PNC Earnings Call Insights: Deposit Cost Expectations, Environmental Cost Drag
Deposit Cost Expectations
R. Scott Siefers – Sandler O’Neill & Partners: Rick, just had a couple of question on the margin, you gave some pretty good color on the fourth quarter expectation. I wonder if you can just speak at a top-level about some of the puts and takes from a core basis. I noticed the yields on most of the categories to the loan portfolio were down and in some case kind of substantially. I imagine that’s mostly the purchase accounting adjustments, but just I am curious to what kind of pricing pressures you are seeing out there on the asset side. Then on the funding side, you alluded to potentially some additional TruPS redemption. So any comment you can make about further lowering your overall funding costs, and I guess along those lines I noticed the cost of your retail CDs kind of jumped up in the third quarter, just curious what was going on there and then if you can speak to overall deposit cost expectations as well?
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Richard J. Johnson – CFO: Let’s start with the assets, yield on assets. I mean, RBC as I mentioned, we’ll continue to see a decline in the purchase accounting accretion on performing loans. Last quarter that was about $40 million decline from second to third. We think that will be about a $30 million to $35 million decline from the third quarter to the fourth quarter. So obviously that’s going to have an impact on the yields. So if you think of the core yields, this quarter we saw loan yields come down about 14 basis points. That was a pretty severe movement for us relative to prior quarters. I expect depending on the mix of business we put on, what happened between the second and the third quarters we did put on a lot of municipal business, we did put on a lot of business through our conduit which tend to (rumble) lower yields in the regulated portfolio and so you saw the yields drop there, although it’s very good business and we’re quite pleased with it. We don’t see the yields dropping as much in the fourth quarter, but again I think that will depend very much on the mix of business that we put on. On the securities portfolio we’re running down about $1 billion a month; that’s about $3 billion a quarter. As that runs off, we replace that 3.3% asset with about a 2.3% asset as we bring on residential mortgage-backed securities. A little bit of a mix shift there as well as we’re not trying to take long dated positions with our security portfolio. We are keeping it very short dated and so we may give up a little bit of earnings in doing that, but we don’t believe it’s appropriate to put our capital at risk. In terms of reduced funding costs, clearly the TruPS we’ve exercises already this year, about a ($1.08 billion) plus the $500 million we’ll do in the fourth quarter, is going to continue to reduce funding costs. In fact, that is one of the reasons why I’m so confident that the contraction in the margin will ease in the fourth quarter relative to the second and third quarter, simply because we’re going to get back a lot on the TruPS funding cost that we have there. So I think the borrowing costs continue to decline. I think the CDs are done. We finished that in the second quarter. There is not a lot more to do on the CD front, but clearly we can continue to do further on the borrowing front. The retail CDs, Scott, that was just a correction of an error in the second quarter. We had a $20 million adjustment on our yield year-to-date which caused the second quarter to look much lower than third quarter. If you adjusted for that, you’d probably have pretty flat yields on CDs over the three quarters of first, second, and third. And then also on the deposit side, as I mentioned, I think, really not a lot of room right now I think on the CD side. We’ll continue to evaluate it on overall deposit cost, but I think they’re pretty much (we price them at).
James E. Rohr – Chairman and CEO: Scott, one of the things we are not doing is we are not putting long-dated mortgages on our balance sheet. As Rick said, we are remaining short. We don’t think you’re getting paid to take that kind of long-dated risk in this interest rate environment. So that’s one thing that you might see other banks doing and going out the yield curve either on the securities book or even more so in booking residential mortgages on their balance sheet, and that’s just something that we don’t think that’s the right risk to be taking this time.
Environmental Cost Drag
Ken Usdin – Jefferies: I was wondering if, first, if you can kind of walk us through the proportion of the expense base that today in the third quarter is still related to environmental costs, and if – both in the expense side and I guess also we know the repurchase number was still a little bit higher than what you had been talking about, so if you can also just kind of put that into context for us, so all things related to environmental cost drag on the current numbers.
Richard J. Johnson – CFO: Yeah, happy to. We didn’t have a lot of litigation in the quarter. I think that was about $13 million in total litigation cost. We ended up with about $45 million related to the mortgage foreclosure activity. That was a little bit elevated in the quarter, up from normal levels of about $30 million a quarter. Then the last item would have been the OREO cost which came in at about $35 million for the quarter.
Ken Usdin – Jefferies: Then the put-back was 37, but you guys have been talking to 5 to 10 kind of go forward. Does this a true-up or is this a change relative to that prior outlook.
Richard J. Johnson – CFO: It is an update. We provided one for the originations in the quarter which would have been about $5 million and then we had a true-up of the reserve that we had, Obviously less than 10% adjustment on the total reserve as just more information as we’re making our estimates. What I’d have been very pleased with is the fact that what we’ve been expecting from Fannie and Freddie is exactly what’s happening. We appear to hit a peak of demand in the month of May and its’ been coming down sense. The month of September was our lowest cost month we’ve had some since February, so not that anyone month makes a trend but I’d say that everything we’re seeing on the GSEs is just as we expect.
Ken Usdin – Jefferies: My second question just related to the outlook for overall revenue growth in 2013, so we know about the purchase accounting delta. I was wondering if you could just kind of first of all give us the kind of base for whatever core stuff or non-core stuff you’re excluding from when you consider growth over, that would helpful I think to understand and then two, if you can just help us understand the components of NII versus fees in terms of getting to growth in ’13?
Richard J. Johnson – CFO: That’s correct. The total revenue guidance we’re giving you is that reported revenues next year will exceed reported revenues this year.
Ken Usdin – Jefferies: So all into all-in…
Richard J. Johnson – CFO: We’re not adjusting for anything.
James E. Rohr – Chairman and CEO: That’s pretty specific guidance for next year already so…
Richard J. Johnson – CFO: We have given that already.
James E. Rohr – Chairman and CEO: Yes, we have given that already and so we’ll update that to some extent when we get to the Goldman Conference in December, when we start talking about 2013 after we get the budget done.
Ken Usdin – Jefferies: Yes, I think the questions are just coming in on relative to the slightly lower than expected NII starting point if that does in fact change the overall outlook, that’s the questions that are coming in today.
Richard J. Johnson – CFO: In my comments today, we upped that guidance. For you to say that total revenue 2013 will exclude total revenue of 2012.
James E. Rohr – Chairman and CEO: It will exceed.
Richard J. Johnson – CFO: Yes, that’s what I said. Yes.
A Closer Look: PNC Financial Earnings Cheat Sheet>>