PNC Financial Services Group Earnings Call Nuggets: Guidance Clarification and Mortgage Banking Production

PNC Financial Services Group (NYSE:PNC) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Guidance Clarification

Erika Penala – Bank of America-Merrill Lynch: My first question is just on some clarification on your guidance, Rick. On the expense side you are now looking for core expenses to be flat to down. Could you give us a sense at what base you are using for core for 2012 and I’m getting a base of about $9.9 billion, is that correct base?

Richard J. Johnson – CFO: No, that’s very well done. That’s exactly right Erika. I would look it as $9.9 billion; it’s down from the $10 billion we gave you before, because we had to beat it at about $100 million in the first quarter.

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Erika Penala – Bank of America-Merrill Lynch: And just my second question is more on the capital deployment priorities. Rick, I appreciate your comments that you are looking to return additional capital to shareholders in 2014. Just to turn this question to Bill, clearly, you are already rounding away from the low end of your range in terms of your Basel III goals, building goals for the year. Could you give us a sense of what your capital deployment priorities are going to be for 2014?

William S. Demchak – President: Sure. First and foremost, and we’ll say this every time you ask, we’ll focus our capital on client activity and growth in good quality loans where we’re getting a return. But beyond that, we will have a focus on continued dividend return and increases in dividend, and then importantly, meaningful share buyback, which we’ve been out of the market for a couple of years, but you know in ’14 we’ve been pretty vocal that we should have capacity and we’ll execute on that. Beyond that, I’ll get the question at some point as to whether or not there are small banks we want to buy, so why don’t we tackle that. That would be pretty far down the list right now, given the bet we already have in the southeast that we need to execute on in the price expectations we see from some of the smaller banks…

Erika Penala – Bank of America-Merrill Lynch: So, is the message there, if there are any large foreign owned institutions that would be for sale in your footprint that would absolutely not be on your priority list?

William S. Demchak – President: My statement was pretty clear. We have a lot on our plate and a lot that we can do organically and we’re going to focus on that and execute on it, and we’ve been doing just that. We feel pretty good about it. We feel good about capital return to shareholders in ’14.

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Mortgage Banking Production

Paul Miller – FBR Capital Markets & Co.: On the mortgage banking front, you made a couple of comments about that your production was a little bit lower than you had thought because of the momentum you had going into the first quarter. Can you add a little color to that and also on your gain on sale margins which have held up pretty – but it was down from I think 4.80% to 4%. Can you give us little guidance on where you think those things are going to go over the next quarter or two?

William S. Demchak – President: It’s Bill, I’ll take the front-end of it. I mean the momentum comment is simply that we grew originations quarter-to-quarter straight to last year as we added capacity and we felt pretty good about our ability to extend that, even though we had expected industry volume to decline. We managed to hold it flat but we didn’t manage to extend it as competition for people frankly got pretty fierce in our ability to add the heads we expected just wasn’t there. Rick can tackle the margin question…

Richard J. Johnson – CFO: The spread declined by about 16% it was previously about 4.90 we ended up this quarter about 4.10 in terms of the margin. So that was what we are expecting. I think what we didn’t expect was the lower volume levels. For the year we are looking at probably about a 3.50 average margin on this activity, but we’ll have to watch that and see how that plays out.

Paul Miller – FBR Capital Markets & Co.: I know HARP loans played pretty decent part of your production last quarter, I mean last year. Is that going down in percentages and do you expect that, what do you expect that to pan out over the year?

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Richard J. Johnson – CFO: Well we added about 30% and we don’t really see much of a change I mean with the extension we just continue to focus on the activity we have, we are not expecting any big change in the percentage.

Paul Miller – FBR Capital Markets & Co.: Because we are talking about burnouts some of the bigger shops thought that most of their HARP loans had burned out, but you think you still got plenty of HARP stuff in your portfolio?

William S. Demchak – President: Part of, you got to remember a big chunk of our focus has been on purchase loans and through the course of last year we actually didn’t focus very aggressively at all on refinance even within our own portfolio because we want to build that purchase franchise. So we may have a slightly different circumstance than some of the bigger guys.

A Closer Look: PNC Financial Services Earnings Cheat Sheet>>