Good morning. My name is Nelson, and I will be your conference operator today. At this time, I would like to welcome everyone to The PNC Financial Services Group Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to Director of Investor Relations, Mr. Bryan Gill. Please go ahead, sir.

Yeah. Thank you, Nelson, and good morning. Welcome to today’s conference call for The PNC Financial Services Group. Participating on the call are PNC’s Chairman, President and Chief Executive Officer, Bill Demchak; and Rob Reilly, Executive Vice President and Chief Financial Officer. Today’s presentation contains forward-looking information. Our forward-looking statements regarding PNC performance assume a continuation of the current economic trends and do not take into account the impact of potential, legal and regulatory contingencies. Actual results and future events could differ, possibly materially, from those anticipated in our statements and from historical performance due to a variety of risks and other factors. Information about such factors, as well as GAAP reconciliations and other information on non-GAAP financial measures we discuss, is included in today’s conference call, earnings release and related presentation materials and in our 10-K, 10-Qs and various other SEC filings and investor materials. Well, these are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of January 13, 2017, and PNC undertakes no obligation to update them. Now, I’d like to turn the call over to Bill Demchak.

Thanks, Bryan. Good morning, everybody. As you have seen today we reported full year 2016 results with net income of $4 billion or $7.30 per diluted common share. You should have also seen our tangible book value at year end was $67.41 per common share. All-in, ’16 was a pretty solid year for PNC, we grew net interest and fee income, we kept expenses essentially flat and we were -- returned more than $3 billion in capital to shareholders, and importantly, we grew our customer franchise. Now, all that said, our net income finished slightly below 2015, in part due to our disciplined risk management efforts throughout the year to best position PNC in the current credit and interest rate environment. As we have learned over and over again through time, our business offers very attractive returns and growth opportunities by effectively managing through the cycles that are inherent to the banking industry. In our view for the most part of ’16 neither the credit, and certainly, not the rate markets offered us an attractive risk or reward opportunity. So we maintained higher than usual cash balances and our loan growth trailed peers. Now as I discussed in depth at a number of investor conferences in the last few months, we continue to invest and make important progress against our strategic priorities. We are particularly pleased with the progress that we have made on modernizing our core technology infrastructure and building a leading banking franchise in the Southeast. As we look ahead, our current indicators suggest improving confidence amongst consumers and business leaders about the direction of economy, which could bode well for our industry. There is also growing sentiment that we are entering a period of rising rate -- rising interest rates. In addition, we've all heard that the new administration of Washington supports tax reform, regulatory relief and other pro-growth policies. But so far, our moving interest rates is the only thing that is actually happened with the apparent likelihood of more of this to come this year, but should some or all of these things come to pass, it would certainly benefit us and the industry as a whole. Now as always, though we remain focused on the things that are actually in our power to control and I am confident that the actions that we took in ‘16 position us for further growth and to continue to create long-term value for our shareholders. But 2017 is an important year for us as we execute on a number of initiatives including the home lending transformation, the ongoing digitization of the retail capabilities, stronger growth in consumer lending, international expansion of our middle market lending franchise. And with that, I am going to hand it over to Rob who will run you through the numbers and share with you some guidance for [2017] and then we would be happy to take your questions. Rob?

Thanks, Bill, and good morning, everyone. Overall, our full year and fourth quarter results were largely consistent with our expectations. As Bill just mentioned, our full year net income was $4 billion or $7.30 per diluted common share and fourth quarter net income was a $1 billion or $1.97 per diluted common share. Our balance sheet information is on slide four and it's presented on an average basis. Total loans grew by $2 billion or 1% linked-quarter. Commercial lending was up $1.7 billion or 1% from the third quarter, primarily in our corporate banking and real estate businesses. Consumer lending increased approximately $300 million compared to the third quarter and by approximately $800 million excluding our consumer runoff portfolios. Our consumer loan growth was in auto, residential mortgage and credit card. For the full year-over-year quarter, we had total loan growth of $4.9 billion or 2%. Commercial lending increased by $6.1 billion or 5% from growth in large corporate and commercial real estate loans and consumer lending was down $1.2 billion or 2% year-over-year, primarily due to the continued decline in our consumer runoff portfolios. Investment securities were up $4.4 billion or 6% linked-quarter, primarily in U.S. Treasuries and increased $8.2 billion or 12% compared to the same quarter a year ago, as we continue to grow balances in conjunction with higher rates. On a spot basis, investment securities decreased $2.6 billion or 3% compared to September 30th. Our securities purchased in the fourth quarter were more than offset by repayments and negative valuation adjustments due to rising rates. Importantly, about half of the securities purchased in the fourth quarter were forward settling and will be reflected in the first quarter of 2017. On a liability side, total deposits increased by $4.5 billion or 2% when compared to the third…

Operator, could you please poll for questions?

Thank you. [Operator Instructions] Your first question comes from the line of Scott Siefers with Sandler O'Neill & Partners. Please proceed.

Good morning, guys.

Hi, Scott.

With the -- either Bill or Rob, something you could just sort of address the idea of the pace at which you would anticipate deploying liquidity favor the course of the year can be, I guess, I can get a directional sense for what you’ve been doing in the earning asset base, but just curious kind of philosophically how are you thinking about legging into higher interest rates as we look throughout 2017?

I mean, look, there is no magical answer to that. Through the course of the last bunch of years even with rates largely flat inside of kind of up and down cycles. We invest opportunistically small bets, we remain very short today, so we have a big opportunity, but we are not going to bet on red all-in sort of one rate move. So you will see us through the course of the year if rates continue their path and what we expect to deploy liquidity and reduce our asset sensitivity, but there is no perfect answer to that, it certainly isn’t programmatic.

Okay. And then maybe skipping over to the sort of the volume side of the NII equitation, the -- I think the first quarter guidance is still for more modest growth than you got the stronger growth outlook for the full year on overall loan growth. Just curious how you see things building as it relates to overall loan growth in some of the actual favorable impact of some of these new initiatives on both equity, consumer and commercial sides?

Yeah. Well, this, as it relates to the first quarter issue on NII, I mean, that’s largely a day count issue, where we had two days.

On the NII, yeah, they are stable…

Yeah. Yeah.

…so loans are...

So, back that out, I mean, loans just in terms of our guidance, we kind of assume flat across the year. But I would tell you inside of that we have kind of continued fourth quarter pace for C&I and we have kind of continued fourth quarter pace for what we had in consumer. Inside of consumers, we’ve got a number of initiatives that ought to allow us to accelerate that through time, not changing our credit back so much, it’s just improving our process. And inside of C&I, a couple of sound bites. December was the highest sales month ever for our corporate bank. The fourth quarter inside of middle markets, the first quarter and multiple quarters where we actually had growth in plain vanilla middle market loans.

Okay.

And so, maybe we’re doing a great job, but maybe some of the sentiment you’re hearing and feeling coming out of corporate America actually plays out and what we have in our forecast didn’t really build in that impact. So, there’s probably upside to that and the consumer piece, there is upside to too, but that plays out over the course of years, frankly, as we change technology, operations and some of the way we go about approving things.

And that consumer lift probably being more, just to the spirit of your question, more on the back half of 2017 than in the first quarter.

Yeah. Yeah.

Yeah. It makes sense. Okay. Perfect. Thanks guys very much.

Sure.

Thank you. Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed.

Hi. Good morning.

Hi, Betsy.

Good morning.

Couple of questions, one on expenses, I see the 350 CIP target. Can you just talk about whether or not there is an opportunity to dropping that to the bottomline, I mean, I saw the guidance for next year with expenses -- expense expectation in the low single digits, but wondered if that includes the CIP and so the result is that you’re not dropping into the bottomline or am I misunderstanding something?

No, no. I think you’re -- hi, Betsy, this Rob. You’re doing it correctly. Our full year guidance were up a bit on expenses incorporates the 350 CIP. And what we’re looking to do in 2017 is what we’ve been doing these last couple of years. A specific list of cost saves that in effect will fund the investments that we intend to continue to make. On top of that, with some growth that we have on some variable expenses around growth and fee businesses would be part of that as well.

Yeah. The other thing is that, ‘17 takes the full impact of the FDIC rolling charge. So, some of it is sort of just carry forward from what we were taking through 2016 and there is a little bit of imbalance in there, as it relates to some of our longer term initiatives. For example, the savings will get out of home lending and the savings will get out of decommissioning data centers, which will start to show up in ‘17, but carry forward into later years.

Okay. That makes sense.

Yeah. So it’s all embedded in the expense guidance but...

Yeah.

... I think my point is a simple one which is we haven’t nor we’ll ever lose site of the goal of holding expenses as tightly controlled as we can.

And in check.

Yeah.

Okay. But what I’m also hearing is a little bit of backend improvement expected?

That depends -- it depends what happens to volumes and the comp side of that.

Yeah. I mean, I think, the best way to think of that, I think, that’s partially true. I mean, as you know, our goal is positive operating leverage. We’re definitively in a position where we feel we’ll deliver that and that’s what we’re going to manage to.

And then just secondly on the tax question, there’s obviously been a lot of chatter around potentially having a lower tax rate. I know there is a tremendous amount of puts and takes until we get to the end state. But could you just speak broadly to whether or not changes in tax policy would impact how you’re thinking about the stake you have in BlackRock?

Well, look, so we’ll go back and restate what we said 25 times, which is we’re rationale stewards of your capital as it relates to our holding in BlackRock, obviously, a lower tax burden on disposition changes the economics on that, without knowing tax rate...

Right.

... or any other things that may play through it’s hard to predict how that plays out. But look it changes the economics and we’re conscious of that and we’ll take that into account if and when we get to something that’s actually made...

On that variable.

Yeah.

Okay. Got it. Thanks.

Yeah.

Thank you. Our next question comes from the line of Erika Najarian with Bank of America. Please proceed.

Hi. Good morning.

Good morning.

Just as I take a step back, clearly, a lot of change since we’ve talked to you last. Can you give us a sense of how much regulatory costs have increased over the past few years for PNC and what you think the natural trajectory is of those regulatory costs and how the trajectory could potentially change if we do have some regulatory relief?

You can start.

Sure. I can start. Erika, this is Rob. I don’t have a definitive number to throw out at you in terms of what the regulatory costs are. I know there are lot. But we gave up a few years ago, just because counting it because it became so ingrained in everything that we did. To answer your question in terms of, if that were to change, would we be able to reduce expenses, I suppose, although there are a lot of things that we’re doing that are sensible that we would continue to do. My mind -- when you asked that question my mind just jumps sort of the opportunity cost if at all. The regulatory work that we do is very time-consuming in terms of management’s time, calories, et cetera, that in theory could be applied to other endeavors. Bill, do you have anything to add to that?

No. The only other thing I’d say is that, that the regulatory burden as it relates to, if you’re thinking CCAR or heightened expectations or three lines of defense, they are certainly a lot of that, much of which by the way, we would keep and go through the exercise anyway. But there’s also a lot of regulatory costs that probably were missing from the industry historically. I’m thinking about to build an AML costs as we put bodies in operations and investment technologies as it relates to AML. I’m thinking about general compliance with consumer laws, independent of where and what happens to the CFPB, it’s clear that that we all had work to do on that. We are done investing in that by and large, but I don’t think those costs go away, no matter nor should they, no matter what really happens to the regulation.

[Ph] In a material way (27:55)

Yeah.

Got it. And just a follow-up to clarify the guidance on revenues, the up mid-single digit, what is the backdrop from a rate perspective Rob that you are assuming?

So, yeah, so on the revenue side, up mid-single digits, again around the loan growth that we have there. The rate backdrop, as I’ve mentioned, we have built into our plans two rate increases in 2017, one in June and one in December both 25 basis points.

That’s clearly the one in June is the only one that matters.

Right.

But what also matters is we are assuming sort of a rational forward curve off of…

Yes.

… rates today in the sense that our reinvestment of our securities book assumes continued higher five-year through seven-year part of the curve, where that’s a flat and substantially then it wouldn’t -- the impact wouldn’t be as great.

Yeah. That’s right. And of course, both rate increases matters but June matters more to 2017.

Yes.

Great. Thanks so much. I appreciate it.

Yeah. Sure.

Sure.

Thank you. Our next question comes from the line of Gerard Cassidy with RBC. Please proceed.

Good morning, guys.

Hey, Gerard.

Good morning.

Rob, coming back to your comments about the technology infrastructure spending that you’ve been doing for a number years now?

Yeah.

Is there a period, where you think that extra spending, if there is extra spending going on that ends and you start to see that kind of flat now, maybe even come down in total technology spending?

Yes. We’re looking at each other here. So the infrastructure spend most definitely falls off substantially and I would see a technology plan given to me that would suggest total tech cost would fall. Having said that, my expectation is that it’s not true, instead what happen is you’ll see a mix shift, such that we’re spending much more on the frontend towards consumers and applications and ease of doing business and automation and real-time payments, and less worrying about the infrastructure. The infrastructure we build supports our capability to do the second order effect, but I think, banking both on the corporate and retail side is increasingly becoming a technology-related business, and I just don’t know that you’re going to see that drop-off a few and tend to remain competitive with what customers expect today.

Yeah. Hey, Gerard. This is Rob. I’ll answer that. That’s the key point. It’s a shift from the build out on the infrastructure to actually using the infrastructure and we have a lot of investments planned around various customer applications.

I see. And is the infrastructure spend, does that finish up end of this year into next year or any timetable?

No. It’s pretty much done this year. We’ll have some trailing effects and we’ll obviously continuously be investing in cyber and then we’ll have a roll forward of the take down of the old data centers, which actually take some period of time, as you sort of decommission and clean old servers, so some of the expense that rolls into ’18.

Right.

But the infrastructure side, absent cyber, which will be continuous, is largely behind us now.

Very good. And then, Bill, maybe -- can you give us any color on where we stand on [ph] Zell (31:41) being rolled out this quarter? What your expectations are for this year and how business could or the PDP spending could help your consumer business?

So, I’m cognizant of not wanting to front run public analysis...

Okay.

... from Zell themselves, but assume that sometime early in 2017, right. The collective of banks that have signed up early on, which include the ownership structure, as well as a number of other large banks and many other banks through third-party service providers will be online with Zell. It will be ubiquitous, you’ll be able to use it on PNC’s mobile app or BofA’s or Citigroup’s or Morgan’s or anybody else’s. And I think, it does a couple of things, one is, it puts our consumers back in our hands, right. The whole idea behind is, we don’t want our customers using third-party application, particularly in what potentially is insecure -- in unsecure fashion. So, solves that issues and then, it gives us mindshare. It’s not a revenue opportunity out of the gate as it relates to the product specifically. But I think it is another part of the customer relationship that makes it more sticky. And I think through time, the concept of real-time payments, whether P2P or business-to-consumer or on the corporate side, it’s where we’re rolling out real-time payments through the clearing houses is alternative to ACH. I think it becomes stable stakes. I think there is revenue opportunities against it. I think the U.S. is behind and I think it’s a trend you’re going to continue to see build and on the back of it, you will see, I know we have many product applications that we are developing on the…

Yeah.

… back of that basic capability, which will be revenue driven.

Great. Appreciate all the color.

Yeah.

Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed.

Good morning.

Hi, John.

Hi, John.

Just on the BlackRock stake, just given the potential corporate tax reform, one of the, see if you can give us your updated thoughts on how you’re thinking about the stake and if you could look at a potential sale here, and if so, if you could just talk about the capital deployment opportunities, how you would view that? Thanks.

Yeah. Well, the rude answer would be -- has been answered, but I’ll answer it again quickly. The -- our thoughts on BlackRock remain the same, which is we’ll be an intelligent owner of valuable position of the company that we’ve done very well through time and it’s been a good partner. We look for ways, if there are ways to monetize that stake, we recognized the concentration of it, we would do so. A lower tax rate changes the economics of a potential sale, but there’s nothing on a sheet of paper, no law, no new rate, that allows us to run any numbers that suggest what we would or…

Yeah.

… wouldn’t do other than we’ll be rationale actors in the right environment.

Okay. Thank you. Yes. Sorry, I just realized, Betsy, had asked that. And then, on that -- in terms of the -- your thoughts on M&A as you look at things. I know you’ve been reserved in terms of your outlook there, are you feeling any different here as you look into next year or this year? Thanks.

Not on the bank side, for the all reasons mentioned before that, we don’t want to buy yesterday’s sort of bank model and we don’t have a need for scale. Having said that, we continue to look at I’ll call them portfolio purchases, but asset generators that would make sense inside of our franchise and would add another product or service to an existing client base, we look at those all the time, we haven’t hit on it, but it wouldn’t shock me if we did.

Okay. And if I could throw one more in there…

Yeah.

On the HELOC loans coming in better than expected in terms of their performance, is that something that you expect to continue through the year?

Premature, John, I mean, that’s going to be an issue for us in 2017, premature to conclude that. This is something, as I mentioned in the opening comments, we pointed to for sometime 2017 was the peak year. So, we’ll obviously keep a close eye on it, but premature to conclude anything yet.

All right, Rob. All right. Thank you.

Sure.

Yeah.

Thank you. Our next question comes from the line of Matthew O’Connor with Deutsche Bank. Please proceed.

Hi, guys. This is [ph] Rob (36:47) from Matt’s team. Just to follow-up on your full year revenue growth guidance in the mid-single-digits, asked another way, any sense of what that would look like ex any rate increases through the year and then looking at the components of that, any sense of growth expectations for fee revenues and then net interest income for the year?

Rob, it’s Rob. Yeah, I mean, I think, the simplest way to answer that Rob would be sort of what’s the value in terms of our revenue guidance of effectively the June rate increase that we built into our plan. There is the December too, but as we just mentioned that won’t have as big of an impact. And all else being equal, which not all else will be equal, but just for math purposes, we value that around $170 million to $200 million of revenue. So, if you wanted to put that into your model or back that out, that sort of answers your fundamental question. In terms of just sort of mid single-digit growth, I think, you just take a look in terms of what we would reasonably expect in terms of securities balances, the loans that we talked about and continued fee growth and they all sort of converge at that mid single-digit level.

Okay. Thanks so much.

Yeah.

Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed.

Thanks a lot. Good morning. Hey, Rob, can I just ask one more on the cost side?

Yeah. Sure.

You mentioned that inside the 350 CIP for the year, you’re now contemplating some of these -- the multiple ongoing initiatives you guys got. So, is it fair to say that as we do roll forward that whether it’s the data center stuff or the tech rationalization, branches, your home equity, that’s all contemplated in your annual CIP as we now forward, at one point in the conference…

Yeah.

… you laid up a lot of individual pieces, but I just wanted to make sure that...

Yeah. That’s right.

... I understand it?

No, no, no. Yeah, yeah. No, that’s right, Ken. So, the 350 captures everything that we planned to do in 2017. Bill mentioned, there could be upside, it’s in the back half of the year. I think it’s an important point though on the consumer lending transformation that we talked about, which is really a multi-year process. So, most of the savings that we talked about and pointed out there kick in post 2017 but we’re working on it now.

Okay. Great. Thank you for that.

Yeah.

And then just on the fee side, if you’re in that mid single-digit zone, in your kind of outlook for fees. I’m wondering just what, if you could parse out, what do you think is going to lead that this year, your last year was a bit of a mixed year with asset management having the charge....

Yeah, yeah, yeah.

....and then the resi mortgage, so what do you think steps back up this year?

Well, I think, it’s largely -- it’s largely the same trends. If you just go through the opponents, I would still say asset management in the mid to high-single digits, consumer services mid to high-single digits, corporate service mid-single digits and residential mortgage probably lower than that. And that’s how I -- don’t add all that up, so that doesn’t add up, but that’s generally the trend that we’ve been on and that’s why that I point to mid-single digits.

Okay. And just one quick one, did you -- can you quantify just how much forward purchases of the securities you did that will settle in 1Q?

I don’t know the answer, Rob, certainly…

I think its $3…

$3, yeah…

Yeah, $3 -- just over $3 billion.

Okay. Thanks, guys.

Yeah. Sure.

Thank you. Our next question comes from the line of Matt Burnell with Wells Fargo Securities. Please proceed.

Good morning, guys. Thanks for taking my question. Maybe a question -- a couple of related questions for you, Rob. First of all and I apologize if I missed any comment you may have said this -- said about this early on. But any change to your thinking about managing the AOCI risk as rates rise, now that it at least appears at this point that we could get a little bit greater of a rate increase than we’ve seen in the past few years? And then just on a related question in terms of any change in your thinking about deposit beta? I noticed in the fourth quarter, there was a little in -- there was a 1 basis point increase in your overall deposit costs…

Yeah.

… which was actually last fourth quarter, when we have the 25 basis points hike, there was a 1 basis point decline.

Right.

So I just curious if there is any changes you’re thinking about deposit beta?

You answer.

Okay. So what I’ll do is the deposit beta one first. And I’m not sure, I understand the AOCI question…

Actually.

… but on the deposit data, obviously, we keep a close eye on it. We’ve -- we break it down between the commercial and the consumer. On the consumer side, we’ve made some moves in 2016. We backed off promos a little bit. So I don’t expect a beta move on the consumer side soon. Commercials are a little bit more fluid. You can see, we’re still trending below what the average is, so we may see some movement in ‘17 on the commercial. But I would definitely expect to see sequence-wise commercial before consumer not sure.

Yeah. Commercial has been running maybe 45% and part of that is driven by the dynamics inside the changing rules and the money for the industry where...

Right.

Sure.

The yields we’re offering are still attractive relative to a treasury-only fund. On the consumer side, there is some noise in there, because what happened was, as we get ready for LCR in ‘16, we had sort of promo rates, which were a large portion of our production, and obviously, higher than straight head-funds rates.

Okay.

And we basically have weaned ourselves off of that today and we go with our base savings account.

Okay.

So, what you saw in terms of that basis point drop was getting out of promo and into something else and then...

That’s right.

... it’s probably random noise…

Okay.

… that you see a basis point increase because we haven’t changed and effectively haven’t passed through on the consumer side…

Which is why it’s…

… which is why it’s changing rates, yeah.

Yeah.

On the AOCI it’s just real quickly, we’ve used...

Yeah.

...and you’ll see it, our held-to-maturity account appropriately, this quarter I think total AOCI as a function that hit the capitals, maybe a quarter of a point, we stress it inside of our own internally run stress, as we don’t think that’s a constraint on us as we go forward. I would tell you that, the move that we’ve had -- think about the move we’ve had in the back just a 10-year part of the curve through the fourth quarter is largely 80 basis points, which effectively is extended any mortgages or mortgage-backed securities you had in that book as far as you’re going to go. So, the negative convexity in terms of the size of the move of the markets you are going to have, my guess for us and everybody else is probably highest this quarter than what you’re going to see going forward.

Yeah. And I would just add to that, that’s right 20 basis points, so capital ratio went from 10.2 to 10…

Yeah.

… on that hit.

Okay. Guys, thanks for the color. I appreciate it.

Yeah. Sure.

Thank you, Matt.

Thank you. Our next question comes from the line of Terry McEvoy with Stephens. Please proceed.

Terry, are you there.

I do believe the line has disconnected. We shall proceed with the next question. [Operator Instructions] Our next question comes from the line of Michael Rose with Raymond James. Please proceed.

Hey, everyone. Most of my questions have been answered. Just wanted to ask a question on energy. It look like the oil and gas loans were up a little bit. I just want to get sense for, is that draws on existing lines or you actually starting to see opportunities to grow that portfolio, I know it’s small. And then as a follow-up, you kind of sided throughout the year that oil and gas was driver of the provision, how much was the contribution to energy this year from provision and how is that relates to your outlook for 2017? Thanks.

Okay. Well, I can take that down a little bit there. The energy loans did actually rise a little bit. We’re still in terms of outstandings in that, $2.5 -- $2.4 billion, $2.5 billion range. And to answer your question, it was more -- the growth was more just good solid deal, so not anything in terms of draw. I don’t have handy the exact breakout. We did that in the slides last quarter for you in terms of the total provision that was energy related.

But part of the issue, but you think that…

Right.

… on provision this year and even some of our charge-offs, a lot of it was not direct energy but rather industry is impacted by...

That’s right. Yeah. That’s right. Yeah.

So some of the charge-offs we’ve had in our asset base book and our services book were not directly energy, but basically companies have lost demand because of it. The issue we have is, we get forward provision guidance and we’re going to say this every time, somebody asks us is, provisions have been low, particularly when you back up the spike that we saw in energy or energy-related early in the year and at some point, they’re going to normalize, whether we run a 20 basis points of charge-offs this quarter, it ought to be through the cycle 50 and so, we kind of always tell you, watch for the 50, even though I don’t necessarily expect it next quarter and you’ll ask me again next quarter and we’ll see what we think about the second...

That’s been the issue for the last couple of years, but bulk of the increase in the provision was energy related. We can get to that I think...

Yeah. I’ll get to that Michael.

Yeah.

Okay. Thanks a lot. I appreciate the color.

Sure. Next question please, okay.

Thank you. Thank you. We do have Terry McEvoy connected from Stephens. Please proceed with your question.

Hi. Thank you. Sorry about that. I guess the question for Bill. At this point in the credit cycle, PNC’s loan growth would lag the industry and if you talk about that for a while now, but if we think about accelerating economic growth, are you willing to take more credit risk to show loan growth, so is this a different playbook given the backdrop that’s emerged since the elections?

Well, I think, it’s a different opportunity book. So, our loan growth if you think, if you track all the categories through time, we had reasonable growth in asset-based lending, equipment finance, a large growth in real estate. We’ve seen, particularly in real estate that trend continued to drop as we’ve seen the heat that’s kind of hit multi-family and some other things, other people continue to accelerate and continue to grow that book at high rates, we’ve basically backed off that, I don’t know that that changes. What the bullishness in the economy, infrastructure spend if corporates get back to capital, what that causes is growth in middle market and continued activity. We’ve also had growth in large corporate, mostly on the back of M&A related activity. But those two things probably accelerate if the buzz in the air becomes real, right. If people -- if we really do get infrastructure spend at the state and local level, if we really do get companies feeling confident about their ability to invest in core durables in a profitable way. We don’t have that in any of our guidance. But the bullish side, I mean, suggest that that opportunity sits out there.

Great. And then just a follow-up question for Rob. The seasonal increase in commercial deposits in the fourth quarter, has that left the balance sheet by the end of the year or do you expect…

Yeah.

…some seasonality to decline in the first quarter?

Yeah. No it did. So, you can see on the spot commercial deposits were down.

Perfect. Thanks so much.

Yeah.

Yeah.

Thank you. Our next question comes from the line of Kevin Barker with Piper Jaffray. Please proceed.

Good morning. Thanks for taking my questions. I just want to follow-up on the question that was just asked about loan growth and you’re saying that C&I loan growth is going to accelerate given the backdrop that we’re seeing right now, but at the same time we have corporate leverage which is very high compared to what we saw...

Yeah.

...post crisis and we have interest rates moving higher. How do you think about the balance between corporate leverage being high and rates moving higher, while also seeing growth in company’s spending?

So, you’ve got to remember, who our core clients are which bulk investment grade corporate leverage, I think, is it an all time high and will on a coverage ratio basis get worse as rates rises, something they’re not 100% hedged, which I think is a safe assumption. They still have debt capacity. So, the way we kind of think about it is, it wouldn’t be unlikely that you would see at least in our internal ratings downgrades in provision, but it wouldn’t stop us from lending into an economically profitable relationship, albeit at a higher spread and hopefully more cross-sell associated with it. So, there is loan demand out there coming from the BB+, BBB kind of sweet spot client for us, we’ll lend into that. But the issue in middle market for the last two years or three years, as they just haven’t borrowed. The borrowings you’ve seen have been largely large corporate and that’s been M&A related and/or share price, share repurchase which is driven leverage. I think there is a big opportunity for this country for kind of middle to small large size corporate to start investing in themselves and to grow. And like I said, we saw -- we had a record sales month in the corporate bank in December and we saw growth in middle market balances for the first time in a lot of quarters in the fourth quarter. We had a record quarter, on our Southeast markets particularly in Chicago. So there is a lot of good momentum out there. What I’m cautious about is nothing has actually happened yet, other than there has been a move in rates, right, and it changes sentiment. And I think we need to start seeing some of confirmations get through. We need to see real progress on tax reform. We need to see real progress on infrastructure, spending bills of state and local, and then all of a sudden, this thing takes flight, but right now, it’s just people talking about it.

Okay. And then on to another topic, I noticed that you marked up your MSR by about 43% this quarter. It appears that the gain was entirely offset by hedging. Could you help us understand how that changed this quarter and how it flowed to the income statement?

Well, I mean, that the markup, I’ll accept your percentage, I haven’t looked at it. But just the rise in rates, the MSR is a big IO strip. So the value of that goes up.

Okay.

We hedge it as effectively as we can. Our hedges outperformed the valuation move and the MSR. So we had a net gain in MSR hedging. I don’t know, Rob, what the net was this quarter, $30 million.

$30 million on residential and $20 million on commercial, yes.

Yeah.

Okay. All right. Thank you.

But there is no -- there is nothing inherently magical about this quarter other than the rate move itself. Again, if you go from Sep 30 to December 30 and you’ve got 80 basis points plus in the tenure, that causes a big swing in the value of that asset.

All right. Was there a change in accounting regarding the MSR, was that just a drop, I’m not sure...

No. It’s effectively at a mark-to-market asset as a function of rates in prepay and all bunch of other assumptions, but none of that -- what changed was the inputs, not anything with the model or the accounting, that’s it.

Okay. Okay. Thank you.

Thank you. Our next question comes from the line of Brian Klock with Keefe, Bruyette & Woods. Please proceed.

Thank you and good morning. Bill, I had a follow-up question again, I guess, on the commercial loan side. You talked about how strong December was, I wanted to, I guess, follow-up and think about. If we’re looking at the linked-quarter, it does look like loan growth was down a little bit from the linked-quarter and actually it was little softer in the retail, wholesale and manufacturing side of things. Overall, on a year-over-year basis, it’s only up 2.8%. So, I guess, are you seeing more extensions of lines of credit, maybe the utilization rates have gone down and is there any...

Utilization hasn’t changed, I’m not sure, I mean, if I think of our mix and I’m not exactly sure what table you’re looking at. But if I think of our mix, we’ve seen real estate slowdown. We’ve seen large corporate continue at a decent pace. We saw middle markets finally turn positive. We’ve seen continued slow runoff in our smaller commercial book largely related to just running off old acquired books as opposed to new activity. We’ve seen growth in utilities as we’ve sort of begun kind of an aggressive cross-sell campaign against that book of business. We’ve seen stabilization finally in our asset base finance business. We did a lot of work there around LCR a year ago and we saw big quarter in equipment finance, largely just on the back of good cross-sell of that product into our traditional corporate clients. So, I don’t -- I -- the momentum feels right, probably, the one thing that has changed, through the course of 2016 is slowed down in the balances of our asset base lending book. As refis continue to kind of head towards cash flow lending on some of that and some of the utilization on that book, particularly related to energy-related credits is in fact declined. But core middle market that -- to me the broader economy, what’s driving our GDP, I get excited about when I see sort of core middle market businesses, manufacturers start to borrow and they did that in the fourth quarter.

And that’s our biggest customers there.

Yeah.

Got you. And I guess, thinking about that way, your commercial loan growth, you continue to have the sort of runoff in the non-strategic and some of those consumer books, which weigh down the overall consumer.

Yeah.

So you think the 5%, I guess, would it be a 5% plus growth you would get from commercial or maybe the consumer would be a positive this quarter or maybe just less of a negative…

Well, consumer was…

… that can shift to overall mid-single.

Well, consumer was positive this quarter. We have planned it to be so into ’17, and I guess if you trend line what we had in C&I and now that might be a mix shift...

Mix shift. That’s right…

… it will be little bit higher, yeah.

But if -- the point is will we see some more momentum around consumer, the answer is, yes. We are expecting that.

Yeah.

All right. Thanks for your time.

Yeah.

Yeah.

Thank you. There are no further questions.

Thank you very much for joining the call and we look forward to working with you.

Thanks, everybody.

Thank you.