan repositionings. And each case, as appropriate, adjusted for the tax impact. We provide details of the adjustments of reconciliation to GAAP to these and other non-GAAP financial measures that we may discuss in today's conference call and our earnings release and financial supplement and our presentation slides in appendix to this call and in various SEC reports and other documents. These are all available on our corporate website at www.pnc.com in the Investor Relations section. The following statements also contain forward-looking information. Actual and future results could differ, possible materially, from those we anticipate in our statements and from our historical performance due to a variety of factors, including those described in today's conference call and in our earnings release and related materials available in our 10-Ks, 10-Qs and other SEC reports and also available on our website. These statements speak only as of October 18, 2007 and PNC undertakes no obligation to update them. And now I'd like to turn the call over to Jim Rohr.

Good morning, everyone. Thank you, Bill, and good morning, everyone, and thank you for joining us today. We're pleased to be here to discuss what we believe is another fine quarter for PNC. But before I get into my remarks, I just want to remind everyone the last time we had a discussion we told you that our disciplined strategies related to such areas as subprime, leverage lending, and syndication and the like were well-controlled and our overall adherence to risk adjusted return requirement left us well positioned. And I'm pleased to report that today I think this gives evidence to the fact that that's true. We have a strong performance in this quarter, given the... in any case... given the unique market conditions, I think, this truly validates our strategies, as we continue to deliver for our shareholders. We look at the things we did. We grew our client base and our footprint and had a number of new customers environment [ph]. Our expenses remain well managed and then we better managed in the fourth quarter as we just executed the conversion of Mercantile as you know. Each of our primary businesses met or exceeded expectations, and our asset quality metrics and our balance sheet are strong, and I believe, well positioned to continue to grow NOI and to maintain good asset quality in our economy. And the integration of the Mercantile operation, which was the largest in our history, actually exceeded our expectations. From these efforts, our adjusted year-to-date earnings are up 19% compared to the same period last year, and we continue to generate solid results at a time when others aren't. As you know, at PNC we take a disciplined approach when focusing on risk adjusted returns. When this credit cycle began we were confident that our model would yield results that would outperform at a relative basis. It wasn't long ago we were being criticized for lack of net interest income growth. We said that we just weren't getting paid for taking the risk, the credit risk that was available. We didn't take subprime bets. We didn't rely on exotic product plays, and you will see as Rick discussed in the results, our strategy served us well. And it also demonstrates that our diversified model performed well in this environment. And moving to the businesses and retail banking, our organic growth depends on our ability to attract new checking account customers and expand our existing relationships to gain greater share wallet. As we've discussed before, we have been making investments in innovation and branding. We are seeing payouts resulting in organic growth and deeper relationships. This quarter alone we added 22,000 net new checking accounts, not including -- net checking account relationships -- not including the recently converted Mercantile relationships. And in addition, the percentage of consumer DDA household using online bill payment increased year-over-year over 50% up to 30% of total households. So, those were made from a significant investments in our retail distribution capability. Last month our extremely successful execution of the technology conversion of Mercantile added more than 286,000 checking relationships, 231 branches, and 251 ATMs. This significantly expands our capabilities in the faster growing wealthier Merrill Lynch market. And the process was virtually seen this to our client thanks to nearly a 100,000 hours of employee training and comprehensive customer communication under the overall strong leadership of the conversion teams, including, really, a wonderful performance of our new PNC colleagues Merrill. On Monday, following the technology integration, everything was up and running and by 2:00 PM we were operating within our normal service center standards. And we're well positioned today on two fronts to deliver value. First, we are able to capture the cost savings, which you have been anxious to see, in line with previous estimates, and those would be captured in the fourth quarter. And secondly, we can now deliver more products and services to our clients in that market. We plan to continue with this pace, Yardville is expected to close later this month and the conversion is slated for the first quarter of 2008. And the closing and integration of Sterling is targeted for next year. Now, turning to the Corporate and Institutional business, despite challenging environment this segment delivered good results on a relative basis. Our relationship approach, supported not only by credit products but by a broad array of fee-based product and services, performed well. In the Corporate and Institutional market, almost 50% of the total revenue in this business is fees, non-interest income. These fees are up strongly as corporate services grew nicely on a link quarter basis. But, of course, we are not immune to the volatile market conditions and this resulted in increased provision and put some pressure on our trading and CMBS securitization revenues. Relative to CMBS, I have to say that I am pleased with how our team is managing through this. They clearly understand the risks and all the market dynamics. We expect to return to more normal activity flow next quarter provided the market cooperates which it's currently doing. Our business model allows for such patience and waiting for more suitable opportunities to bloom our cap [ph]. And our PFPC, our global fund services provider, they reported double-digit revenue growth on a year-over-year quarter basis and the sales pipeline is robust. Last month our PFPC operation launched custody services in the $1 trillion work support market. This means that we can now offer a full range of fund administration, transfer agency and custody services in the second largest worldwide market for funds after the United States. Now this expansion of services follows on the heels of opening last month a new sales office in London, and we continue to be optimistic about the prospects for growth in this business. And yesterday, BlackRock reported another strong quarter of core earnings. Here, again, I am awfully pleased with the assets under management growth now $1.3 trillion and the strategic decisions that are being made to grow the distribution network, expand the product reach and their overall focus on investment performance and client service as well. In all of our businesses we're growing clients and revenues while managing expenses. And the result is a positive year-to-date operating leverage on an adjusted basis. Our disciplined approach to risk management is reflected in our strong balance sheet and I believe we've positioned the firm with more than ample liquidity and excellent credit profile and very strong capital position. Now, Rick will provide you with more detail about our financial strategies and outlook. Rick ?

Thank you, Jim, and good morning, everyone. This is a strong quarter for PNC and another opportunity to differentiate ourselves. As we reported earnings of a $1.19 per diluted share or $1.37 when adjusted for the $0.09 of acquisition and other integration costs primarily related to the successful conversion of Mercantile and $0.09 related to our BlackRock long-term incentive plan share obligation. Just as a quick reminder, the price of BlackRock stock increased to about $17 per share this quarter. This reduces our reported revenues by $50 million due to the increased obligation, but significantly enhances the value of our overall investment in BlackRock by more than $700 million. As of quarter end our total unrecognized gain in BlackRock was $3.5 billion. Now, let's focus on the key takeaways from our performance this quarter. Our diverse revenue streams delivered strong growth despite challenging market conditions. We continue to execute by delivering substantial, positive operating leverage on an adjusted basis. Our disciplined risk management strategy continues to differentiate us and we continue to have balance sheet flexibility. As you can see on slide 5, overall adjusted revenues for the first nine months grew 20%; a substantial achievement in this environment. We are differentiated by our higher quality, diverse revenue streams which require relatively less credit capital than our peers. Our fee-based businesses account for 58% of total revenues and on an adjusted basis grew 7% linked quarter and 15% on a year-to-date basis. Asset management revenues increased 7% on a linked quarter basis primarily due to BlackRock, which as Jim mentioned, reported another strong quarter yesterday and our wealth management business continues to deliver strong results. Fund servicing revenues remained steady on a linked quarter basis and we now service $2.5 trillion in assets. On the consumer side, we are very pleased with the organic checking relationship growth during the quarter. On a year-to-date basis our consumer service fees and deposit service charge revenues are up 11% due to organic growth and the addition of Mercantile. In addition, brokerage revenues remain strong with year-to-date growth of 14%. On the Corporate and Institutional side, corporate service revenues grew 30% over last quarter and 19% year-to-date. Thanks to excellent results by treasury management services, Midland Commercial Mortgage serving and Harris William's M&A advisory services, which by the way reported record high fees this quarter. As we discussed before, our revenue from equity management and other market sensitive activities like trading and commercial mortgage securitizations can produce lumpy results, particularly in this environment. Taken together, strong private equity results were offset by softer than expected trading revenue and lower CMBS gains. Collectively, these market sensitive areas met by revenue expectations for the quarter and year-to-date. With that in mind, the 47 million of equity management revenue per quarter will not be sustainable, and with the cooperation of the markets we expect to do better in trading and be back on track to deliver higher CMBS gains in the future. Overall, and despite challenging market conditions, we posted strong adjusted quarter and year-to-date non-interest income growth of 7% and 15%, respectively. Now, our next largest contributor to revenue is our deposit franchise which accounts for 26% of total revenues and grew 2% on a linked quarter basis and 32% on a year-to-date basis. We are differentiated by our ability to gather low cost deposits through multiple channels. We were successful in growing our average non-interest bearing deposit base by 2% on a linked quarter basis through several channels including consumer businesses, small business, corporate banking and treasury management. For example the retail segment was up almost a $130 million and treasury management was up a $110 million both on a linked quarter basis. On the interest bearing side, our revenue growth was enhanced by our strategy of focusing on relationship customers rather than pursuing higher rate single service products which actually decreased our retail CD deposit balance. Our smallest contributor to revenue is our lending product which represents 16% of revenues and grew 5% linked quarter and 20% year-to-date. We continue to deploy credit capital where it meets our risk return criteria, and as a result we saw an average total loan growth of about 1.3 billion quarter-over-quarter. On the commercial side, this growth was led, primarily, by corporate finance and asset-based lending. In fact, our pipeline of deals and asset-based lending is the strongest that it has ever been. And while the consumer segment held loans relatively steady quarter-over-quarter, we added about 800 million of prime quality residential mortgages as part of our balance sheet management activities. We like the risk/return dynamics of certain parts of the mortgage market. In summary, we like the diversification in growth of revenues resulting from our business mix and the way we have managed the risk challenges in our market-related areas. Overall, it has delivered 20% growth in adjusted year-to-date revenues. Now, as you can see on slide 6, we continue to execute and deliver positive year-to-date operating leverage on an adjusted basis. And this is never more important than at this point in the credit cycle. This has been accomplished with a 20% growth in adjusted revenues and a disciplined 15% adjusted expense growth for overall adjusted net income growth of 19%. As we've reported consistently throughout the year, our outlook for year-over-year growth has not changed. We still expect total adjusted revenue growth in the high teens and adjusted non-interest expense in the low teens. Thus we remain positioned to reach our goal of creating substantial positive operating leverage from 2006 to 2007 on an adjusted basis. Now relative to our fourth quarter, we expect to see incremental savings of $18 million related to Mercantile cost saves. This gets us to $27 million benefit for the quarter which is a $108 million on an annualized basis, meeting our target for cost save in the Mercantile acquisition. In addition, we expect $11 million in after tax integration cost related to Mercantile and a one-time after-tax charge of about $30 million, primarily for credit cost related to our pending Yardville acquisition. Now, let's turn to our balance sheet, from a strategic to day-to-day practices, PNC is well positioned from a risk perspective. We have strong credit quality because of the disciplined strategic choices we've made such as exiting about $50 billion of lower risk adjusted return credits over the past few years; showing the discipline to avoid subprime and over exposure to leverage lending; and last, but not least, on a day-to-day basis, we are focused on risk adjusted returns at the client level. At the same time we are not immune to the credit trends in the marketplace. But relatively speaking, we feel good about the choices we have made. This quarter we recorded a provision of $65 million. Our provision for credit losses continues to be driven by growth in our total credit exposures. And as you would expect in this environment, some credit quality migration that is leading to higher reserves. Non-performing assets increased quarter-over-quarter but are only 0.22% of total assets at quarter end up from 0.20% last quarter and remain in line with our expectations for this stage of the cycle. And as we've being discussing our exposures are granular in NPAs to total loans and our reserves to total loans remain consistent with our disciplined approach to credit. Our exposure to subprime borrowings on and off our balance sheet is relatively low, and we continue to expect minimal losses. And as we have been saying, we have no owned syndications [ph]. Our real estate exposure, particularly on the commercial side, remains relatively low as a percentage of our Tier 1 capital, and I should also point out that our commercial real estate portfolio is well diversified. For example, our exposure to the home building sector in that portfolio represents only about 3% of our total loans and the majority of which is in our footprint. We recognize this as an area of heightened concern in the industry, so we remain diligent in our underwriting practices and in our periodic credit assessment. From an interest rate perspective, our duration of equity is three years which provides us with continued flexibility to invest opportunistically and benefit from lower funding rates. Now, you would expect the reduction in the said effective [ph] rates be NII beneficial and it was. But recognized at more significant benefit from lower rates takes effect when LIBOR rate fees and, more importantly, when our deposit base re-prices which will take more time to develop. Last but not least, our balance sheet flexibility has served us well throughout the year. At a time when liquidity is paramount, PNC's loan-to-deposit ratio of 84% is among the lowest of the major commercial banks. And our strong internal capital generation will enable us to complete our $800 million of stock repurchases for 2007. And as we announced a couple of weeks ago, our Board approved a new repurchase program for 25 million shares. In summary, despite these challenging market conditions we believe that we're positioned to deliver solid results for the remainder of 2007 and into 2008. With that I will turn it back to Jim.

Thank you Rick. In closing, it was another solid quarter and nine months for our key businesses and I am comfortable that we will deliver a full year result in line with your expectations. I believe our performance, year-to-date, validates our approach and re-enforces our commitment to the key strategies that have delivered these results. And we'll continue to focus on our proven business model with three areas: diversified business mix with a consistent focus on growing our customer base and deepening customer relationships through a significantly enhanced planning initiative; strong risk management and a disciplined capital allocation process; and thirdly, positive adjusted operating leverage by growing our businesses and maintaining a disciplined expense management. Quite frankly this is just successful execution of our plan by our team. And with that, we'll be pleased to entertain your questions. Operator, could you please give our participant the instructions now. Question And Answer

[Operator Instructions]. Your first question comes from the line Scott Siefers.

Good morning, Scott.

Good morning, Scott.

Scott, your line is open. Scott Siefers - Sandler O'Neill & Partners L.P.: Hi, good morning. Hello?

Good morning, Scott. Scott Siefers - Sandler O'Neill & Partners L.P.: Hey, sorry about that; not sure what happened. I have a couple of questions. First I was hoping that you could talk a little bit about how you are feeling about the health of the home equity portfolio. I guess it's been kind of a mixed quarter, some comments of some of your peers, very bad but others seem to think it's kind of healthy. So, any color you could give there? And then separately, Rick, I was hoping you could talk about the margin and I guess you had added some securities this quarter, just kind of how you see things flowing through, how you are thinking about the NII margin trade-off, etcetera.

I don't know, if you are talking about the home equity portfolio, we are going to put the -- our charge off experience there has been anywhere between the third-and-a-half of the industry average. It's been a portfolio that we developed on a customer basis, not through brokers, and primarily in our footprint. It's almost 90% in our footprint. We maintain the FICO scores, I think, that averages around 747. We have a 70% loan-to-value ratio. And we've never securitized that, that's why it's a large portion of our roller, a large portion of our balance sheet. But if we would securitize today, then we're certainly going to be securitized at a prime plus. So it's... let's say it was not developed with season rates, it was developed around customers, and for the most part we develop around people, customers of ours that borrows on a home equity basis and pay it off through their credit cards, because of the tax advantage. So, we feel really good about that home equity portfolio, it's basically customer-driven. Rick you want to talk about the market?

Certainly. And one comment, Scott, on the home equity is, this is a very modest up-tick in delinquencies and charge-off amounts in recent period. So, we recognize the housing sector. It is a challenge but we are watching that very carefully, but nothing that concerns us at the moment. Scott Siefers - Sandler O'Neill & Partners L.P.: Okay.

In terms of the margin, which you saw this quarter was it went down about three basis points, so nominal amount. But what actually happen is we put on a significant increase in some of our trading positions as well as our balance sheet management. And the trading positions alone drop the margin by about five basis points. So, that's sort of the trend quarter-to-quarter. I think as you look forward, I am not ready to give any guidance on 2008 in terms of specific line items. But as we look to the fourth quarter, I am comfortable that I think our net interest income will be up as we add on the Yardville acquisition and the margin will remain reasonably flat. I think the pieces [ph] people are expecting, as I said on my comments, is they are thinking that with the Fed affective rate or the Fed contractual rate coming down that there is going to be a big benefit to banks, but many of us have prime rate loans that offset that. And we are still waiting for LIBOR to come down to more normal levels. And I think when that does, we will start to see more of a benefit, but as I said, I think, the real, real benefit of the decline in rates is going to be when the deposit base starts to re-price. Scott Siefers - Sandler O'Neill & Partners L.P.: Okay. Thank you very much.

Thanks Scott. Next question please.

Your next question comes from the line of Gary Townsend.

Good morning, Gary.

Good morning. Gary E. Townsend - Friedman, Billings, Ramsey & Co.: Good morning. How are you both? Jim, congratulations on your honor from the American Banker.

Well, thank you very much. That was very nice. Gary E. Townsend - Friedman, Billings, Ramsey & Co.: Rick, in looking back to the quarter, it was obviously difficulty and the whole banking area either from credit or capital markets. As you look at your risk management and experience during the quarter, what have you learned from it, what could you do better, any color in that regard?

Yes. I... I think the group has done a very, very good job. I think that's the first point to point out. I think if you look at, in particular, the commercial mortgage space, which we know a number of, had a very difficult time in. And that's not simply because of what's happened this quarter, but how we position the business over time. And the group has spent a lot of time making sure that we are being very disciplined about the structure around the deals that we will take and the pricing. We've actually made sure that we move our inventory through our portfolio quickly. So, we don't have lot of inventory hanging around. We try not to go down to non-rated credits, because in going down there you tend to get more kick-out loans and those can cost you a lot of money if you have them sitting in your balance sheet and if we do, we get them off our balance sheet pretty quickly, mark them down. So, I think there has been a lot of decisions around how the business to be managed to make that work. I think on the trading side the group has... we don't take a lot of value at risk. We are probably right now... probably about $8 million value at risk per day, which is not a substantial amount. I should also point out that the trading numbers are down for reasons which are unrelated, necessarily, to trading. A piece of that is about 7 million of hedging of our CMBS commitments, and another piece of it is about 6 million loss related to asymmetrical accounting, once again, between structured repo transactions we have versus the hedges of those transactions. So, without those two items trading would have been just fine. Gary E. Townsend - Friedman, Billings, Ramsey & Co.: You completed one acquisition you're in midst of doing another... can you just speak to your appetite to do more on the banking sector?

Well, the first thing about the appetite is where the share price is right now, and I'd rather buy the shares back than spend them on other acquisitions today. So, that's the first item. Secondly, it's interesting, we have not seen a lot of other banks their audit books lately, and I think we've been very careful in terms of the acquisitions that we've made, the acquisitions that we've made and presented to you... show, really show they've been averaging about 15% internal rate of return, and basically that comes off the back of the cost hedge. And I think that's a good way to do it. But the banks are sold, not bought up. We were, frankly, surprised when we were able to acquire the three banks that we, we were able to acquire it for different reasons. And I think we just have to watch that, I don't think immediately on the horizon that I can see. And the share price where it is, I'd rather buy that bank. Gary E. Townsend - Friedman, Billings, Ramsey & Co.: Thanks for your comment.

Operator, our next question.

Your next question comes from the line of John McDonald.

Good morning, John.

Good morning John.

Hi, good morning. A couple of questions for Rick. Rick, any update to the accretion dilution projection for Sterling or Yardville?

Yes, absolutely. Well, if you recall with Yardville, it was going to be accretive immediately. So, we are pretty comfortable with that and there is really no changes there. On the Sterling side, two updates, we originally told you for 2008 that it would be dilutive by about $0.06. Two things are happening there, one is we have been able to close the gap between the conversion and the actual closing of the deal and the conversion of the systems, and as a result probably knock a $0.01 or more off related to that. And secondly, we had originally put in our assumption that we are going to close the deal in January 1. I think that's unlikely, I think it will be probably later in the first quarter and that's probably another $0.01. So, I think at this stage when we keep working at it, we are probably down to $0.04 dilution.

Okay. And could you clarify what is the credit charge you mentioned for Yardville that... for the fourth quarter?

Yes, the Yardville acquisition and we consider this fully and taking look at the internal rate of return on the acquisition. We expect that certain credit costs to be in excess of what is previously provided by Yardville. And so when we put that into our model and we take a look at how we look at reserving. And we expected some of that incremental piece to be related to loans we might want to sell, some of that to be simply impairment. Those two go through purchase accounting and the remainder would be incremental allowance which could go through the provision. So, in the fourth quarter we are expecting approximately $45 million to go through our provision line.

Okay.

And we see that as a one time charge of the acquisition and move on from there.

Okay. And then... sorry, if this has been more repetitive... just wanted to clarify on the equity management gains at venture capital you have. Historically, you kind of talked about maybe 15 to 20 a quarter as normal for you?

Yes, John, I'm not giving guidance on that line anymore.

Okay, okay, so you just wanted to point out 45 is too high, it won't be that, but --

45 is too high. CMBS, the normal activity we have there is probably 15 million below what we typically do. Trading was probably 10 below what we normally do, and private equity is, let's say 25 to 30 more than we normally do.

Okay.

So, I'm not... those items in this environment are still volatile. I am going to give up the guidance game on those.

Okay. And speaking of guidance, well, I just hear Jim write internally you are comfortable with the estimates that are out there for the rest of this year.

Yes. We are in the process of put the budget together now for next year, so we are not commenting on next year. Business is good and we are comfortable with where you have us for the fourth quarter.

Okay. Thanks.

Next question, please.

Your next question comes from the line of Ed Najarian.

Good morning, guys.

Good morning, Ed.

Good morning, Ed.

Good quarter by the way, especially relative to everybody else's quarter.

Thank you.

Thank you.

Could you just go through, sort of, or may be re-go through, how much incremental expense say do you expect to pick up third quarter to fourth quarter given that you've just completed the Mercantile conversion? And then subsequent to that after the fourth quarter how much more in Mercantile-related expense savings we have the go? Thanks?

Sure. Thank you, Ed. Ed, we're going to take us another $18 million in the fourth quarter versus the third quarter. And that's going to bring us to a quarterly impact in the fourth quarter of $27 million of cost saves. And if you annualize that for a full year, that could shoot us to $108 million that we had committed to in the original transaction.

Okay, so the $18 million is an actual linked quarter, not an annualized kind of number?

That's correct. That's the linked quarter increase in cost saves.

Okay. Go ahead, I am sorry.

Yes. And that gets us to the 108 which was basically our commitment of cost saves related to the Mercantile transaction. I mean with any business we operate and while we are booking some more savings, but we haven't set any incremental targets related to this Mercantile.

And then, kind of a follow-up on that, is there any... as you look out to '08 is there any, sort of, anything you can put your finger on that you would call sort of, don't know, one PNC initiative or anything like that that creates additional operating leverage within the core bank?

Yes, we've been driving this continuous improvement process that continues to work its way through each of the businesses debt. And I think that will come to fruition, parts of that will show up in the budget that we will do in the next 30 days, and it's an ongoing basis. I think, one of the things that we learned, or share when we asked all the employees for their ideas with one PNC, was it they have a lot of ideas that will eliminate duplication, replications [ph]. They continue to come in, some are big, some are small, but I think you will see that the point that Rick makes on operating leverage is something we just have to continue to drive, and there's a lot of it there.

And then finally, if you could just give some color on how you are thinking about your loan loss reserve and the adequacies of the loan loss reserve given what we're seeing in the credit environment right now?

Well, I think we... we feel our coverage ratios overall, in terms of non-performing assets, our reserves to total loans, we think look very strong relative to the peer groups that are out there. And I am pretty comfortable with those, Ed. I think if you look overall. The allowance to loans loss leases, allowance to loans is about 1% coverage overall, I think, we fell really good for that. The allowance for non-performing is almost three times, which we think is a pretty strong coverage at 290%. So, we think relative to the peer group that looks good. I mean, that being said, as I made in my comments before, we're watching commercial real estate, the housing market, all those spaces very carefully because those spaces are moving quickly, we want to make sure that we stay ahead of those, but we think that the reserves today are quite adequate with what we're seeing at the moment.

Okay. Great. Thank you.

Next question, please.

Your next question comes from the line of Mike Mayo.

Good morning, Mike.

Good morning, Mike.

Mike your line is open. Please, check to see if your phone is on mute.

Good morning, Mike.

Okay, that question has been withdrawn. Your next question comes from the line of Nancy Bush.

Good morning, Nancy.

Good morning, Nancy.

Good morning, guys. How are you?

Good.

Two questions here, Jim, one for you. We've had results this week from SafeStreet and Northern Street and now Bank of New York, Mellon this morning. And they were quite strong. And those stocks were sort of selling at getting back to I think peak multiples that we've ever seen for those companies. Do you feel like your shareholders sort of getting the full benefit of what's going on the PFPC and are you still thinking about alternative for that unit?

Well, I think, PFPC's performance has been terrific. I mean we would like to see our share price higher as you might imagine. I think every CEO would like to see their share price to be higher. I think quite frankly when we look at it on a liquidation basis, I think we are a few dollar short of where we ought to be. But I think the issue for us is to keep delivering, Nancy. I think we basically have been saying for a long period of time that we will deliver through periods like this when other people recruit more aggressive risk profile get penalized. And we are hoping that we would expect that our share price would perform in that light. I think in the last... couple of days ago that our PE and our performance was significantly better than the peer group. And so we are in a peer group that's struggling now, but I think we'll continue to perform, so. I would hope that our share price would reflect that.

Well, if you could just do a favor, I think it might help in some future presentation, whether it maybe the Boston Conference or something, if you could highlight PFPC and talk a little bit more about it, it would be very helpful.

We'd be happy to. They have done a wonderful job. In our last presentation in New York we talked about how they changed their business mix. And so they've taken their business mix from what we call new emerging product that have a higher margins, to about 28% of the business up from 21% in last couple of years and our transfer agency is, which used to be much more dominant is now much smaller. So, be happy to do that.

Just a follow-up. On the sort of asset management, wealth management, institutional asset management business; can you just tell us what sort of inroads you've made into the Mercantile base from the PNC and the BlackRock product?

We just did the conversion. So, actually the products that we have available on our platform and the open architecture for PNC advisors was not available to them until last Monday. So, we are now in the process... as a matter of fact, just for the group of customers on Monday. We are very delighted about the opportunity of our investor to move their trust assets and a number of other things into a broader range of products and capabilities. So, I don't know, we are really optimistic about the opportunity there. But we weren't able to deliver it really with the same kind of reporting structure and access until Monday.

Thank you.

Thank you.

Next question please.

Your next question comes from the line of Mike Alton [ph].

Hello, Mike.

Hey, good morning. I had a follow-up question for Rick on what he said about the Company's homebuilder exposure. Rick, did you say it was about 3% of total loans?

Yes.

Okay. And of that 3%, which I guess is just under $2 billion, how much is already on non-performer, or how much is on non-performing status?

Not a significant amount, not a significant amount. And we have a very minimal exposures in some of the areas that I have been most concerned about, like Florida and California and so on; very small exposure there. And what we have there is very diversified.

Okay. Thanks.

Next question please.

Your next question comes from the line of Bob Hughes.

Hello Bob.

Hi, Bob. Robert Hughes - Keefe, Bruyette & Woods: Hey, good morning. Jim, one quick question for late last quarter there had been some discussion on taking advantage of dislocation in the credit markets to potentially purchase some assets at a steep discount, I am wondering if there are purchased assets in the third quarter and what kind of opportunities you are seeing coming into the fourth?

We really don't see much, the spreads moved out a bit in the mortgage side; Rick mentioned that we did put some prime mortgages on the books that I think will help us. But the credit markets came back into the traditional higher quality credits. And so we really haven't seen a real opportunity for risk/rewards side to change much, but we haven't added much. The nice thing is we've added a number of customers where the returns on customers are better, but just to do a wholesale buy, really, is not attractive to us at this time. Robert Hughes - Keefe, Bruyette & Woods: Okay. And a follow-up for Rick, I guess, thinking about your balance sheet growth needs next year and uses of capital, I am wondering if you could just give us a quick update on where you see your tangible capital post the Yardville and Sterling closings, where you would like it to see in what your capacity to repurchase shares might be next year?

Well, we usually target tangible about 5.5%, but one of the things we are looking at right now is that that the organization is recognizing a lot of the deficiencies of the tangible ratio in terms of the AOCI impact, the volatility of that's effected, it doesn't risk adjust assets. We are looking very aggressively at moving more to Tier 1 capital ratio model, and something that we're still discussing with our risk committee and so on, but that's something that we think would be more reflective of the risk profile of our balance sheet and also enables us to do more hybrid capital which we think the rating agencies are clearly recognizing that as capital as are the regulator. So, we think that's a good place to be headed. But our earnings generation overall in terms of what we are generating from earnings. It gives us the tremendous capacity next year either to, first and foremost, to pay the dividends which is about to 45% payout ratio but also significant capacity to buyback stock or to invest in our business franchise. So, I think there... we haven't set on plan yet but I don't see any reason why it would be much different than what we're looking at in the current year. Robert Hughes - Keefe, Bruyette & Woods: Great. Thanks a lot, Rick.

[Operator Instructions]. Your next question comes from the line of Mike Mayo.

Good morning, Mike.

Hi, sorry about that earlier.

That's okay.

No problem.

Just following up on the last question. So how... Tier 1 is 7.6% at the end of the third quarter. So, how many basis points for that declined due to Yardville and Sterling?

Well I think each one was probably about, I wanted to say, 30 basis points, not significant, so Yardville will be covered in this year's exercise, and obviously by next year, we'll be generating more earnings to cover Sterling. As well as the fact that we're always looking in our hybrid capital strategy and deciding if we want to issue more hybrid capital.

All right. So, on an adjusted basis, re-adjusted for both it would be around 7% now of what your target for Tier 1.

Well I wouldn't go to 7% simply because one is happening next year, and between now and then we'll generate a lot of earning. Each quarter about $400 million of earnings, so, I wouldn't make that adjustment. I would probably adjust for Yardville, and I think that would be reasonable.

And your target Tier 1?

We have not established a target for Tier 1 yet, I wouldn't want to give that out until we discuss that with the Risk Committee of the Board.

And are you allowed to buyback stock in the fourth quarter?

Good question. Another good discussion with our Risk Committee. I think, right now, it looks like a great opportunity and so to the extend we can, we will. Right now our tangible equity ratio, which is how we are still managing, is at 5.2%. And while we set a target of 5.5% our minimum is 5%. So, we will be having that discussion. One thing is certain, we will... we have about $20 million left of dollars, $20 million to buyback to finish the 800 million, we will certainly do that and then we will reevaluate how much more we want to do.

But looking at the Tier 1 ratio gives you more flexibility than you have under tangible capital?

A little bit, because it recognizes hybrid capital in a more holistic way.

Okay. I guess as a general thought, this is the right environment to be kind of relaxing a little bit which capital ratio you are managing towards.

Well, we think it is in any environment, because it's risk adjusted, right? It's taking a look at the underlying assets and it's risk adjusting those to the expected risk for each one. To simply look at it as tangibles which is total assets without any risk adjustment, we think is a business winning.

And I guess there is lot of trade-offs, you can buyback stock or you could continue to purchase assets like you did this quarter. So, how do you evaluate that tradeoff, what's the prospect maybe additional leveraging of the balance sheet?

Well we, one, we look to stock buyback. I think, we felt we are fairly traded today which we don't, that's probably about a 12% turnover rate of return. I think it's much higher than that to buyback shares, given the fact that we do were undervalued today. And then we evaluate that against deploying it into whether we are buying home... residential mortgages or whether we are doing other growth. In this particular quarter we had an interesting time in that. Obliviously, a lot of people came to us, liquidity in the corporate side. And so that was a great opportunity and we also will deploy capital into our asset base lending area, which has a terrific pipeline.

And last question. You said there is special kind of $45 million provision for Yardville in the fourth quarter?

Yes, approximately, that's correct. We haven't finished all the work on that yet.

So how do you recommend us thinking about that, should we add that $45 million to the purchase price?

Well, I have already included it in the purchase price, in coming up with the internal rate of return on the deal which you recall is 15%. So, I had actually reserved for that and more associated with this. And so I was to look at it as a one-time charge that is going to occur in the fourth quarter, and will not repeat it.

But it had been reflected kind of in their prospects for next year, and that obviously kind of accelerated into the fourth quarter?

Well that's unclear; I'd have to ask them to comment on their own books --

Okay. All right, thank you.

Okay.

There are no further questions, Mr. Callihan, do you have any closing remarks.

Well, just thank you for joining us. Jim?

Thank you very much. It was another good quarter for PNC. We are very pleased with it on all fronts whether it's growth, discipline or execution. Thank you very much for supporting.

Thank you for participating in today's PNC Financial Services Group earnings conference call. You may now disconnect.