PNC Financial Services Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript

PNC Financial Services Group (PNC)

Q1 2012 Earnings Call

April 18, 2012 8:00 am ET


William H. Callihan - Senior Vice President and Director of Investor Relations

James E. Rohr - Chairman, Chief Executive Officer, Member of Executive Committee and Member of Risk Committee

Richard J. Johnson - Chief Financial Officer and Executive Vice President


John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Ian Foley - Jefferies & Company, Inc., Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Edward R. Najarian - ISI Group Inc., Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division



Good morning. My name is Kimika, and I will be your conference operator today. At this time, I would like to welcome everyone to the PNC Financial Services Group Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to the Director of Investor Relations, Mr. Bill Callihan. Sir, please go ahead.

William H. Callihan

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 and Chief Executive Officer, Jim Rohr; and Rick Johnson, Executive Vice President and Chief Financial Officer.

Today's presentation contains forward-looking information. 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, related presentation materials and in our 10-K and various other SEC filings and investor materials. These are all available on our corporate website,, under the Investor Relations section. These statements speak only as of April 18, 2012, and PNC undertakes no obligation to update them.

Now I'd like to turn the call over to Jim Rohr.

James E. Rohr

Thank you, Bill, and good morning, everyone. Thank you for joining us this morning. We are starting 2012 as we had expected, with an excellent first quarter performance that builds on last year's significant accomplishments. Once again, we have grown the number of customers we serve, effectively managed risk and expenses and returned value to our shareholders. We saw a strong revenue growth this quarter as a direct result of our strategy to grow customers and loans. Net interest income was up as were several client fee categories.

Let me share some highlights. We earned $811 million in net income or $1.44 per diluted common share. That includes first quarter integration costs of $145 million or $0.18 per share. In early March, we closed on RBC Bank (USA) and successfully converted nearly 1 million customers. This acquisition was accretive to our first quarter earnings, excluding the integration costs. Earlier this month, we announced a 14% increase in our quarterly dividend, quarterly common dividend to $0.40 a share, along with plans to repurchase up to 2.5 million -- $250 million of common stock in 2012.

We continue to have remarkable customer growth in the first quarter, and I'll say more about that in a minute. We saw $8 billion in average loan growth in the first quarter, a 5% increase, following strong results in the fourth quarter. And due to customer growth, loan growth and our expanded footprint, we saw a 5% increase in revenue in the first quarter. Overall, credit quality remained stable and expenses remained well managed.

Our balance sheet remained highly liquid and core funded with an 85% loan-to-deposit ratio, and our Tier 1 common capital ratio remains strong and is estimated to be 9.3% as of March 31. The impact to our capital ratio of purchasing RBC Bank was approximately 1.2 percentage points.

And with regards to the RBC Bank, we estimated an internal rate of return that we gave you at the acquisition time to be 19%. In terms of generating long-term shareholder value, we see that as a more valuable use of capital than share buybacks. At this point, with the conversion behind us, we feel even better about this transaction now. And lastly, we continue to believe we're well positioned with Basel III capital requirements, and we expect our capital ratios to grow from here.

Now moving to RBC's acquisition. The acquisition of RBC Bank significantly expanded our footprint, adding approximately $15 billion in loans and $18 billion in deposits to our balance sheet. More importantly, it gives us access to a very attractive -- very attractive markets in the southeast. With more than 400 branches, this was our largest single branch conversion in our history, and the process was nearly flawless. And that's what makes us so optimistic.

Frankly, when we learned that the -- when we identified the gap between the RBC Bank product offerings and our product set was larger than even we had anticipated. For example, even online statements were not available. Beginning on the first day of business, as our products became available over the -- after the -- as a result of the conversion, we saw customers coming into the branches to open accounts with our new service capabilities.

In less than 2 months since conversion, we already have a substantial pipeline of treasury management business and have plans in place to grow our corporate and institutional business much in the same way as we did following our acquisition of Riggs. Our Asset Management Group has developed a solid list of referrals from our business partners in our new markets already. And our new management teams are in place and are comprised of a combination of RBC Bank employees and legacy PNC employees who act as culture carriers, bringing both product and corporate knowledge to these new markets.

Looking ahead, we have more people to hire this year in the southeast. We'll be acquiring approximately 200 additional personnel for the Corporate & Institutional Bank and Asset Management over the next 9 months. We've got tremendous applications for these jobs. Overall, this acquisition is off to a great start, and we see tremendous opportunities to grow in these markets. And as we mentioned, it was accretive immediately x the integration costs.

Now turning to our business segments. We see current -- the current environment as a great time to add customers, and they're -- as there's ongoing disruption in the marketplace and the cost of client acquisition has never been lower, and we can see -- we continue to see strong client growth in the first quarter of 2012.

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