The PNC Financial Services Group, Inc. (PNC) Q1 2017 Earnings Report, Transcript and Summary

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 like to turn the call over to the Director of Investor Relations, Mr. Bryan Gill. Please go ahead, sir.

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

Thank you Bryan and good morning everybody. As you have all seen this morning, PNC reported net income of $1.1 billion or $1.96 per diluted common share in the first quarter. All-in-all, it was a pretty good quarter for us. We grew loans and revenue and net interest income was up 1% on the back of higher loan and security yields that benefited from higher interest rates in the quarter. As you saw, we continued to manage expenses well which has been a long-running theme for us even as we have invested significantly across our lines of business and credit quality remained stable in the quarter. We were pleased and frankly a little bit surprised to see another interest rate hike by the Fed in March. Of course, we welcome news of economic indicators that seem to suggest the confidence amongst consumers and business leaders. Now, as I said before, PNC is positioned to benefit should environmental factors turn more favorable. But still, we remain focused on execution against our strategic priorities. To that end, building on the progress we have made over the last three years on technology and infrastructure, we have recently realigned our tech innovation and operations functions which will have both near and long term benefits. Now near-term, we would expect that this effort will help us accelerate the pace and quality of innovation across the company. Think about that in terms of delivery of some of the digital products at a faster pace. And long-term, we believe it will help us achieve greater efficiency across back-office functions that will enable us to further improve the customer experience. Now before I turn it over to Rob, who is going to go through the results in greater detail, there's a few things, a few items that I would like to comment on that might have jumped out at you from the earnings release. Now the first of these are the elevated cash balances at the Fed and a relatively flat quarter-to-quarter security balances and you would think, despite the higher interest rates and the opportunity to put more money to work. Now to be clear, we did in fact put more duration on this quarter. However, we did it through the use of interest rate swaps where we saw relative value given the increase in swap spreads. And inside our securities book, the book yields and related NII increased appreciably is we were able to replace runoff at attractive yields. The 22% of the securities book that is in fact floating rate repriced higher and importantly the amortization expense of certain mortgages decreased as prepayments slowed. Now the balances themselves inside the Fed, in fact our total cash balances, were driven a bit by deposit growth but frankly also by some opportunistic borrowing that we did in banknotes just at really attractive levels. Now the other comment I would like to make is related to loan growth. You would have seen that we grew average loans around 1% in the quarter, once again driven by commercial loans. Although I would like to mention as well that consumer is holding its own and did manage to grow on an average basis reflecting significant efforts that we are making in this space. Now within commercial, this has been a fairly consistent growth rate for us and it's likely to continue. Interestingly however, there has been a significant shift in where this growth is coming from. This time last year, growth was dominated by real estate. This quarter, real estate loans are actually down but have been replaced by growth in the rest of C&I which seems to run counter to recent industry data. The C&I growth was very broad based across equipment finance, ABL, large corporate, middle market and for the first time in seven years, straight commercial loans, which we categorize as loans declines in the $10 million to $50 million range in revenue. Now you would recall, for some time this bucket has kind of been running off based on acquired loans that largely came through the RBC acquisition. Now we have managed all of this by growing clients, particularly in our expansion markets like the Southeast in Chicago and we have done this without changing pricing. Spreads were actually flat quarter-to-quarter as well as utilization. And I point this out because I think it highlights the power and consistency of our franchise and the opportunities we have in front of us, including the new markets we just opened in Dallas, Kansas City and Minneapolis. Now I know it's going to be a pretty busy day for everybody and we would like to leave time for questions, so with that I will turn it over to Rob who will run through the results of the quarter in greater detail and then we will open it up for Q&A. Rob?

Thanks Bill and good morning everyone. As Bill just highlighted, our first quarter net income was $1.1 billion or $1.96 per diluted common share. Our balance sheet is on slide four and is presented on an average basis. Total loans grew by $1.4 billion or 1% linked quarter. Commercial lending was up $1.2 billion or 1% from the fourth quarter, primarily reflecting growth in our specialty lending verticals, large corporate and our equipment finance business. Consumer lending increased by approximately $200 million linked quarter driven by increases in residential mortgage, auto and credit card and this was partially offset by declines in home equity and education lending. Investment securities increased by approximately $200 million linked quarter and $6 billion or 9% compared to the same quarter a year ago. As Bill just mentioned, we added to our duration this quarter with interest rate swaps at higher spreads and replaced securities runoff at attractive yields primarily through the purchase of agency residential mortgage-backed securities and treasuries. On the liability side, total deposits declined by$2.1 billion or 1% when compared to the fourth quarter, reflecting seasonal activity as growth in consumer deposits was more than offset by declines in commercial deposits. However, on a spot basis, deposits increased $3.5 billion or 1% reflecting the timing of deposit inflows. Average common shareholders' equity decreased by approximately $300 million or 1% linked quarter, primarily due to higher share repurchases and a decline in average accumulated other comprehensive income. During the quarter we returned $884 million of capital to shareholders or 92% of net income with repurchases of five million common shares for $612 million and common dividends of $272 million. This includes the impact of the increase to our share repurchase program that we announced in January. Turning to capital. As of March, 31, 2017, our fully phased in Basel III common equity Tier 1 ratio was estimated to be 10% which was unchanged from December 31, 2016. Our tangible book value reached $67.47 per common share as of March 31. Our return on average assets for the first quarter was 1.19%, an increase of six basis points and our return on tangible common equity was 12.15%, an increase of 25 basis points. As I have already mentioned and you can see slide five, net income was $1.1 billion and we achieved positive operating leverage on both the linked quarter and year-over-year basis. Revenue was up $10 million over the fourth quarter. This was driven by net interest income, which benefited from higher interest rates, partially offset by a lower day count. Noninterest income reflected seasonally lower fee income, predominantly on the consumer side offset by higher other noninterest income of $322 million which included a $47 million positive valuation adjustment associated with a five-year extension to conform certain equity investments subject to the Volcker Rule. Noninterest expense decreased by $39 million or 2% compared to the fourth quarter. Expenses continue to be well managed, due in part to our continuous improvement program. Provision for credit losses in the first quarter was $88 million, an increase of $21 million and overall credit quality remained stable. Our effective tax rate in the first quarter was 23% and included the impact of higher deductions for stock-based compensation related to stock activity and a higher common share price. For the full year, 2017, we continue to expect the effective tax rate to be approximately 25% Finally, diluted earnings per common share were negatively impacted by$0.04 this quarter due to recognition of deferred issuance costs of $19 million related to the redemption in March of all of our REIT preferred securities, which totaled $1 billion. Now let's discuss the key drivers of this performance in more detail. Turning to slide six. Net interest income increased by $30 million or 1% linked quarter, primarily driven by higher loan and securities yields that resulted from higher interest rates, somewhat offset by an increase in borrowing and deposit costs. Additionally, the first quarter was impacted by two fewer days. Net interest margin was 2.77%, an increase of eight basis points compared to the fourth quarter primarily due to higher interest rates. As you can see on slide seven, noninterest income decreased by $20 million or 1% linked quarter as seasonally lower fee income was partially offset by higher other noninterest income. Compared to the first quarter of last year, total noninterest income was up by $157 million or 10% and fee income increased by $141 million or 11%. This reflects the challenging environment during the first quarter of 2016, but also our continued progress toward growing fee income. Looking at the various categories, asset management fees, which includes earnings from our equity investment in BlackRock were up $4 million or 1% on a linked quarter basis, primarily driven by higher equity marks. Compared to the same quarter last, asset management fees increased by $62 million or 18% reflecting stronger performance in the equity markets and net new business activity. Consumer services fees were down $17 million or 5% compared to fourth quarter results reflecting seasonally lower client activity. Compared to the same quarter a year ago, consumer services fees were down $5 million or 1%. We continue to increase debit and credit card penetration and those fees were up approximately 10%. However, this was offset by higher credit card reward activity and an adjustment to our reward usage estimate. Corporate services fees increased by $6 million or 2% compared to fourth quarter results, which was somewhat more than expected due to higher merger and acquisition advisory fees. Compared to the same quarter a year ago, corporate services fees increased $68 million or 21% due to higher merger and acquisition advisory and other capital markets revenue as well as growth in treasury management. Residential mortgage noninterest income decreased $29 million or 20% linked quarter reflecting seasonally lower activity as well as lower net hedging gains on mortgage servicing rights. Compared to the same quarter a year ago, residential mortgage noninterest income increased $13 million or 13% primarily driven by higher net hedging gains on mortgage servicing rights. Service charges on deposits decreased by $11 million or 6% compared to the fourth quarter and again driven by seasonally lower customer activity. Other noninterest income increased $27 million or 9% and as I mentioned earlier, benefited from the $47 million Volcker Rule related valuation adjustment. Going forward, we continue to expect this year's quarterly run rate for other noninterest income to be in the range of $225 million to $275 million. Turning to slide eight, first quarter expenses decreased by $39 million or 2% reflecting our continued focus on disciplined expense management. The linked order decline reflected the impact of our fourth quarter contribution to the PNC Foundation and was partially offset by higher variable compensation related to business activity and seasonally higher occupancy costs. As we previously stated, our continuous improvement program has a goal to reduce expenses by $350 million in 2017. Based on first quarter results, we are on track and confident we will achieve our annual target. As you know, this program funds a significant portion of our ongoing business and technology investments. Turning to slide nine. Overall credit quality remained stable in the first quarter. Total nonperforming loans were down $146 million or 7% linked quarter with improvements in both commercial and consumer loans. Total delinquencies decreased by $192 million or 12% reflecting improvements in all past due categories. Provision for credit losses of $88 million increased by $21 million linked quarter attributable to loan growth and normalizing trends in our commercial loan book. Net charge-offs increased $12 million to $118 million in the first quarter, largely driven by seasonal increases in home equity and credit card loans. The annualized net charge-off ratio was 23 basis points, up three basis points linked quarter. Our credit quality metrics remain near historical lows and these results fully reflect the outcome of the recently completed Shared National Credit examination. In summary, PNC posted a solid first quarter driven by growth in loans, higher net interest income and strong expense management. For the remainder of the year, we expect continued steady growth in GDP and a corresponding increase in short-term interest rates two more times this year, in June and December, with each increase being 25 basis points. We are also assuming that loan rates remain relatively stable. Based on these assumptions, our updated full year 2017 guidance compared to 2016 full year results is as follows. We continue to expect mid-single digit loan growth. Given the March rate hike, we now expect revenue to grow in the upper end of the mid-single digit range. And we continue to expect a low single-digit increase in expenses, which will allow us to post positive operating leverage for the year. I should add that our guidance includes the acquisition of ECN Capital Corp., which closed earlier this month. However, the impact of this acquisition will be nominal to our overall full year results. Looking ahead to the second quarter of 2017 compared to the first quarter of 2017 reported results, we expect a modest loan growth. We expect total net interest income to be up low-single digits. We expect fee income to be up mid single digits. We expect expenses to be up low-single digits. And we expect provision to be between $75 million and $125 million. The second quarter provision will include an initial allowance and reserve for the ECN acquisition, which could result in total provision being at the higher end of this range. And with that, Bill and I are ready to take your questions.

Operator, could you please poll for questions?

[Operator Instructions]. Our first question comes from the line of John Pancari with Evercore. Please proceed.

Good morning.

Good morning John.

Hi John.

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

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

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

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

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

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

Got it. Thanks Rob.

Sure

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

Yes. Hi, good morning.

Good morning.

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

Well, sure. I mean you would see generically off of our base where we are kind of same low single digit growth in C&I, that's under the presumption we are basically just getting new clients. At the point where existing clients start to borrow more because they become bullish on the economy and capital expenditures increase and therefore the H8 data increases, we would benefit from that as well and I would expect we would accelerate. But we are not relying on that in our forecast.

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

Yes. So starting with the retail and you have to remember that we and most other banks had our core product interest-bearing accounts paying sort of above market to begin with, right. So I think our primary relationship product pays 60% or 80% or something and basically there was kind of zero beta. We did increase it all in the course of the first quarter on the back of the December rate cut inside of retail. In the corporate book, the debate is obviously running somewhat higher pushing what I guess 40% or something. But what's interesting to me inside of the corporate book and I guess we kind of expected this, but we are watching it play out is, the yields in that book are driven as much by the available yield in the government money market funds as opposed to traditionally kind of being driven by LIBOR. So if you think of all the money that ran out of the prime funds into the government money market funds, the corporate depositing cash has two choices at a bank or at the government fund and what has in effect allowed us to run a lower beta on our corporate rate paid as much as anything, in view is there are alternative inside of the government funds which are obviously struggling with the yield. Just as a side, we obviously --

That's clearly a factor.

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

That was very clear. Thank you.

Yes.

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

Hi Gerard. Are you there?

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

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

It's in our asset base book.

It's in our corporate book, but it is secured, yes.

Alright. And just as a follow-up, just on underwriting standards in general, we look at the senior loan officer survey and you could see the industry, there is some tightening going on particularly I think in CRE. Can you guys give us some color on your underwriting standards relative to a year ago?

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

And that's really true of our philosophy all around. That's why you see this cyclical differential growth rate.

Great. I appreciate that. Thank you guys.

Sure.

Thanks Gerard.

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

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

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

I mean some of our fee businesses, particularly in C&I, I think Harris William had a quarter and Solebury had a record first quarter. So probably some upside inside of the fee categories as well, just given the activity in the markets.

And then as a follow-up on the consumer loan portfolio. You have had that run-off, but then you have also really emphasized credit cards, home equity and direct auto. Could you talk about trends in the 1Q? I couldn't really find any details? And what are the opportunities for growth in specifically those three areas as you think about the full year 2017?

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

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

Great. Thank you both.

Sure.

Thank you. Our next question comes from line of John McDonald with Bernstein. Please proceed.

Hi. Good morning. I was wondering if you could remind us where you are on the home lending transformation, combining the mortgage and home equity platforms and the current timeline you are seeing for that to play out and the benefits you expect from that?

Yes. Hi Jon, it's Rob. So on our home lending transformation, we are progressing well. As you know, 2017 is sort of the work here in order to get our systems in place, which will be completely front-end to back-end in terms of originating, fulfilling and servicing. So we are excited about it. We are working hard on it. The financial impact of most of the benefits will be, as you know, in the outer years, so beginning in 2018 and beyond. But so far so good.

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

Yes. Maybe an easier way to do it, John, is just take our full year guidance that we gave in January, which at that time anticipated a June and December hike. You with me? And then add to that the March increase, which I approximate $150 million, worth $150 million.

Over the course of the rest of the year?

Yes.

Okay. Got it.

I never took June out. We had June in there from the start.

Put March in. Okay. I was wondering if Bill had a quick comment on Zelle and how that's going? Is the ramp out across the banks been a little slower than initially hoped? And what's the update there?

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

Hot it. Okay. Thanks guys.

Yes. Thanks.

Thanks John.

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

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

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

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

Yes. We don't really mess around with our liability side in the sense that we swap our issuance and leave it. You will see it actually show up in the loan yields inside the C&I book because we point the receipt fixed swaps at the floating rate C&I loan. So we talk about sort of 60% of our book being floating rate. That 60% is impacted by the fact that we swap some of those loans into fixed rate and that will move up and down through time as a function of relative value.

And then you also see it in the NII from the securities book.

Yes.

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

I would say, yes. Although I will qualify that slightly with the notion that part of our yield increase in the securities book this quarter came from a decrease in amortization expense as a function of the slowdown in prepayment speed on mortgages. So that may or may not continue driven by yields in the back end of the curve as opposed to what the front end is doing.

So premium am was lower, right.

Yes.

So could you just tell us what that delta was? And I will stop there, sorry for the extra.

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

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

We can discuss it offline.

Okay. Thanks guys. Sorry for the extra question.

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

Good morning. Thanks for taking my question. Maybe just a riff on the idea of deposit beta and you mentioned the difference in performance between retail and commercial. But I guess I am curious, are you seeing any meaningful difference in the deposit beta performance in your newer markets than you are in your more legacy PNC markets? And I guess I am asking because of the market share differential there could cause you a little bit different performances in terms of deposit beta.

It's a fair question, but the answer is, we are not really seeing anything different. I mean we compete market-by-market as a function of, we try to offer in our prime relationship product an attractive rate relative to peers. But that rate is pretty consistent. One of the things we have done over the course of the last six or nine months is kind of move away from promo rates we have been offering in our money market product to get ahead of this whole LCR thing. So we paid up and we got a lot of deposits [indiscernible]. We have moved away from that. By the way, we have held onto the vast majority of those deposits, but we have moved away from that and basically have been moving them into our core interest bearing MMDA product that goes along with our premium accounts and that seems to be working well for us. But we are not going into the Southeast and saying, we have got a pay a quarter more for deposits than we are able to pay in Pittsburgh.

Fair question, but that's not the case.

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

I mean not really. I mean it's bounced around. It bounced up a little bit. I guess through the course of last year, it was in the 50%?

45%.

And inverting numbers.

Right.

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

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

Yes.

Okay. Thanks very much for the color.

Yes. Sure Matt.

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

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

I don't know the answer to that. I am kind of surprised by that stat.

Yes. Not particularly.

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

We have managed to continue to grow the book, albeit at a slower pace staying within the credit bucket that we have been in the whole time.

Yes. That's right.

Great. And then finally on the auto, are you seeing higher yields and spreads within your book, given some of the pullback that we have seen in different pockets within auto?

Well, we are seeing higher yields simply because the rates are going up but not higher spreads per se risk adjusted. Again, we are playing, I don't know what the average FICO is on that book but it is something 40 or so. Well, that's high. So we are playing at a very high level of prime. The place where you are hearing about people increasing spreads, not surprisingly, is in the subprime space and some of the long dated leasing space, given pressure on used car prices, but we are not in either of those businesses. So it really hasn't affected our peer spread market.

That's right.

Got it. Thank you very much.

Sure

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

Good morning. Thanks for taking my questions.

Sure. Hi Brian.

So Rob, I guess just a quick follow-up. On the securities yields and I think about where that first quarter of 2017 yield is for total securities. I guess with the roll-on, roll-off after the adjustments you made with the swaps, I guess are we going to have some pressure going forward? Or are you at a point where anything you are putting out now might actually be accretive to the book yield?

It was basically what we bought. So inside of that relatively flat number was in fact a whole bunch of replacement of run-off. Our yield on replacement is kind of a push to what is running off. So we are in kind of a good place to the extent the curve stays where it is. Now you would say, why is a tie good. The tie is good because for most of the last couple of years, we have been replacing at lower yields than it had been running off.

So you saw that $257 billion now on these investment securities.

Yes. Exactly. Alright. Thanks for the color, Bill. I guess maybe the other question to follow-up on that is, as you mentioned the end of period balances at the Fed went up. So would the 10-year kind of pulling back here? Is there any appetite to take some more duration with that excess liquidity?

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

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

Yes. Approximately $25 million.

$25 million. And then in theory, so that benefit used to be in other comprehensive income previously, but now --

That's right.

So I mean it comes where the first quarter when usually have more of the option grants, or the RSU grants. So next quarter --

Yes. It's that and also the share price appreciation obviously, that's has been pretty significant

Got it. Okay. Thanks for your time guys.

Thank you. There are no further questions.

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

Thanks everybody.

Thank you.

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