PNC Financial Services Group, Inc. (The) (PNC)

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PNC Financial Services Group (PNC)

Q3 2012 Earnings Call

October 16, 2012 9:00 am ET


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

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

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


Scott Siefers

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

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

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division



Good morning. My name is Mira, 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, Mira, 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, by those anticipated in our statement and from historical performance due to a variety of risks and other factors. Information about such factors, as well as GAAP reconciliation and other information on non-GAAP financial measures we may discuss, is included in today's conference call earnings release, related presentation material and in our 10-K, 10-Qs, 8-Ks and various other SEC filings and investor material. All of -- these are all available on our corporate website,, under the Investor Relations section. These statements speak only as of October 16, 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, and thank you for joining us. This was an outstanding quarter for PNC. We earned $925 million in net income or $1.64 per diluted common share. Our strong overall performance was driven by our ability to increase the number of customers that we serve, grow loans and fees, resulting in higher revenue.

Total loans increased by $1.5 billion in the third quarter, primarily driven by commercial loan growth. The majority came from new customers as utilization rates remained essentially unchanged. As we expected, the rate of loan growth in the third quarter was slower than the first half of the year. However, for the first 9 months of the year, loans have increased by almost $23 billion or 14%, a strong gain.

Fee income of $1.7 billion was up 23% compared to $1.4 billion the same quarter a year ago. We sold some of our Visa stock during the quarter, which continued to the -- contributed to the increase in this category. But without the pretax gain of $137 million from the Visa sale, our noninterest income was up 13% from the same period a year ago and reflects higher quality as the overall client fee income remained strong.

And more than 3/4 of our markets were above plan for the first 9 months of the year. Our southeastern markets are performing well and are above our expectations. Taken together, our sales performance, along with the contributions from all of our employees, is basically driving these results.

Overall credit quality improved and expenses were well managed, and Rick will cover these in greater detail. At the quarter end, our balance sheet remained core funded with an 88% loan-to-deposit ratio, and we remain -- and we maintained a strong liquidity position.

And we continue to improve the quality of our capital. We recently issued $480 million in preferred stock with a dividend rate of 5.38% -- 5 3/8%. The offering was well received by the market. And during the first 9 months of the year, we redeemed a total of $1.8 billion in trust preferred securities that had a weighted average rate of more than 7%, and obviously, redeeming these securities is lowering our funding cost. And finally, our Tier 1 common capital ratio increased from the second quarter and is estimated to be 9.5% as of September 30.

Overall, I'm very pleased with these results. Clearly, 2012 is shaping up to be another strong year for PNC.

Now I'd like to spend a few moments talking about the performance of our business segments. In all my years of banking, I've never seen us grow the numbers of customers we serve as quickly as we are today. Let me begin with Retail Banking. We're looking to add customers, serve them efficiently -- sufficiently and deepen our relationships with them through cross-selling.

We added more than 230,000 net organic checking relationships during the first 9 months of the year. On an annualized basis, organic checking accounts increased 4% during the same period. That's twice as fast as the population growth rate in our footprint. Additionally, we acquired 460,000 checking accounts through our acquisition of RBC Bank (USA) in the first quarter of the year. In the third quarter, nearly 70% of our new checking accounts were relationship accounts, as more customers are seeing the value of having deeper relationships with us as opposed to having just a free checking account.

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