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

Demchak - President, Director and President of PNC Bank National Association Richard J. Johnson

Erika Penala - BofA Merrill Lynch, Research Division Paul J. Miller - FBR Capital Markets & Co., Research Division Matthew D.

O'Connor - Deutsche Bank AG, Research Division Keith Murray - Nomura Securities Co. Ltd., Research Division Ian Foley - Jefferies & Company, Inc., Research Division Gerard S.

Cassidy - RBC Capital Markets, LLC, Research Division Moshe Orenbuch - Crédit Suisse AG, Research Division Michael Turner - Compass Point Research & Trading, LLC, Research Division Jack Micenko - Susquehanna Financial Group, LLLP, Research Division Terence J. McEvoy - Oppenheimer & Co.

Inc., Research Division Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Jason E.

Harbes - Wells Fargo Securities, LLC, Research Division

Good morning. And thank you, everyone, for joining our call.

Participating on this call is -- are PNC's President, Bill Demchak. As many of you know, Bill will be elected CEO at our annual meeting later this month.

Also on this call is 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 our historical performance due to a variety of risks and other factors. Our forward-looking statements regarding PNC's performance assume a continuation of the current economic environment and do not take into account the impact of potential legal and regulatory contingencies.

Information about such factors, as well as GAAP reconciliation 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 the Investor Relations sections.

These statements speak only as of April 17, 2013, and PNC undertakes no obligation to update them. And now I'd like to turn the call over to Bill Demchak.

Thanks, Bill. And good morning, everybody.

I will open today with some brief thoughts about the first quarter and progress that we're making against our strategic priorities, then I'll turn it over to Rick to run you through the results. And then we'll take your questions at the end.

Rick reminded me that it's been about 8 years since I last joined you on this call, and I am thrilled to be back. And I'm honored and excited to be stepping into the role of CEO at PNC later this month.

Jim obviously guided PNC through not only an historic economic crisis, but at the same time, he led us through some of the most rapid growth in our company's history. And I would tell you that I am grateful, and I know we are all grateful, for his friendship and his leadership.

Turning to this morning's announcement. We had a great first quarter.

We reported first quarter net income of $1 billion or $1.76 per diluted common share, with a return on average assets of 1.34%. Our diversified businesses delivered solid revenue despite what was frankly weaker lending in the quarter.

It was slower than what we saw in the fourth quarter when businesses were rushing to get deals booked before new tax rates could take effect. Having said that, we still grew loans.

It just wasn't at the pace that we saw in the fourth quarter. And it remains to be seen, as we go forward, whether the slower first quarter activity is simply seasonal or a reflection of what the market is going to look like for the year ahead.

Now let me jump to our strategic priorities and just give you a quick update of where things are headed here. We are -- we continue to make good progress towards our goal of building a leading financial services franchise in the Southeast.

It's been just over a year since we closed RBC. And from what we've seen today, we feel pretty good about our decision to expand in the Southeast.

While it's still early in the game, I can tell you that "out of the gate" activity is good and it's better than we expected across all of the businesses' end markets. Our brand recognition across the Southeast has nearly doubled from 28% before the RBC Bank conversion to more than 50% today.

Our teams in wealth and C&IB are largely in place, and our focus has moved from integration to winning and building new relationships. To give you an idea, in the first quarter in the Southeast, we added 9,000 new DDA households in retail, 76 new primary wealth clients, which may not sound like a lot, but you've got to remember, we didn't have a single wealth employee in the South -- Southeast a year ago.

We also added 144 new primary clients in the corporate bank. And our Southeast loan book in the corporate bank grew at nearly a 20% annualized rate in the first quarter despite continued runoff in the noncore loans that we acquired.

Clearly, this is a lot faster than what we're seeing in PNC's legacy markets. All that said, we're not underestimating the challenges of this expansion and the time and the patience that it's going to take to get it right.

We'll update you as we go forward on our progress in the Southeast, but we're certainly encouraged by the early wins and encouraged by the markets' receptivity to PNC. In our wealth business, AMG, we also had a terrific first quarter, accelerating the pace of new client -- new primary client acquisition by more than 50% year-over-year.

You've heard us repeatedly talk about our efforts to capture more of our clients' investable assets, and our investing in retirement cross-sell effort is really gaining traction. AMG cross-sell revenues from retail and C&IB increased by more than 20% linked quarter and 70% year-over-year.

AMG also achieved all-time-high assets under administration of $236 billion and assets under management of $118 billion. Mortgage business also had a good first quarter, though, I would tell you, our origination performance didn't meet our expectations.

Origination volumes for the industry were obviously down. And while our volumes remained essentially flat, stable, we were expecting growth given the momentum that we'd carried into the end of last year, and we didn't see that.

It is worth noting, though, that there were no surprises on repurchase reserves, and we do like our sales momentum. In retail, we've talked with you lately about our work to leverage new distribution and transaction channels that better align with our customers' preferences while at the same time lowering our cost to serve.

And while it's still early, I'm pleased with the progress we're making. To give you an idea, in Southwestern Pennsylvania, this is our first market to be fully outfitted with the new image-enabled ATMs, and there, we see consumer teller deposits are down 17% if you go Feb to Feb and despite a 2.25% growth in actual customers.

So a big change. At the same time, we've been pretty public about our plans to close up to 200 branches and to open others where it makes sense to do so.

We actually added customers this quarter while closing 30 branches in the first quarter. If we look at corporate-wide expenses and recognizing the environment that we're in, I'm very pleased with the commitment of our senior management team and managers throughout the organization to disciplined expense management.

PNC has long been good at continuous improvement, but it's a new environment. And throughout the organization, there's a new attitude about expenses and a realization that we still have room for improvement.

And while we might not be able to maintain quite the pace we set in the first quarter, we are in an excellent position to achieve our expense management goals for the year. And that's probably a good place for me to turn it over to Rick.

Thank you, Bill, and welcome back. Good morning, everyone.

Let me begin with our balance sheet on Slide 4. Total assets declined by $4.3 billion or 1.4% on a linked quarter basis as we reduced cash on deposits with the Federal Reserve and we did not replace prepayments on our securities portfolio.

In addition, loan growth slowed in the first quarter as spot loan balances increased $650 million compared to year end. In the first quarter, we have seen more transactions move to the capital markets and away from bank balance sheets.

It remains to be seen if this is an aberration or a trend, although we did see some modest improvements in our pipeline in March and early April. Commercial loan growth was the driver of our increase in total loans.

Total commercial lending increased by $1.4 billion compared to the fourth quarter of 2012 as a result of specialty lending businesses, including public finance, asset-based lending and commercial real estate. Consumer loans declined in the first quarter primarily due to paydowns of residential real estate, credit card and education loans.

First quarter transaction deposits decreased by approximately $1.3 billion on a spot basis compared to the fourth quarter primarily due to the seasonally high year-end corporate deposits, which exited the bank in the first week of January. However, on an average basis, first quarter transaction deposits grew by $3.1 billion on a linked quarter basis, reflecting our growth in customers and their liquidity.

Shareholders' equity increased by $660 million or approximately 2% in the first quarter primarily due to retained earnings. As a result, we ended the first quarter with strong capital ratios.

Our Tier 1 common ratio at the end of the first quarter is estimated to be 9.8%. That's up 20 basis points since the end of the fourth quarter.

Our Basel III Tier 1 pro forma common capital ratio was estimated to be 7.9% as of March 31, 2013, without the benefit of phases. This reflects growth in retained earnings and a reduction in risk-weighted assets.

The reduction in risk-weighted assets can be attributed to enhanced modeling processes and greater clarity regarding the rules. We will continue to enhance our process and estimates, as we entered parallel run in January 1 of this year.

However, at this level, we have narrowed the gap and are close to the lower end of our operating range for Basel III. We continue to believe we will be well positioned to return additional capital to shareholders in 2014.

Now turning to our income statement on Slide 5. We produced nearly $4 billion in revenue in the first quarter, and expenses of $2.4 billion were better than planned.

This resulted in pretax pre-provision earnings of approximately $1.6 billion, an increase of 26% compared to the fourth quarter of last year and 22% compared to the same quarter a year ago. Now overall credit trends remained positive.

Consistent with our guidance, our provision for the first quarter was $236 million, which was down $82 million from the fourth quarter of last year as a result of overall credit quality improvement. And you will recall, our provision in the fourth quarter was $318 million, which includes $53 million due to the implementation of regulatory guidance for loans discharged from bankruptcy.

Looking ahead to the second quarter, we expect the provision to remain between $200 million and $300 million. Overall, this quarter resulted in $1 billion in net income and $1.76 per diluted common share.

Our return on average assets for the quarter were 1.34%, an increase of 39 basis points compared to the fourth quarter of last year. Overall, these are great results to start the year, but as I will explain further, this level of earnings may not be sustainable in this challenging environment.

Let me take a moment to discuss the impact of loan growth on our net interest income, on Slide 6. Average interest-earning assets increased by $2.5 billion on a linked quarter basis due to average loan growth of approximately $2.9 billion or 1.6%.

Compared to the same quarter a year ago, average interest-earning assets were up $18 billion or 8% as a result of a $21.5 billion or a 13% increase in average loans. Now comparing the first quarter to the fourth, core net interest income remained stable, while scheduled purchase accounting accretion decreased, as expected.

However, cash recoveries on impaired commercial loans remained stable, resulting in a less-than-2% decline in net interest income, better than expected. When comparing to the prior year quarter, net interest income increased $98 million or 4% primarily due to a 6% growth in core net interest income due to loan growth and a stable net interest margin.

As you can see from the graph on Slide 6, overall net interest margin contracted by 4 basis points on a linked quarter basis, while core margin held steady at 3.43%. Now looking to the second quarter, we're once again expecting a 2% to 3% decline in net interest income compared to the first quarter due to a decrease in scheduled purchase accounting accretion and lower expected cash recoveries.

For the full year, we now expect purchase accounting accretion to decline by approximately $350 million versus 2012, while core net interest income is expected to increase modestly from 2012 to 2013. And as you can see on Slide 7, total noninterest income declined by $79 million or 5% in the first quarter compared to the fourth quarter results.

When you adjust for the provision for residential mortgage repurchase obligations and a fourth quarter gain on the sale of Visa shares, noninterest income declined even further. This decrease is driven by a reduction of almost $100 million in revenue on capital market activities such as M&A, loan syndications and customer derivative activities.

The fourth quarter performance in capital markets was exceptionally strong, and lower-than-expected lending activity in the first quarter contributed to the quarter-to-quarter decline. Residential Mortgage Banking revenue also declined, primarily due to lower loan sales revenue, below our expectations, partially offset by higher net hedging gains on mortgage servicing rights.

On the other hand, we had steady growth in asset management and consumer service fee categories. The diversification of our businesses resulted in noninterest income-to-total revenue remaining steady at 40% in the first quarter.

Total noninterest income increased $125 million or 9% from a year ago due to a $114 million or 10% increase in fee income, primarily driven by gains in corporate, consumer and deposit services and asset management fees. This year-to-year comparison reflects progress we have achieved in customer growth and in our efforts to deepen customer relationships.

We continue to expect that full year total reported revenue will increase in 2013 compared to 2012. Now turning to Slide 8.

First quarter expenses decreased by $434 million as every category declined on a linked quarter basis. This performance clearly exceeded our expectations.

The decline included lower expenses related to selected items such as lower residential mortgage foreclosure-related expenses and no charges related to trust preferred securities redemptions, goodwill impairments or integrations. We also saw lower marketing costs and reduced incentive compensation expenses primarily related to lower capital market activities.

As I've said before, we are looking to achieve a total of $700 million in cost savings. These dollars are being used to offset investments we're making in our businesses and infrastructure.

Through the end of the first quarter, we have captured approximately $500 million of annualized savings. This gives us confidence that we will meet our full year cost savings target.

Comparing first quarter to the same period a year ago, noninterest expenses were down $60 million or 2%, reflecting prior year integration costs and the benefits of our continuous improvement efforts, offset by investments we've made in our strategic priorities, including the full quarter impact of RBC Bank expenses. For the second quarter, we currently expect noninterest expenses to be 2% to 3% higher than the first quarter due to an expected increase in marketing expenses and up to $48 million in noncash charges from calling trust preferred securities.

On a full year basis, I continue to expect reported expenses to decline by mid single digits on a percentage basis, while I now expect core expenses, which exclude integration and trust preferred securities redemption charges, to be flat to down in 2013 versus 2012 due to our strong first quarter performance. Turning to credit quality on Slide 9.

Credit trends in the first quarter were impacted as we aligned our regulatory guidance that had the overall effect of increasing charge-offs by $134 million and nonperforming loans by $426 million by reducing reported delinquencies by $395 million. This included adoption of a policy to classify performing second-lien consumer loans as nonperforming when the first lien is 90 days or more past due.

While our credit metrics were impacted by this, underlying credit quality continued to improve in the first quarter. Overall, PNC posted strong financial results in the first quarter.

Looking ahead, certain first quarter results may not be sustainable in the current environment. For the second quarter, we expect the following: Spotted loan growth but at a slower pace than we had experienced in 2012.

We expect net interest income to decline by approximately 2% to 3% compared to the first quarter due to a decrease in purchase accounting accretion. We believe expenses will increase by approximately 2% to 3% in the second quarter over the first quarter.

The provision should be in the range of $200 million to $300 million. Finally, we expect continued progress towards the achievement of our full year capital goals.

Taken together, this was a very good quarter for PNC, providing us with a strong foundation for future growth. And with that, Bill and I are ready to take your questions.

Operator, if you could give our participants the instructions, please?

My first question is just on some clarification on your guidance, Rick. On the expense side, you're now looking for core expenses to be flat to down.

Could you give us a sense at which -- what base you're using for core for 2012? And I'm getting a base of about $9.9 billion.

Is that a correct base?

No, I think -- no, that's very well done. That's exactly right, Erika.

I would look at it as 9.9. It's down from the 10 we gave you before because we had a beat of about $100 million in the first quarter.

Got it, okay. And just my second question is more on capital deployment priorities.

Rick, I appreciate your comments that you are looking to return additional capital to shareholders in 2014. And just to turn this question to Bill, clearly, you are already a rounding error 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?

Sure. First and foremost, and we'll say this every time you ask, we'll focus our capital on client activity and growth and 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 in '14, we've been pretty vocal that we should have capacity, and we'll execute on that. It's -- beyond that, if -- I'll get the question at some point as to whether or not there's 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 and the price expectations we see from some of the smaller banks.

So is the message there, is there any large foreign-owned institutions that would be for sale in your footprint that would absolutely not be on your priority list?

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.

Yes, 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 -- it was down from, I think, 4.80% to 4%. Could you give us a little guidance on where you think that -- those things are going to go in the quarter or 2?

Yes. 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-to-quarter straight through 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 and our ability to have the hedge we expected just wasn't there.

Rick can tackle off the margin question.

Yes. 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 were expecting. I think what we didn't expect was the lower volume levels.

For the year, we're 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.

And I know HARP loans played a pretty decent part of your production last quarter -- I mean, last year. Have you -- I mean, is that going down in percentages, and do you expect that?

I mean, what do you expect that to pan out over the year?

Well, we ended about 30%. And I -- 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're not expecting any big change in the percentage.

Because a lot are even talking about burnouts. Some of the bigger shops thought that most of their HARP loans have burned out.

But do you think you still got plenty of HARP stuff in your portfolio?

Part of -- you've 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.

Just a follow-up on some of the expense comments earlier. I guess, if you're already at a $500 million run rate in the first quarter and you're targeting $700 million by the end of the year -- I think you've talked about closing another roughly 150 branches throughout this year, and I'd imagine there are some other back-office areas that are being addressed as well.

So I guess, why won't we be at a higher run rate by the end of the year than the $700 million?

Well, you're naturally going to be at a higher run rate. Given -- keep in mind, that's an annualized number, so it really means we saved $125 million in the first quarter, which will repeat through the other 3 quarters.

So that's your $500 million. And the reason why you're there is you've got the momentum of the initiatives you had in the prior year, so they get the full year impact into the first quarter, you see that immediately.

Second thing is we got a big benefit of almost $25 million in the first quarter on mortgage foreclosure, $25 million for the quarter and $100 million for the year. So the fourth -- it's going to be harder sledding to increase that number for the rest of the year, but we should easily get it to $700 million.

Yes. I mean, the one comment I'd make, Matt, we won't declare victory at $700 million.

So we're going to get as much as we can get out of the company here and stay focused on it. That's just kind of the number we have out there right now, but it's not a stepping-stone goal.

And then I guess, on the flipside, in the last couple of years, you've talked about some continuous improvement costs but then a lot of it being reinvested. And this year, you've obviously said there will be less reinvestment versus the savings.

But just as we think about the pace of reinvestment throughout this year and beyond, are you getting to a point where your -- it'll be meaningfully less? Or is it going to continue at that kind of $500 million range?

It's hard to look out very far. I mean, remember, in the last year, in particular, as we've built out the Southeast, we had a lot of investment in people, in facilities, that cost last year in particular.

Now we carry those -- that run rate forward, so it'd be higher than it otherwise might be. We also, through time, and will continue to spend on risk management initiatives as it relates to Basel II and CCAR and core infrastructure, but I don't know that we'd see that accelerating.

No, no. Matt, the only thing I'd mention, if you recall, when we talked about the full year $700 million, we had $550 million being invested, $150 for unidentified items at the moment, but we didn't need that portion of the $150 million in the first quarter.

So we still have that $150 million in our full year forecast.

Okay. I guess what I'm just trying to figure at is -- I mean, it seems like, this year, the core costs, I mean, you said flat to down, so maybe there's a downward bias this year.

I'm just trying to figure out if we'll see net expense reductions again this year and next year if the revenue environment remains challenging. That's what I'm trying to get at.

Well, if the revenue environment stays challenging, and I expect it will. You're going to see us continue to focus on it.

We'll see what the end result of that is. But beyond kind of the comments we've got out, that Rick's put out there, on the $700 million and the flat to down, that's probably the best we can forecast at this point.

Yes. And I think, Matt, that we positioned ourselves well for '14 by keeping expenses pretty flat throughout the year, whereas in prior years, we had an increase in expenses through the year, and that automatically put you at a higher level.

So we're -- we can't give guidance on '14, but we're clearly positioning ourselves for the right actions.

Can we spend a minute on Basel III?

Sure.

Would you guys be willing to give us a Basel III risk-weighted asset number?

We haven't disclosed that yet. And we've just chosen not to simply because we're just entering the parallel run January 1.

So we've just chosen -- we've given you the ratio, we're going to continue to monitor that and continue to grow it. And I think, as we get more and more comfortable with modeling and some of the other conservative estimates we've made in the calculation, then I -- we'll put it out at some point in the future.

Okay. And you mentioned the benefit from enhanced modeling this quarter.

Do you see opportunities for further RWA mitigation?

Well, it can go both ways. I think that's what we got to be careful, but I think I'm hopeful that we've been more conservative than not.

And obviously, it's -- part of this, by the way, isn't just better modeling and so on, it's also the rules are changing. And we have the market risk rule, you have the securitization rules, and we refined our modeling on that.

So you had a number of items that we were able to refine this quarter to improve the risk-weighted asset number.

Yes. But you have to go back and remember that we became a Basel II-mandatory bank much later than most of the other people who had to report it.

So in our own internal numbers, certainly early on, our variance around our estimate was probably wider than we would've liked, which is why it took us a while to disclose it. Through time, we're just kind of narrowing the variance on that expectation.

But Rick's right: It -- we'd like to think that we're still conservative, but it can move both ways.

And then just switching to loan pricing and competition. Are there particular areas, whether it's auto or commercial, that you're really seeing, whether it's terms or pricing, issues that concern you?

We could just answer yes to all of the above. A couple of sound bites: In the smaller balanced stuff, so think this as banking and commercial, it's interesting, the spread compression on new stuff has largely kind of stopped.

I mean, it's down a couple quarter-to-quarter. And what we're seeing is actually extension in terms and weakening structures to why we're losing deals on the small side where guys are going out 10 years now.

You've seen it on indirect auto, right? The banks have been on fire and growing balances there.

We grew balances pretty aggressively last year. We're reaching the point now where we're willing to give up volume here because the spread levels have kind of gotten down to the point where our returns on equity are basically at the margin.

In the larger commercial side where things need to be syndicated, let's leave out leveraged loans for a second, things are -- they're tightening but structures are still same. And for these to go to a handful of banks, it's still decent value on that, still decent spreads and asset base.

We've seen compression in real estate but thus far not to the point where I would be worried about it. Perhaps starting to see some of that multi-family projects that are coming on.

But it's getting tight. People are chasing assets.

There's no yield on securities. And they're going to chase loans, it's not a surprise.

And what we do when that happens is we'll gradually change our focus from new loan balances to cross-sell and harvest all the new clients that we added over the last couple of years, which we're pretty good at.

Guys, it's actually Ian Foley for Ken. Just wanted to start off at the margin.

Could you kind of just walk us through the puts and takes over the next quarter and just what you have left in terms of margin-ed events over the year?

We've given guidance that it'll be down 2% to 3% primarily because of purchase accounting accretion...

Net interest income. Let's say cost of [ph] margin [indiscernible].

Yes. I'm sorry.

For net interest income, we've given guidance. But we don't typically give margin guidance, so I'm not going to necessarily get into that.

Okay. But could you give some of the put -- just kind of what you have left in terms of CD repricing, debt calling, et cetera?

Not a lot on the CD side. I mean, obviously, all the CDs that we have priced to National City, they're gone.

We finished all that repricing. You did see overall cost of funds drop during the quarter at the same time we saw on the core.

At the same time, we saw the interest-earning asset margins declined. So we're able to keep the margin stable in this quarter, but we will run out of room, clearly, on the liability side at some point.

And as a result, I would expect at some point, and then it continues to decline.

Okay. And then a quick question on the corporate services line.

Just in terms of how it builds over the year, do you think that can get back over $300 million as time goes on?

Absolutely. I think, if you look back at the prior couple of quarters before that, we were up to $275 million, I think, in the third quarter.

And I think if we'd add customers and added activity, I think we can certainly get it back up. But a lot of it is going to have an impact on how much lending goes to bank balance sheets now that affects some of the M&A activities, syndications and derivatives on the back end of that.

So we'll just have to watch and see how the lending market progresses.

Coming back to the loan terms that you guys were just referring to, can you put that in contact -- context to what we saw in the '06-'07 time period versus today? Are you guys seeing terms and conditions that are as weak as they were back then?

Or are they weaker compared to 2009?

It means that nothing is back to where it was on '05 on a spread or structure side. We're gradually grinding our way lower, but we're not through the threshold of where we would see, for the most part, decent -- still decent returns on credit.

And there's different pockets. The very -- the commodity-like corporate loan where there's nothing special about it, one bank can take it down without syndicating it.

That's where you see most of the pressure. Or a stand-alone real estate loan, CMBS market is back and putting competition into that.

Where we -- the thing that we did well with all through last year and this quarter is our specialty lending activity whether it's our asset-based lending, some of the activities we have in real estate, our equipment finance activity, public finance, the securitization activity that kind of has left the capital markets, it can come back on balance sheet. Our growth is coming from those areas, which differentiates us, and not so much where we're seeing a real strong competition in the plain vanilla product.

But even the plain vanilla isn't back to where it was in '05 where it just -- it got pretty silly.

The second question is regarding -- Rick, you just were talking about the corporate services. The weakness in the quarter, could you go over again why the -- it came in at $277 million versus where you were in the fourth quarter at $349 million?

Yes. The -- it wasn't so much the weakness in the quarter, as it was an outstanding fourth quarter.

I mean, we have $70 million in the fourth quarter in M&A fees, just to give you an idea, but down to $16 million in the first quarter, so -- and typically, that might run at about 20 a quarter. So it -- marginally weaker in the first quarter, is what I would say.

It was really just a very strong fourth quarter.

Yes. Fourth quarter, they -- the pipeline kind of got cleaned out as people were raising ahead to get deals done prior to the uncertainty on what was going to happen with taxes.

And the one thing to remember about our derivative activity: it basically goes along with our new loan activity, right? So we're not -- we don't cover traders and hedge funds and so forth.

We cover corporations, and they hedge loans. So when loan activity is robust and syndications are robust, you'll see our derivative income be the same.

Great. And then finally, can you give us some more color on the decline in the consumer lending?

Was it primarily due to pricing? Or what were some of the factors there?

It's different story in each bucket. I think education lending is self-explanatory.

I think, in card, we just saw less utilization as we turned the year. Some of that's seasonal.

Indirect grew but at a slower pace than we saw last year. And the business banking area was kind of a wash between origination and runoff, which we'll continue to see on the acquired books.

I guess some equity was more or less flat again.

So I think most of the things that I actually wanted to ask about expenses have been asked and answered. But going through the line of business stuff, I thought it was interesting, in the mortgage business, you had slightly down earnings relative to a year ago, but the capital doubled.

So the return on capital was down by 2/3. So could you talk a little bit about how you would envision that business getting to an acceptable return on capital?

We have guys scrambling through sheets here. So I'm not sure I can explain exactly what happened to the capital number.

I think the challenge for mortgage, for us and everyone else, obviously is that, when the refi wave burns out, it's going to be -- and as you go towards that margin's decline, we're going to have to get expenses out of the business. Ultimately, long term, we believe that we can get a production level at an expense level that allows us to get a decent return out of that business.

But for us and everyone else, it's going to be noise in between here and there as the business rightsizes when the refi wave ends. Do you have anything...

No.

Sorry, go ahead.

Just -- yes. One other thing, kind of in a related area.

We'd had some discussions in the past about asset management and the investment process that you're making and the fact that your expenses are kind of growing, at least roughly in lockstep with revenues, and some quarters have been higher. Where do you stand on that?

And when can we see -- I mean, you had good numbers there but not seeing that operating leverage yet.

Yes, the breakeven on adds, and we continue to add and we'll add this year, it's running, what, Rick, 18 months on average when we bring new people into a new market. And we have history now to kind of prove that and roll forward, and we see it in our sales momentum and growth.

But it's going to take a while, right? We're -- we fundamentally changed the focus we have on this business and want to materially change the size of the business.

And so we've invested in people to do that. Then we've changed the folks inside the company to get the whole company to sell the product, in effect, through referrals, and we're seeing great traction on that.

To be honest with you, we're really pleased with the fact that, by and large, we have been able to pay for it as we go along off of new revenue, which if you think about the number of people, I think we've added 300-plus client-facing people for the last bunch of years and managed to hold things flat. That's a pretty outstanding accomplishment.

Your -- just wanted to find out. I know that the new guidance on levered loans came out about 3 weeks ago, and my understanding is that the guidance wasn't really all that changed from the initial proposals a year ago.

Maybe if you could comment on the impact of those new -- of that new guidance, if you've seen any, if you've been complying with it. Any color would be appreciated.

Sorry, guidance from where?

Yes.

The Federal Reserve put out new guidance on levered loans. It was on March 19...

I would tell you, we play such a tiny role inside of that. It hasn't hit my radar.

The loan growth that you're seeing inside this company certainly isn't coming from that space. And to the extent we had loans that kind of looked levered or higher risk, they exist in our asset-based lending book.

And they aren't, in the end, because they're secured with a monitored borrowing base. So we don't really play in that space.

I suspect they put it out -- I don't know what was in it, but I'm sure they put it out because we've seen some pretty frothy terms in structure and price in the levered loan market, largely on the large corporate side, which we don't play in either.

Bill, I think, in a competitor conference a few weeks or month ago, you had expressed some confidence that mortgage trends in '13 is going to be above '12. And I think you've pointed to some improvement in processes, talked about shrinking some closing times down pretty aggressively.

And then your comments today, a little bit more cautious but then you're talking about purchase, doing more in the purchase side. Do you still feel confident that '13 numbers can be above '12?

Or has the recent trends changed your mind a little bit?

Trends have changed my mind a little bit. I would tell you that our production numbers ought to be above '12.

You get there if you simply straight-line what we did in the first quarter, so that's not a heroic assumption. The challenge is, we see margin compression.

So total revenues, it'll be a fight to get them to be flat. And so that is a change.

I -- frankly, we kind of underestimated the degree of difficulty in adding mortgage originators as we got into this year. The competition for people got really hot, and we basically faded off of paying that much money for new people into the company.

But it ought to be -- at the end of the day, it's going to be a good performance. It's -- and the difference isn't material to PNC.

It's -- just it's a little worse than I had hoped. And yes, so I was wrong.

Fair enough. And I think, Rick, in your comments, you're talking about pipeline for C&I building in April.

Is there anything -- if I heard you wrong, correct me, but if that's the case, is there any one industry or perhaps region that you can point to that is showing maybe some of that recovery in April?

The building I saw in March and April was of nothing in January and February. So -- but it's clearly in the specialty lending areas, as Bill mentioned before, whether that be commercial real estate, public finance, equipment leasing, commercial real estate and so on.

Yes. It's interesting that, the big guys talking about market activity, they kind of said January and February were strong and March fell off.

And for us, it was just the opposite. Jan and Feb for middle market was really, well, kind of scary, it was weak.

And March came back pretty strong as a sales month. And that's kind of carrying here into April but not at levels that are breaking records here.

With the RBC deal closing over a year ago, I was wondering if you could talk about branch or customer profitability in the newer Southeast markets. I know you mentioned earlier the business wins in the first quarter, but are you starting to see higher products and servicers -- services per customer and, call it, transitioning away from what some of the critics of the deal felt was a one-product customer base?

Well, look, anecdotally, I can tell you that we're growing, as you saw, from households to corporate clients, wealth clients and through-the-door, and we're selling them more products. We don't have accurate metrics at this point as you think about the changes that are going on in that client base because we continue to run off loans that just aren't core to what we would want to hold as we grow new customers and then cross-sell their existing customers that we do on a whole.

So progress is good anecdotally, and we need to work on being able to come up with better metrics longer term.

Yes, I think, to Bill's point, the best you can hope for in the first year of operations is to maintain the balances flat to up. And we've been able to increase our balances by about 6% in loans despite the runoff over the course of the year.

So we're real pleased with that.

First question, Bill, just going back to some of your comments on auto possibly kind of scaling back volumes in terms of as you relate it to margins, if you will. Just curious, as it relates to those volumes, any impact or how you're thinking about the recent -- the noise coming out of the consumer protection board as it relates to kind of pricing, the upfront charges within that market?

Is that any impact on that?

Well, it is a concern, but they're unrelated. And in terms of -- we're basically holding the price, so that's going to cause volumes to decline, notwithstanding, I guess, March was kind of the best in 5 or 6 years in auto production.

But the CFPB's look-through to dealers on disparate impact and whether or not dealers are charging unfairly the markup on top of our price, that'll have to play out. And it's something that we, in effect, are being asked to police.

And so I think the whole industry is waiting to see how that plays. We, of course, try to monitor that with our dealers, but this is kind of unknown territory as to how it plays out, and we're watching.

Okay, but for the time being, it's not really affecting how you're looking at the business itself. And again you're focused on...

Well, it affects how we choose dealers, but it always has, right? So in some ways that the CFPB kind of coming out and making this statement, I'd like to think that we were pretty good in our dealer selection that we work with through history to take that sort of thing into account.

Okay, great. And then just secondly, just in terms of credit, maybe Rick, just in terms of some of the noise with the policy changes in Q4, Q1.

The provision guidance has stayed relatively consistent the last several quarters, if you will. How should we think about now in terms of the past dues obviously getting better and so forth?

How do we go -- how should we think about in terms of the actual level of criticized assets, how that's trending in terms of the pace, as well as the charge-offs, on a go-forward basis after you strip out some of the noise?

Well, I think, you're going to continue to see improvements in the underlying credit quality statistics. And we've been running -- if you take out the unusual adjustments, around $300 million of charge-offs in the quarter, I think that'll continue to improve over time.

And I believe that still puts us in that $200 million to $300 million range as we're obviously seeing a faster pace of improvement on the commercial side than we are on the consumer side and so, as a result, releasing some reserves on the commercial side. Not yet ready to release a lot of reserves on the consumer side, we still have a large pipeline of IOs and POs coming to maturity over the next 5 years or so.

And I think we got to keep watching that to make sure that we keep funding our reserve levels to replenish the charge-offs that we're seeing.

Kind of curious [ph] on kind of 2 sections. One was more just technically on -- you were talking about the $1.76 and not thinking that, that would move lower as you kind of move forward.

You highlighted 2 things, which was the increase in expenses related to marketing and trust preferred. You also [indiscernible] on the NII.

The other thing I was wondering about was, the tax rate was a little bit lower this quarter at around 24%. In the past years, it's been around 27%.

Was that another item that would kind of go on that list that was favorable this quarter?

No, we were expecting about 25%. And we got some isolated credits.

I think we've given guidance of 25% to 26%. Got some isolated credits in the first quarter, which made us at 24%.

So I think it'd go back to 25%, you're fine there. And the other thing too is, in the wording, we say "may not be sustainable."

We're not giving up on $1.76, but we mean, clearly with the trends of low rates on NII and further higher expenses, it'll be a challenge to keep it at that level.

And did you -- out of the 2% to 3% increase in expenses, how much of that will be related to the trust preferred expenses...

Well, what we did is -- the trust preferred could be anywhere from $15 million to $45 million, $48 million, somewhere in that range. And also you've got, marketing is going to go up.

We expect marketing to increase anywhere from $25 million to $35 million. I think the -- take each of those, you get a range of between 2% to 3%.

Okay. And then Bill, just a general question to you.

As you are kind of taking the reins over now, what are the things that -- 2 or 3 things you're focused on as you begin to go through the PNC and start to create the next direction here?

So we got to execute. And we're not changing the direction we were going in.

We've got to execute on the Southeast and build that out to a sustainable size and turn it into look and feel like the rest of PNC's markets. We'll continue on the wealth and investing initiative.

We continue to build a sustainable and profitable mortgage business. And then long term, and this is over years and years, is the rebuild and rethink of the retail business as it relates to changing profitability, changing demographics and changing technology.

We've got to get that right. And then finally, near term, the expense initiative that we have in the company as we grind our way through, what is a slower economy and low interest rates.

I -- people shouldn't expect to see a change in direction of PNC beyond executing the best we have on the table today. And we're well set up to do that.

This is -- actually, it's Jason Harbes, on for Matt. Most of my questions have been asked and answered.

I just wanted to ask, as far as the loan growth that you're expecting in the second quarter, geographically, where are you seeing the greatest pockets of strength or, conversely, weakness? And also, by product, is it going to be continued C&I that's kind of leading the growth?

Or is there anything -- any color you can give us there would be appreciated.

It's pretty geographically dispersed. I don't know that there's a particular region of the country that would stand out in terms of where growth is coming from.

And while it's bucketed inside of C&I, the growth that we're seeing in pure C&I is really in asset-based lending, which while C&I related is kind of a specialty product and something that we've gained a lot of share and credibility in. And we've seen less growth in traditional corporate revolvers, certainly in terms of utilization, even though we've grown clients.

Real estate balances, Rick, you may have a better number, but we -- because we got into the projects early 3 years ago, we will see balances grow simply through utilization increase as they finish out the projects. And we continue to see balanced growth in equipment finance, which is spread pretty much across the footprint as well.

Yes, I would say, spot year-end 2012 to spot year-end 2013, we're looking at mid-single-digit loan growth, which is driven primarily by the commercial side.

I forgot to ask a question on issues with the regulators and the credit. Was this something new, or is this just a follow-up to what they did last year with some of the banks in terms of the second liens when the first lien is in trouble?

Yes, Gerard, this is a follow-up. We took the provision impact in 2012, but we were unable to operationalize the changes until the first quarter of this year in terms of the impact of charge-offs, nonperforming loans, non-accruals and all other things that have to take place for that.

So yes, we're just catching up, to be honest with you.

Okay, good. And then the second part of the question: I know you've talked, Rick, about the IOs and POs and the impact that may have on charge-offs and provisions as we go forward.

Can you guys talk about the new loans both primarily consumer, I guess, on what the credit behavior has been? Because when you look at the monthly credit card delinquencies from the large issuers, the credit card delinquencies are at incredibly low levels.

And then if you look at Fannie Mae's cumulative charge-off numbers and delinquencies for vintages of '09, '10, '11 and '12, they are very low. Are you guys seeing that in your new business?

Not the old IO, PO stuff, but what about the new originations over the last couple of years? Are they trending better than expected on credit?

I mean, they are trending extremely well. I don't know if it's -- is it better than expected.

I think it's certainly better than through cycle, which is probably true, which is what you're seeing in all the others' statistics as well. But the one place I would tell is that we're probably potentially even too conservative is in card, where we don't have enough people that revolve balances.

Our people are basically paying the -- paying off their real high FICO. And we could probably tend to take a little bit more risk there than we're doing today.

But the rest of it, I mean, look, I think all the consumer delinquencies at this point are kind of below cycle levels, at least as it relates to new production.

Okay, all right.

Well, listen, thank you, everybody, for joining us. And we look forward to talking with you again next quarter.