The PNC Financial Services Group, Inc. (PNC) Q3 2013 Earnings Report, Transcript and Summary

Good morning, everyone. My name is France, 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 today, Wednesday, October 16, 2013. I would now like to turn the call over to the Director of Investor Relations, Mr. Bill Callihan. Please go ahead, sir.

Thank you, and good morning. Welcome to today's conference call for The PNC Financial Services Group. Participating on this call is PNC's President and Chief Executive Officer, Bill Demchak; and Rob Reilly, Executive Vice President and Chief Financial Officer. Today's presentation contains forward-looking information. Our forward-looking statements regarding PNC's performance assume a continuation of the current economic environment and do not take into account the impact of potential legal and regulatory or federal debt ceiling 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 factors and risks. Information about such factors, as well as GAAP reconciliation and other information on non-GAAP financial measures we discuss is included in today's conference call, earnings release, related presentation materials and our 10-K, 10-Qs and various other SEC filings and investor materials. These are all available on our corporate website, pnc.com, under the Investor Relations section. These statements speak only as of October 16, 2013, and PNC undertakes no obligation to update them. And now I'd like to turn the call over to Bill Demchak.

Thanks, Bill, and good morning, everybody. I'm going to run through some of the highlights from the third quarter and talk about the progress we're making on our strategic priorities. As you've seen already today, we reported net income of $1 billion or $1.79 per diluted common share with a return on average assets of 1.36%. You'd also seen that we had a few select items that impacted earnings, including a pretax gain of $85 million or $0.10 per diluted share on the sale of some Visa Class B common stock, similar to the gain that we had on Visa sales in the second quarter. In addition, the provision was lower than expected, primarily due to overall improved credit quality. We also exceeded our own expectations regarding expense management. As you'll recall, we expected expenses to be up modestly in the quarter, but in fact, expenses declined by $11 million. And we achieved our $700 million annual continuous improvement goal in the quarter. We also continue to build on our strong capital position. Our estimated Basel I Tier 1 common capital ratio increased to 10.4%, and our pro forma Basel III Tier 1 common capital ratio reached an estimated 8.6% in the third quarter. This stronger capital position should position us well in terms of returning capital to our shareholders in 2014, subject, of course, to the CCAR process. And during a time when the Fed data tells us loan demand has slowed across the industry, PNC continued to grow loans in the third quarter. Importantly, we did this within our risk parameters by winning new clients, and we delivered solid fee income by deepening relationships with our existing customers. Year-over-year, commercial and consumer lending combined are up almost $11 billion or about 6%. Now looking across the business, we continue to make important progress against our long-term strategic priorities. We're seeing very promising activity in the Southeast, outpacing our expectations. We have 51 new primary corporate banking clients in the Southeast this quarter versus 44 last quarter. And client and loan growth in the Southeast are significantly outpacing our legacy markets on a percentage basis. Now that being said, the incremental opportunity in the Southeast is significant, as these markets are running at less than half the median productivity of our legacy markets. And across the company, especially in C&IB, we're seeing many relationships that began with lending grow deeper as the average number of products those clients are buying ticks up each year. Now noninterest income in our Asset Management Group is up by $18 million or 11% year-over-year due to increases in the equity markets and strong sales production resulting in net positive flows. The growth was driven by an increase in new primary client acquisitions of more than 35% in the first 9 months compared to a year ago. Now for the Residential Mortgage Banking business, refinanced volumes and gain on sale margins continue to decline as we suggested they would last quarter. Our total origination volume was down 21% in the quarter as growth and purchase volume was not enough to offset the declines on the refinance side of the business. In response, we took steps to better align our expenses with decline in revenue, and Rob is going to talk a bit more about that in a few minutes. We continue the work we've discussed in the past to dramatically improve the home-buying process for our customers and to get them from application to closing more efficiently than our peers. Customer loyalty continues to grow stronger as a result. In Retail, we closed or consolidated another 62 branches in the quarter, and we remain on pace to close or consolidate about 200 by year end. Still, net checking account relationships increased by 69,000, and we grew consumer loans by $1.1 billion on a spot basis in the quarter. Additionally, we experienced record-high migration of deposit transactions, up 70% year-over-year, as evolving customer preferences continue to drive our transformation of the Retail Banking business. Now Rob is going to review the quarterly results in a second, but I wanted to step back just for a moment to look at where we are at the end of the third quarter this year versus the same time in 2012. As we look year-to-date, net income is $3.2 billion, which is an increase of 39% from the $2.3 billion through the third quarter of 2012. Our return on average assets through the first 3 quarters of 2013 was 1.4%, and noninterest income increased by 20% compared to the same period last year. Noninterest income as a percentage of total revenue was 42% year-to-date. That's up from 37% year-to-date through the first 9 months of 2012, and that's really in keeping with our intended strategic direction. Now we had a better-than-expected third quarter in spite of all the environmental challenges that the industry has been confronting, as well as the uncertainty created by the federal government shutdown and the threat of a potential U.S. default. Now, in my view, the shutdown here is unlikely to cause any permanent economic or financial markets damage, assuming that it doesn't continue for any extended period of time. On the other hand, a U.S. default, while still unlikely, would have a much worse outcome for the economy. Even if Congress increases the debt ceiling in a timely manner at this point, we're still likely to see an impact in the form of a slowdown in broader economic activity as we go into the fourth quarter. So things aren't going to get any easier, and we have plenty of work to do yet to fully capitalize on the opportunities that are in front of us. But our results clearly indicate that our strategy is working as designed and that we're better positioned to create long-term shareholder value because of that. With that, let me turn it over to Rob to take you through the numbers.

Great. Thanks, Bill, and good morning, everyone. Let me start with our balance sheet on Slide 4. Loan growth and solid operating performance resulted in higher retained earnings in the third quarter, which led to strengthened capital. Our total assets increased by $4 billion or 1% on a linked quarter basis as we saw growth in both consumer and commercial lending. Total commercial lending increased by $1.2 billion compared to the second quarter of 2013, predominantly in commercial real estate and to a considerably lesser extent, our other specialty lending businesses. Consumer lending saw an increase of approximately $1.9 billion on a linked quarter basis, primarily due to accelerated growth in automobile lending across our footprint. We also saw increases from growth in our home equity and credit card portfolios. And in addition, we purchased approximately $900 million of jumbo mortgage loans in the quarter. This growth was partially offset by paydowns in education loans. Total deposits increased by $3.8 billion or almost 2% in the third quarter as growth in commercial deposits offset seasonal declines in consumer deposits and further CD runoff. Shareholders' equity increased by $844 million or more than 2% in the third quarter as a result of growth in retained earnings, and this drove our capital ratios higher. Our Basel I Tier 1 common ratio at the end of the third quarter is estimated to be 10.4%. That's up 30 basis points since the end of the second quarter. And our Basel Tier 1 pro forma common capital ratio was estimated to be 8.6% as of September 30, without the benefit of phase-ins, a 40-basis-point increase from June 30, primarily due to retained earnings. This Basel III estimate is based on our current understanding of the final Basel III rules. As you'll recall, we said our operating range for the Basel III Tier 1 common ratio was between 8% and 8.5% without the benefit of phase-ins. Our target was to achieve that by year end 2013. Through our strong year-to-date performance, we've obviously exceeded the upper end of that range. Importantly, we continue to believe we will be well positioned to return additional capital to shareholders in 2014. Our income statement for the third quarter reflects strong overall performance. And as you can see on Slide 5, net income was up $1 billion or $1.79 per diluted common share, and our return on average assets was 1.36%. These results reflect ongoing loan balance and fee income growth, along with disciplined expense management. As Bill mentioned, this quarter's results also benefited from a gain on the sale of additional Visa stock and lower-than-expected provision for credit losses. Let me highlight a few items in our income statement. Net interest income declined by $24 million, which was aligned with our expectations, primarily due to lower core net interest income and lower purchase accounting accretion. While fee income was strong overall in the third quarter, total noninterest income was down by $120 million or 7% on a linked quarter basis, primarily due to higher gains on asset sales and valuations we experienced in the second quarter. I'll say more about that in a moment. As a result, total revenue for the third quarter was $3.9 billion. Third quarter expenses of $2.4 billion declined $11 million on a linked quarter basis, reflecting our focus on expense management. As a result, our pretax pre-provision earnings were $1.5 billion, down 8% compared to the second quarter, but an increase of 4% compared to the same quarter a year ago. Provision in the third quarter was $137 million, lower than the guidance we provided due to better-than-expected improvements in credit quality. Now let's discuss the key drivers of this performance in more detail. Turning to net interest income. As you can see on Slide 6, total net interest income declined by $24 million on a linked quarter basis as loan growth largely but not entirely offset the further spread compression we saw this quarter. As expected, net interest margin decreased to 3.47% in the third quarter, primarily reflecting these lower spreads. In our investment securities portfolio, you'll recall that we put additional money to work late in the second quarter following a substantial movement in interest rates. Those actions resulted in a slight increase in interest income in the third quarter. Having said that, we're not taking on additional interest rate risk as we've maintained a negative duration of equity of approximately 2 years. Importantly, our balance sheet remains asset-sensitive and positioned for a rising interest rate environment. Total purchase accounting accretion declined due to lower scheduled accretion, which was partially offset by higher-than-expected cash recoveries on purchased impaired loans. Over time, you should expect a lower level of cash recoveries as the amount of our purchased impaired loans continues to decline. Regarding our outlook for purchase accounting accretion in the fourth quarter, we are now expecting purchase accounting to be approximately $175 million. For the full year 2013, this equates to a decline of approximately $300 million versus 2012, and that's due to the elevated cash recovery. As a result, we now expect purchase accounting to be down approximately $300 million in 2014 compared to 2013. Bill talked about the progress we're making with our strategic priorities, and you can see that in the third quarter results for our fee income categories as shown on Slide 7. Our Asset Management Group had another good quarter with strong net positive flows and growth in asset -- I'm sorry, growth in sales and primary customers. As you know, the asset management fee category reflects the combination of fees generated by our asset managed business, along with earnings attributable to our interest in BlackRock. Consumer service fees were up $2 million or 1% compared to the second quarter, primarily as a result of higher debit card and credit card fees. Corporate services saw increased merger and acquisition advisory fees in the third quarter, offset somewhat by reduced client activity. The valuation gains on commercial mortgage servicing rights that we discussed with you last quarter were lower in the third quarter. And as a result, corporate service fees declined $20 million on a linked quarter basis. Residential Mortgage was up $32 million or 19% linked quarter, and 3 factors drove these results: First, our provision for repurchase obligations was a $6 million benefit in the third quarter versus a $73 million provision in the second quarter as the third quarter benefit reflects a small reserve release; second, we did see a decline in loan sales revenue reflecting lower origination volumes and declining gain on sale margins. As you know, higher interest rates affected third quarter originations, which were $3.7 billion, down $1 billion or 21% as a result of lower refinancing activity. Of strategic importance to us, the decline in refinancing was partially offset by home purchase transaction volume, which was up 5% on a linked quarter basis and now represents 38% of originations, up from 28% in the second quarter. At the same time, the gain on sale margin fell to 292 basis points. And third, our net hedging gains on servicing rights were $57 million in the third quarter, an increase of $31 million on a linked quarter basis. I'll say more about the Residential Mortgage expense reductions we have taken in a moment. Finally on this slide, deposit service charges increased by $9 million or 6% linked quarter from increased customer activity across nearly all geographies. Moving beyond the fee categories, net gains on sales of securities less net OTTI decreased in the third quarter, consistent with the levels we saw in the same quarter last year. Other noninterest income was impacted by the sale of 2 million of our Visa Class B common shares in the third quarter resulting in a pretax gain of $85 million, consistent with the prior quarter. We continue to hold 10.4 million shares of Visa Class B common stock with an estimated fair value of approximately $833 million as of quarter end. These shares are recorded on our books at approximately $158 million, resulting in an unrecognized value of approximately $675 million pretax. Excluding the impact of the Visa sale, other noninterest income declined by $97 million or 26%. On a linked quarter basis, the primary decline was in the lower credit valuations, and that relates to customer-initiated hedging activity, which accounted for approximately $40 million. The remainder was accumulations of small gains and recoveries on asset dispositions that we experienced in the second quarter. Our diversified businesses resulted in noninterest income to total revenue of 43% in the third quarter. Given the progress we're making on our strategic priorities, we expect this percentage to grow over time. We continue to expect that full year total reported revenue will increase in 2013 compared to 2012. Expenses continue to be well managed in the third quarter. Turning to Slide 8. Total expenses decreased by $11 million on a linked quarter basis. As you'll recall, our 2013 goal is to achieve a total of $700 million in continuous improvement cost savings this year. As of September 30, we have already reached and now continue to work on surpassing that goal. As a result of these efforts, we now expect full year 2013 expenses on a reported basis to be below 2012 by more than 5%. We recognize that controlling expenses will continue to be critical to success in this low interest rate environment. To that end, we have already started the process of identifying continuous improvement opportunities for 2014. As a further note, we concluded our redemptions of the remaining discounted trust preferred securities in the third quarter with a noncash charge of $27 million. In total, we now -- we have now redeemed some $3.2 billion in these higher rate securities, resulting in noncash charges totaling approximately $550 million since the fourth quarter of 2011. In regard to our Residential Mortgage business, earlier this month, we took actions to reduce operating expenses that included eliminating approximately 7% of the workforce. This will result in annual savings of approximately $24 million, which we'll begin to see in the fourth quarter with the full realization of these savings occurring in the first quarter of 2014. As you can see on Slide 9, overall credit quality continued to improve in the third quarter. Criticized commercial loans, non-performing loans and overall delinquencies all decreased on a linked quarter basis. Non-performing loans were down $115 million or 3% compared to the second quarter as we saw broad-based improvement in both our consumer and commercial loan portfolios. Overall delinquencies were lower by $128 million or 5% on a linked quarter basis, driven by lower 90-day past due consumer loans. Net charge-offs increased nominally by $16 million on a linked quarter basis as recoveries were lower than previous quarters. However, as we said in the second quarter, we still believe this low level of charge-offs is not sustainable. Finally, our provision of $137 million declined by 13% on a linked quarter basis, driven by this improved overall credit quality. In summary, PNC posted strong financial results in the third quarter. Looking ahead to the fourth quarter, we expect our results to be consistent with our previous quarterly guidance and performance. Of course, our outlook assumes a sensible resolution to the federal government shutdown and the debt-ceiling situation. We expect modest growth in loans and continued growth in fee income, reflecting our focus on our strategic priorities. We also expect net interest income to be down modestly, reflecting the continued decline in purchase accounting accretion. And we expect noninterest expense to be stable when compared to the third quarter. Over the last few quarters, our provision and our guidance on provision have been coming down. While the performance of our corporate and consumer loan portfolios has been favorable, consumers, for example, are still facing a number of headwinds as a result of the sluggish economy. This causes us to believe that this reduced level of provisioning may not be sustainable. As a result, for the fourth quarter, we expect the provision for credit losses to be between $150 million and $225 million. And with that, Bill and I are ready to take your questions.

[Operator Instructions] And our first question from the line of Erika Najarian, Bank of America Merrill Lynch.

Yes, my first question is on how we should think about the efficiency for next year and making sure that we're understanding the puts and takes that you mentioned on the call. On the one hand, Bill, you mentioned the opportunity to continue to increase productivity in the Southeast, clearly positive for that efficiency ratio. On the other hand, you also mentioned a $300 million decline on the accretable yield, but you also mentioned that you're looking for more savings post achieving your continuous improvement process savings. I guess, given all those puts and takes, should we expect the efficiency ratio to continue to grind down in 2014 from the 62% that you mentioned -- or that you posted this quarter?

Look, it's too early to tell you or give you guidance on what we think is going to happen in '14 exactly, but I think we, as well as the rest of the industry, face this fight against top line revenue as we're in a tougher environment. We do have organic growth opportunities. We highlight the Southeast. We highlight cross-sell and fee income categories. What I would tell you longer term as it relates to our efficiency ratios, the near-term success we've had in controlling expenses and in fact, lowering expenses was kind of the easy stuff. We have a longer-term opportunity that we're focused on now on process reengineering that relates to basically cleaning up the sequence of integrations that we've done over the last bunch of years. And this will bear fruit over the next few years, not necessarily visible in '14. But it is the thing that ultimately would allow us to substantially improve our efficiency ratio, at least that's what our goal would be relative to our peers. But that's not a near term -- we'll be working on it near term, but you're not going to see those results show up immediately.

Erika, if I can just add to that. This is Rob. We're in the middle of our budgeting process for 2014. And as been our custom as far as guidance for '14, we'll cover that in our January call as we've done in past years.

Okay. And just my follow-up question is on the Basel III Tier 1 common disclosure. Rob, is that under the advanced method or standardized method?

Yes, it's currently under the advanced method.

Our next question from John McDonald from Sanford Bernstein. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Rob, was wanting to just clarify on the noninterest income outlook, the purchase accounting, you said down 170 or so in the fourth quarter and 300 next year?

Yes, I'm sorry. To clarify that, it will be 175 in the fourth quarter. If you recall, we had given guidance where purchase accounting would be down approximately $600 million over the 2-year period 2013 and 2014. In 2013, we've experienced more recoveries, about $50 million more than we expected. So that's now down $300 million. And then for '14, which was previously $250 million, is down $300 million. So it's still the same $600 million, just the timing of those recoveries has changed a bit. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And that combines both the scheduled accretion and your outlook for cash recoveries?

It does, yes. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Together? Okay. And what's your outlook for kind of the core NII? In a flat rate environment, what would you expect from core NII, and what are the puts and takes there on your outlook for core?

The -- well, again, we'll save our '14 guidance for the January conference call. But I think it's in terms of the guidance that we talked about, down a bit, largely reflective of the purchase accounting decline, less so on the core side. But downward pressure for sure.

Just thinking about what's happening here, we continue to grow loans. We'd expect to be able to still do that, but we're growing loans at tighter spreads as spreads continue to contract. While rates are higher, we've been pretty clear that even while we reinvest roll-off of securities, which as an aside, we weren't doing for part of the year. But even as we do that now, we're typically reinvesting at a lower book yield on new securities than what's rolling off. So we have that pressure unless we choose to increase balances in today's rate environment, which we just otherwise have chosen not to do. We want to kind of maintain that dry powder with the asset sensitivity. So it's -- it'll be a fight to keep core flat. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And, Bill, just a bigger-picture question, you're clearly indicating you'd like to do more capital return next year. But it also sounds like you're happy with the opportunities that the RBC platform has given you in the Southeast. So just kind of wondering how you will balance over time the return of capital versus kind of adding new platforms like you did with RBC through acquisitions.

We've been pretty clear about our strategic priorities. I'll reiterate them for you. We think our organic growth opportunity here is substantial. I also think that given what we're seeing in terms of just changes in the Retail Banking model for the industry, it's not obvious that adding sort of yesterday's Retail Banking model is what would necessarily allow us to succeed in the Southeast. In some ways, building the model for the future down there is actually an advantage for us, and that's what we're going to focus on.

Our next question from the line of Paul Miller with FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: Yes. Going back a little bit on the net interest margin, how much of that decline was driven by your cash balances? I noticed your -- some of your cash balances really increased over the quarter.

A couple. Yes, they came relatively late in the quarter there, Paul. So it would be a couple of basis points. Paul J. Miller - FBR Capital Markets & Co., Research Division: It would be a couple of basis points?

Yes. Paul J. Miller - FBR Capital Markets & Co., Research Division: And then talking about this -- the performance down in the Southeast, can you add some more color around that? Exactly -- are you opening up new branches? What type of wallet penetration are you getting down there? I know so far, there's -- that acquisition has been doing very well for you.

Well, it's -- I mean, a bunch of different businesses, right? So in wealth management, RBC didn't have a single employee focused on the space. We have full teams down there. So we're growing by vast percentages off of a base of 0. In C&IB, we've been really surprised by the pace of loan growth and client wins. Part of that is we have the right people in the seats down there. I think part of it is simply that we're new players in markets where there's clients down there that just aren't satisfied with the existing providers. So some of it's low hanging fruit, I'm sure. On the retail side, which is kind of the question everybody gets to on we don't have retail penetration at least as it relates to what you would want to have on historical standards for retail. We're pursuing a path in retail across our footprint of -- think of hub branches or universal branches with sort of a digitally thin or digitally enabled branches surrounding them. Think of new branches as half the space and half the cost as you roll forward versus a traditional branch network that in the past would have cost more to build and more to maintain and run. And we're building that out, trying new things down in the newer markets, some with successes, some with failures, but we're learning from it. We're applying the successes to all of our markets.

18 months in.

Yes. Paul J. Miller - FBR Capital Markets & Co., Research Division: What was that last comment, 18?

Just 18 months since start. Paul J. Miller - FBR Capital Markets & Co., Research Division: And if I just back up real quick, last question. You said you're getting good penetration to C&I. I mean, is it -- how much of this is in the overall book, like, in other words, how much of that stuff is coming in relative on a percentage basis of your growth in loans on your overall?

It's vastly outpacing our legacy markets. I don't know if any of you guys...

In terms of loan growth. In percentages, it's about 2x.

Yes. It's starting to -- I mean, it is starting to make a difference in terms of the growth rate for the whole company. Somewhere we have that number, I'm sure Callihan could dig that up after the call or something.

Yes, we'll get back to you, Paul.

Yes.

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

So a couple of follow-ups on the expense side. When you say flat expenses in 4Q versus 3Q, is that off of the 2 3 7 6 adjusted number or the reported 2 4 2 4?

So we said that's stable, and it's off the 2 4 2 4 number.

Okay. And do you, expect, there's obviously the truck [ph] charges this quarter and then some other expenses that you've applied to your totaling about -- between the two of them about $50 million. Are there some other lumpy items you expect in 4Q or...?

Yes, typically -- that's a good question, Matt -- I mean typically, we see a rise in our fourth quarter expenses around some seasonal items, notably incentive compensation, et cetera. Where we've changed that to stable is we do think the expense control program that we've put in place is largely going to be able to offset that in the fourth quarter. So we don't see anything necessarily lumpy, but we do see what's typically a seasonally high quarter coming in stable.

Okay. And I realize you'll provide more guidance in a few months, but as we start thinking about kind of run rate levels of costs heading into next year, I mean, it seems like we should be focused more on the 2 3 7 6 and then factor in whatever revenue and different efforts that you have.

Well, look, we'd like to be focused on that too, but give us till the January call to give you some guidance on that.

Okay. And then just separately, I realize this is a little nuanced, but the payoffs within the nonperformers came up quite a bit, and was just wondering -- or sorry, the return of nonperformers to performing status was a much bigger number and obviously, it's good, credit's getting better. Just wondering if there's anything lumpy in there or...

No, I think there's some categorical shifts. But generally speaking, we're still running at that $3.6 billion so in total, which is fairly flat. And they're non-performing.

Okay. And then just lastly...

What line number are you picking up?

It's just the return to performing status of $354 million. It's a pretty big number.

Part of that's TDRs.

Yes, primarily, Matt, there's some of the TDRs that have now come back to performing after 6 months in the program.

Okay. And then lastly if I could squeeze in just the tax rate, it's -- I guess it's been consistently lower than expected. Do I -- how do we think about that going forward, not necessarily for 4Q but just out a year or 2?

Yes. As you know, our guidance around tax rate is at 25%. We came in below that in this quarter. That was a result of some minor true-ups of our deferred tax accounts. Again, we'll give you a 2014 information in a couple of months. But for the balance of the year, we're still at that 25% number.

Next question from the line of Keith Murray from Nomura.

Actually, ISI now. Just wanted to touch on loan growth. It came in, I think, better than expectations this quarter. I know on the last quarterly call, you were talking about walking away from some deals where you didn't like the terms and the structures. Have you seen any improvement there or has it stabilized at least, and where are you guys taking some market share?

It's -- no. It's a tough market particularly in sort of traditional C&I. If anything, it's gotten worse from our comments in the second quarter. But the growth we had at least on the commercial space, and I'll let Rob speak to retail in a second, but the growth we've had on the commercial space, the majority of it in real estate, a lot of that on the back of just continuing fund up on projects done in past periods of time, as well as we continue to take advantage of some term financing on CMBS rollover, small growth in asset-based lending and some of the other specialty segments. But it's really tough in just generic C&I revolver space to the point where we're starting to see spread returns pushing back to 2005 where we saw before a lot of competition. We haven't, as I mentioned in my comments, just on the risk side, we walk away when we have to walk away. We defend clients aggressively when we have a lot of cross-sell, and we'll give on price when necessary. We won't give on structure.

And then just on the retail side -- or the consumer side rather, it's been largely a result of our growth in our automobile portfolio, some nominal minor growth on the home equity side on the term loans. And then as I mentioned in my comments, we did purchase some jumbo loans during the quarter.

And then switching to the fee side, you focused on growing asset management and wealth management, are you seeing any opportunities there for lift outs of teams?

We hired, in effect, I don't know if it's necessarily teams, but we hired all new people down in the Southeast. We transferred some people down. But we, in some ways, have become an employer of choice in the business. We've been growing aggressively. I don't know, Rob, what's the number over the last couple of years of people [indiscernible]

Yes, 300 plus annually.

Yes. Generically, either buying a team or buying small firms become problematic in terms of their integration into our model, so we try to hire employees as opposed to think about teams or businesses.

If you don't mind, I'll just add one more. You talked about changing the Retail Banking model. You think about the ROE of that business today versus 5 or 6 years ago, if you put, obviously, the rate piece of it aside, how big of a difference is it down 20%, 30%, do you think?

I don't know that I've ever calculated it that way because we have a combination of the regulatory changes on the fee side, higher costs. You have the rate impact and importantly, you just have the changing preference of consumers and the use of technology. It is very clear, and I've been pretty public in my remarks that the business model for retail needs to change as we embrace both the new regulatory environment, but importantly, consumer preferences and their desire to interface with us through multiple channels both physical and digital. So I don't -- what it is today versus in the past, it's down a lot. I think there's opportunity, a lot of opportunity for that to improve, but it's going to come through a transformation of that business in my view as opposed to pulling individual costs out or hoping that interest rates go back up.

Next question is from the line of Ken Usdin from Jefferies and Co.

Hey, just one last cleanup on the guidance. You talked, on the fee side, you talked about the core lines all growing in the fourth but that other component is a big one. I know you guys have given some color on that in the past, and you mentioned that there was kind of a $40 million hit on it this quarter. How do we think about that other piece?

Well, I would say again, so the guidance is on that core piece. The other piece, which has been, as you said we've experienced big numbers there related to rate movements primarily in the one that you referenced as well as some asset sales, it's hard to give a lot of guidance on because it reflects whatever happens in the environment in that particular given quarter.

Okay. All right. Secondly, just with regards to asset yields in core and the core NIM, it was down again a decent amount. And I've heard some of your -- heard your prior comments about not necessarily taking on more interest rate risk, but x purchase accounting accretion, what are you seeing in terms of new loan yields relative to what's on the books? And can you give us a little bit of color just like what's rotating through the securities portfolio?

You want to hit the loans, and I'll...

Yes, sure, sure. So I'll, again I'll handle the loans and Bill will talk about the securities. On the loan side, as Bill mentioned to the earlier question, it's tough on the corporate side, the spreads that we're seeing in terms of the deals that we choose to do within our risk parameters are lower than what we have on our existing books. So that's going to put downward pressure on the NIM. We can grow the NII depending on what kind of volume shows. And on the consumer side, there is similar spread pressure. So I think as far as from the loan perspective, the downward pressure on the NIM is our outlook.

But we have -- I mean, I think if you look back in time, we've had 5, 6, 7 basis points of C&I spread decline pretty consistently. It's not accelerating, but it's not going away. So I think you could probably kind of build that in and then you have this race of volume against spread decline. On the securities book as I mentioned, we are rolling off yields off various things of call it 3.25%, replacing it with 2.5% to 2.75%. We are also lightening, for what it's worth, taking on less spread duration or spread product. We've been using swaps more than we have in the past. We see opportunities in the municipal space and isolated pockets, but it's tough. Again, the same things that are impacting corporate spreads are impacting securities and the attractiveness of securities. So we're being pretty careful there.

And lastly, within your NII, have you had any meaningful changes from deltas in premium amortization?

No.

No.

Next question from the line of Kevin Barker with Compass Point. Kevin Barker - Compass Point Research & Trading, LLC, Research Division: Could you help us understand the increase in the installment home equity loans? You've had 8 straight quarters of home equity installment loan growth. Could you just walk through some of the main drivers of what's occurring right now? And are you -- what the new yields you are seeing given the move in the long end of the yield curve?

Well, in terms of just the growth on the installment loans, that's a function largely of our clients locking in the lower interest rates across the spectrum, across the consumer spectrum from the mass to the high net worth. We've seen it in all the portfolios along all the client segments. So we would say that's largely rate driven in terms of being able to fix or refinance any other type of debt. And what was the second part of the question?

Just rate, I mean, risk-adjusted spread on that product over some 10-year term rate has been pretty consistent. I don't know what we're booking today but think about it in terms of live rate sheets that you'd quote on a fixed-rate product at the right risk premium, and it moves with interest rates outright. Kevin Barker - Compass Point Research & Trading, LLC, Research Division: Okay. And then given the massive increase in home equity broadly across the nation, are you seeing signs that borrowers may start utilizing their lines of credit outside of what you have in your nonstrategic portfolio?

Nothing...

Yes, we haven't seen a lot of that on the... Kevin Barker - Compass Point Research & Trading, LLC, Research Division: Okay, and then finally, on the mortgage banking side. So are you seeing declines in HARP volumes due to the higher rates or are HARP-eligible borrowers still willing to take on these mortgages even though rates have been -- rates are still fairly attractive compared to where HARP-eligible borrowers sit today?

Well, I mean, we've seen volume declines clearly as a function of rate, but we're also going to see just burning through the population of eligible borrowers. So you're getting declines on both sides, I would suspect. Kevin Barker - Compass Point Research & Trading, LLC, Research Division: So you would say it's relatively in line with the rest of the market?

In terms of our refi percentage drop versus other mortgage originators or...? Kevin Barker - Compass Point Research & Trading, LLC, Research Division: Yes, HARP versus refi and how that's come through for your mortgage originations.

Well, I don't have...

The composition of those, yes.

We fell pretty consistent on the percentage of HARP versus our total volume.

32%.

Yes, HARP was -- exactly, so that remains about the same. Kevin Barker - Compass Point Research & Trading, LLC, Research Division: Okay. And then it can't quite tell given that you have an average balance on your mortgage servicing rights that increased 25% quarter-over-quarter. But on a quarter-end basis, did you also have a significant markup in the MSR? And what was the main driver of that given rates have been relatively benign through the quarter?

We had I think a de minimis markup, but model adjustment driven. We remain, based on the surveys we participate in on where we mark our book, very comfortable and somewhat conservative relative to what we see in the market.

[Operator Instructions] And our next question is from the line of Steve Scinicariello from UBS.

Just a couple of quick ones for you. Just wanted to follow up on your comment, Bill, about the productivity in the Southeast being half of the more mature markets. I'm just kind of curious how you go about ramping that up and how long does it take before they kind of are equivalent to your more normal operations.

Yes. The half-full, half-empty argument. It's going to take a while. We were very explicit that we kind of staffed full teams in the newer markets largely with no client book. So if you think of what's happening down there versus a market like Pittsburgh or Philly, in those markets, we have all hunters. They're out gathering clients and then cross-selling new clients as opposed to sitting on existing books of business. So that's what causes the productivity to be so much less. But through time, we continue to build as we have as we add new clients and then we cross-sell new clients. We'll build that to where we want to be. So I don't have a timeline on it. We track progress, always one step forward and be better tomorrow than we were today, and that continues to work for us. But it is a big opportunity.

It definitely sounds like it. And then just unrelated question, just on the mortgage repurchase provisions, saw a nice recovery or going the other way this quarter, but just kind of curious as you kind of look out, and we see some of the peers kind of cutting checks to settle issues out there, what's your kind of opinion on kind of where you are in terms of risk exposure? And we saw a good move this quarter. I mean, is that something that you guys would consider or are you just satisfied with your reserves and risk?

No, no. Look, this quarter's numbers, we're continually refining estimates for reserves across any number of categories, so don't read too much into the number you see this quarter. But we, like others, would like to put this behind us. And we're working with Fannie and Freddie and would like to come to a settlement. It's kind of on their timeline, not ours. We're reserved for everything we know about. But as we've proven in the past, we don't know everything. But no, we'd like to put that behind us.

The next question from the line of Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: Just I was wondering, I know that you don't really want to talk about your 2014 kind of target for expense improvement, but you did talk about the process. Can you expand a little bit on the process that you're going through, and what sort of things you're looking at? Is that something...

Well, this productivity enhancement or process improvement that I talk about, think about we've done for the last 6 or 7 years starting with Riggs and Mercantile, National City, RBC, a number of bank acquisitions and then integrations where we -- during the course of time, you put everything on hold to do the integration and you kind of stop process. And you put together the companies, but you never take a timeout to basically refine the core processes going on in the company. And that's what we need to do. So think about that in terms of loan servicing systems. By one count, I think we had 11 loan systems. We probably need 4. There were logical reasons as to why we kept them when we did it. You look back today, and it seems illogical. There's a lot of things that we can do through automation, consolidation of systems and sites and process that's going to take time. It's going to take invested dollars to save dollars. But it's something we need to do to make this company a more efficient company in the long term. Moshe Orenbuch - Crédit Suisse AG, Research Division: Okay. And just a small question. I mean, you mentioned the 10.4 million Visa shares. What's the process that gets you to decide when you sell those shares?

I mean, it's -- look, it's been a great investment to hold on to. It certainly... Moshe Orenbuch - Crédit Suisse AG, Research Division: Yes. 735 million today, right?

Yes. But it's quite clearly, I mean, it's a noncore asset for us, and it's something that we've been pretty public that through time we'll liquidate the position. So we look at opportunities to do so with counterparties. We look at the value of the shares, and I would expect all else equal that you'll see us continue to move it out kind of on the same timeline that we've done in the past.

Market conditions being...

Yes.

Next question from the line of Gerard Cassidy with RBC.

Bill, maybe you can share with us your thoughts on capital levels. I recognize that the regional banks like PNC have not been given their final Basel III Tier 1 common ratio. Yes, you have the 7%, but we don't know yet about SIFI buffers for the regional banks. JPMorgan and Citi obviously have their SIFI buffers. Both have said they're going to run around 10% to 10.5%, which is above the required 9.5%. What you think, when you run PNC, what kind of buffer do you think you want to have, whatever the number turns out to be, whether it's 7.5% or 7.25%, how much do you want to be over whatever your final number is?

The way we think about it is when you go through the CCAR process, if you could see it in our last year results, if you think about the drop from whatever you hold to your outcome in the mild case or the drop in the severe case, right, we want to maintain a buffer so that in a mild case, we don't drop to the 7%, and in a severe case we obviously stay above the 4.5%. And I think for us in the industry, that's going to sort of define the excess that you hold in the end driven by your declines as you go through the CCAR process. Now if we get assigned a 1% buffer, which, by the way, I think is highly unlikely, but let's assume that they added some buffer to our minimum 7%, then what I would tell you is that on my -- or to the 4.5% goes to 5.5%, the 7% to 8%, then I would tell you is that on my mild stress, I can't go below 8%. And on my severe stress, I can't go below 5.5%. And we'll drive what we hold as a function of the balance sheet and the environment that we find ourselves in. Clearly, if you look at last year's results, our decline in outright capital levels, so losses as a percentage of capital, given the risk profile we hold was pretty manageable, and that's what kind of has given rise to our suggested boundaries today or guidelines today of 8% to 8.5%. That could change through time for any number of reasons though. It's not a static number.

Okay. Have you guys discussed or thought about what you might be considering -- and you may have touched on this early in your earlier remarks, what type of capital return you may request in the 2014 CCAR?

We haven't. I mean, our bias is to do more rather than less. Again, but we've got to take that first through, that -- see what the CCAR instructions are and what the guidelines are from the Fed, and we'll work with our board. But our bias is to do more rather than less, and we'll have to work within the instructions to figure out what that number is.

And one final question, shifting on -- you really started to separate yourself from others on your views of Retail Banking and really pushing it hard to try to get that optimum mix of what type of delivery channels you want. Do you have any idea yet of 5 years from now or maybe even little longer term what the shrinkage in, not necessarily footprint in the storefronts or branch fronts, but in square footage, do you think there could be a 20%, 30% reduction in total square footage of retail branches in the PNC system in the end because of these alternative delivery channels that you guys maximize?

I hadn't thought of the question that way before. But if you just think about our new branch profile for the digital branches, even if we had the same physical number of locations, you would easily get there on square footage. I don't know if that's a 5-year phenomenon or what timeline that is. But practically, as we build out a digitally thin network, and by the way, you hear other banks talking about the same thing. I just don't know if they're doing it as aggressively as us. But yes, I think that your square footage drops pretty substantially through time while you still maintain physical presence and serve your customers.

Correct, and I know there's a lot of talk about that physical presence and we may not see the unit count come down, which may be deceptive if the square footage drops.

Yes.

Our next question from the line of Dan Werner with Morningstar.

You indicated, if I heard you correctly, that you're looking for a loan loss provision of $150 million to $225 million. Does that still imply reserve release going forward here? And I guess ultimately, where do you see the allowance being as a percentage of loans long term?

Yes, I think the -- this is Rob. I think in terms of the guidance that we've given you, we would expect reserve releases along the lines of what we've done in the past assuming credit quality continues to improve. And the second part of the question on...?

Where do you see allowance as a percentage of loans long term?

Yes. So we're clearly, we're running somewhere just below 2 or over 2 if you put the marks in on our L33 [ph] loans.

Yes.

Through history, given what we're seeing in this credit cycle, you would have seen reserve to total loans drop well below where we are today. At the same time, you hear very publicly regulators starting to voice concerns about reserve releases and the need to be countercyclical. I don't know where that plays out, right? We have accounting guidelines we follow and model based reserves with a little bit of judgment with regulators who are getting concerned with the industry, not with us necessarily, on reserve releases. So we'll follow guidance from everybody who wants to give it to us. We'll run our models. If we end up holding more through time through the next cycle than we did in the last then that's fine. It's a form of capital, yes.

Okay. And then one last question. Any update to your position on your BlackRock holdings?

No.

Next question from the line of Betsy Graseck with Morgan Stanley.

So a couple of questions. One is on just core expenses. Wanted to make sure when we hear you on stable expenses on core basis 4Q versus 3Q, we get to about $9.6 billion for annual core expense. Is that fair? Okay. So then in the past, you've been highlighting that the cost saves over and above are likely to be reinvested. So is what I'm hearing you say is the reinvestment opportunities are either fading or the time frame for reinvesting is extending and as a result, you're ending up with this net benefit for the 2013 full year?

Yes, I don't know if we think about it so much in those terms. I would say you're correct in terms of the bulk of that $700 million continuous improvement number was targeted for investments in the business, which we have made. I would just say I think the company understands the need for expense control to a greater degree than we did in the past in the current environment, and we're seeing that across the company and across all the categories and that's showing up here with more savings than what we would have otherwise thought a year ago when we put the program in place.

Okay. And then, I get it that you're going through the budgeting process and you can't really talk about what your next year plan is. But if I'm assuming no specific new types of investment in 2014, typically, managers are going to want to be showing improvement year-on-year in their P&L and in their pretax margin. Is that typically the way that the budgeting process goes?

Well, again, while we haven't -- yes, we haven't done it, but I think we're...

The budgeting process is usually people show up with a whole bunch of wants and no [indiscernible], and then we push back and say that doesn't work. We -- you shouldn't assume that as we go into next year that we're not going to invest in the business. Clearly, we're going to do that. Our -- particularly as we think about this process reengineering and some of the automation opportunities that we have. But we'll get into that in some level of detail as we go into January and provide a little more color on next year.

I think, with that, operator, we're approaching 11:00. Are there any other questions in the queue?

We have no further questions at this time, sir.

Okay, Bill, do you want to have any final comments?

No. Thanks, everybody, for joining us. We'll talk to you again in a handful of months. Hopefully we'll get through the next week here with our debt situation with a good outcome.

Thank you, operator.

Thank you. This concludes today's conference. You may now all disconnect your lines. Have a great day, everyone.