PNC Financial Services Group Inc (PNC) 2016 Q1 法說會逐字稿

Good morning, my name is Emma 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. Bryan Gill.

Sir, please go ahead.

Thank you, operator.

Good morning.

Welcome to today's conference call for The PNC Financial Services Group.

Participating on this call are PNC's Chairman, President and Chief Executive Officer Bill Demchak and Rob Reilly, Executive Vice President and Chief Financial Officer.

Today's presentation contains forward-looking information.

Our forward-looking statements regarding PNC performance assume a continuation of the current economic trends and do not take into account the impact of potential legal and regulatory contingencies.

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 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 investor relations.

These statements speak only as of April 14, 2016 and PNC undertakes no obligation to update them.

Now I'd like to turn the call over to Bill Demchak.

Thanks, Bryan, and good morning everybody.

As you've all seen this morning PNC reported net income of $943 million or $1.68 per diluted common share in the first quarter.

Now that was down linked quarter and year over year as our results were impacted by weaker equity markets and lower capital markets activity which impacted our fee revenues as well as continued pressures across the energy industry which resulted in higher than expected loan-loss provision.

In addition to normal seasonality, the weaker equity markets impacted the equity earnings that we received from our investment in BlackRock whose results you've likely already seen today.

And while our overall asset quality remained relatively stable our loan-loss provision did increase $78 million to $152 million this quarter.

Now this increase is primarily related to reserves for our oil and gas and coal exposure.

In spite of these factors it was a pretty solid quarter for PNC as we continue to focus on the execution of our strategic priorities.

We grew loans and deposits on a spot basis this quarter.

You saw that net interest income increased linked quarter driven by growth in core NII and importantly non-interest expenses were down about 5% due to seasonally lower business activity but also our ongoing focus on disciplined expense management.

We also saw good momentum in some of our businesses.

In the Corporate & Institutional bank we saw continued year-over-year growth in treasury management as we benefit from new customer wins, strong growth trends in corporate payments and repricing activities.

We also maintained momentum in our underpenetrated markets, particularly across the Southeast and Chicago where we are building high-quality customer-driven franchises.

Wins in the core middle-market and cross-sell demonstrate the efficacy of our model.

Within our Retail bank we saw good year-over-year and linked quarter growth in earnings and we continue to see improved efficiency within the business as we execute our ongoing strategy to reinvent the Retail Banking experience with more customers migrating to non-branch channels for most of their transactions and the expansion of our universal branch model.

It was a decent quarter for our Asset Management Group also.

Inside this business fee income was down just 4% linked quarter and 2% year over year despite the weakness in the equity markets during the quarter.

Meanwhile AUA actually ticked up during the quarter as we continued to see positive flows.

At the same time, however, despite an increase in NII this quarter we continue to be impacted by interest rates that remain near all-time lows.

And we have had to adjust to the reality of at least one less rate hike in 2016 than we had previously forecast.

Now Rob will have more to say about that in a few minutes.

But on the whole, although this quarter will be reported as a miss we were solid in terms of our execution against the things that are in our power to control.

Despite the hit to provision this quarter, beyond the energy book in certain exposures in the steel industry, we don't see negative trends in other areas of credit.

In fact, our total nonperforming assets have declined by about $200 million year over year and our core businesses performed well relative to market conditions in the ongoing interest rate environment.

Now Rob will speak to the details of our guidance.

But I would say as we look out at the landscape the conditions support our view that the fundamentals remain solid in the US economy.

The labor market continues to improve and the tight job market is going to eventually lead businesses to raise wages which should in turn support consumer spending.

Also we see housing and commercial construction offsetting drags from trade and the downturn in energy production.

Within our businesses we continue to make progress against each of our strategic priorities.

We are working hard to continuously improve the customer experience across our lines of business and I am confident in our long-term ability to continue to create value for our shareholders.

And with that I will turn it over to Rob for a closer look at our first-quarter results.

And then we will take your questions.

Thanks, Bill, and good morning everyone.

PNC's first-quarter net income was $943 million or $1.68 per diluted common share.

First-quarter results reflected the expected seasonal declines in business activity.

However, as Bill mentioned results were also adversely affected by weaker equity markets, lower capital markets activity and energy portfolio pressures.

Offsetting these items were growth in net interest income and strong expense management.

Our balance sheet is on slide 4 and is presented on an average basis.

Commercial lending was up $2 billion, or 2% from the fourth quarter, primarily reflecting growth in commercial real estate along with increases in large corporate loans.

Average consumer lending declined by $865 million, or 1% linked quarter in part due to the year-end D recognition of purchase impaired loans as well as decreases in home-equity and education loans.

Investment securities were up $2.4 billion or 4% linked quarter and increased $13.1 billion or 23% compared to the same quarter a year ago.

Portfolio purchases were comprised primarily of agency residential mortgage-backed securities and other liquid debt and asset-backed securities.

Our interest-earning deposits with the Federal Reserve averaged $25.5 billion for the quarter, down $6 billion from the fourth quarter as we shifted some Fed deposits to higher-yielding assets.

On the liability side total deposits declined by $803 million or less than 1% when compared to the fourth quarter as growth in consumer deposits was more than offset by seasonally lower commercial deposits.

Of note, consumer savings deposits increased by $5.5 billion linked quarter reflecting our strategy toward relationship-based savings products.

Total equity remained stable in the first quarter compared to the fourth quarter.

Retained earnings and higher AOCI were essentially offset by common share repurchases.

Turning to capital, as of March 31, 2016 our pro forma Basel III common equity Tier 1 capital ratio fully phased-in and using the standardized approach was estimated to be 10.1%, essentially flat linked quarter as we continued to return capital to shareholders through our dividends and share buybacks.

During the first quarter we repurchased 5.9 million common shares for approximately $500 million.

As a result period-end common shares outstanding were 499 million, down 21 million or 4% compared to the same time a year ago.

For the four-quarter period that ended March 31, 2016 our total payout ratio including dividends and buybacks under the current share repurchase program was 85%.

Finally, our tangible book value reached $65.15 per common share as of March 31, a 6% increase compared to the same time a year ago.

As you can see on slide 5 net income was $943 million.

Highlights include the following.

Net interest income increased by $6 million linked quarter despite a lower day count driven by growth of $10 million in core net interest income.

Non-interest income was $1.6 billion, a decrease of $194 million or 11% linked quarter.

This decline was primarily driven by weaker equity markets and lower capital markets activity along with seasonally lower client revenue.

Non-interest expense decreased by $115 million or 5% compared to the fourth quarter.

Expenses continued to be well-managed, due in part to our continuous improvement program.

However, expenses also declined as a result of lower business activity.

Provision expense in the first quarter was $152 million, an increase of $78 million compared with the fourth quarter due to certain energy-related loans which I'll discuss in more detail in a few minutes.

Finally, our effective tax rate in the first quarter was 23.5%, down from the 26.1% rate in the fourth quarter.

For the full-year 2016 we continue to expect the effective tax rate to be approximately 25%.

Now let's discuss the key drivers of this performance in more detail.

Turning to net interest income on slide 6, core net interest income increased by $10 million linked quarter, primarily driven by higher loan and securities balances and higher loan yields, partially offset by the impact of consistently low interest rates and one less day in the quarter.

Purchase accounting accretion declined by $4 million linked quarter.

For 2016 we continue to expect purchase accounting accretion to be down approximately $175 million compared to 2015.

Net interest margin was 2.75%, an increase of 5 basis points compared to the fourth quarter.

This was primarily due to the impact of lower Fed deposits and higher loan balances and yields.

Turning to non-interest income on slide 7, in addition to normal seasonality which typically impacts the first quarter, weaker equity markets and lower capital markets activity contributed further to the linked quarter decline of $194 million.

Asset management fees, which includes earnings from our equity investment in BlackRock, were down $58 million or 15% on a linked quarter basis.

Of that amount PNC's asset management group represents $8 million of the decline.

Despite the decline in the equity markets discretionary client assets under management increased by $1 billion linked quarter to $135 billion, reflecting solid net flows.

Consumer services fees and deposit service charges were both lower compared to fourth-quarter results, reflecting seasonally lower client activity.

Within consumer services, brokerage fees increased 4% linked quarter driven by account activity and growth.

Compared to the first quarter of last year, consumer services fees grew by $26 million or 8% with growth in all categories.

Highlights include increased debit and credit card activity along with higher brokerage income, all consistent with our efforts to meet the broad financial needs of our customers.

Service charges on deposits increased by $5 million or 3% compared to the same period a year ago, driven by higher customer activity.

Corporate services fees declined by $69 million or 18% compared to fourth-quarter results which are typically strong.

However, beyond seasonality this category was also affected by lower activity levels in the broader capital markets.

As a result first-quarter results were also lower year over year.

On the positive side we saw good trends in our treasury management business on a year-over-year basis and we expect that to continue driven by strong customer relationships and new products.

Residential mortgage non-interest income declined by $13 million or 12% linked quarter.

Most of the decrease was driven by our hedging results.

Mortgage originations were down compared to the fourth quarter due in part to closing delays resulting from the implementation of new disclosure requirements.

However, servicing fees increased both linked quarter and compared to the same quarter a year ago.

Other non-interest income decreased by $30 million or 9% linked quarter primarily due to lower gains on asset dispositions.

We also had slightly lower gains on the sale of Visa stock.

Going forward we would expect this year's quarterly run rate for other non-interest income to be in the range of $225 million to $275 million excluding net securities and Visa gains.

In summary, despite weaker equity markets and lower capital markets activity in the first quarter we continue to believe that our underlying trends for fee income are favorable.

And we expect that to continue due to a strong new business pipeline.

Turning to expenses on slide 8, first-quarter levels decreased by $115 million or 5% reflecting our continued focus on disciplined expense management along with both seasonal and lower market related business activity.

The decline linked quarter was primarily due to lower variable compensation and employee benefits.

As we previously stated, our continuous improvement program has a goal to reduce costs by $400 million in 2016.

We're one quarter of the way through the year and we've already completed actions to capture more than one-third of our annual goal.

We remain confident we will achieve our full-year target.

Through this program we intend to help fund the significant investments we are continuing to make in our technology and business infrastructure throughout the year.

As a result, we continue to expect that our full-year 2016 expenses will remain stable to 2015 levels.

Turning to slide 9, overall we view our firm-wide credit quality as relatively stable compared to the fourth quarter as improvements in our consumer loan and commercial real estate portfolios were offset by deterioration in our energy portfolio.

Total delinquencies including the impact of energy loans continue to decline on both a year-over-year and linked quarter basis.

In addition, it's important to note that many of our customers benefit from lower energy prices.

What the graphs on slide 9 depict is the impact on our credit metrics of both energy-related loans as well as our non-energy-related portfolio.

Nonperforming loans increased by $155 million or 7% linked quarter as $259 million of new nonperforming energy loans were partially offset by $104 million net reduction in non-energy-related commercial and consumer portfolios.

On a year-over-year basis, nonperforming loans decreased by $124 million or 5% even with the impact of the energy nonperforming loans.

Provision for credit losses increased by $78 million linked quarter and total $152 million, over half of which was energy-related.

Non-energy provision increased by $21 million, reflecting the continuing normalization over the historically and in our view on sustainably low levels we experienced throughout 2015.

Net charge-offs increased to $149 million in the quarter resulting in a net charge-off ratio of 29 basis points.

Energy-related charge-offs represented approximately 17% of losses.

And the remainder was due to consistent levels of charge-offs for home equity, credit card and other commercial loans in the linked quarter comparison.

Now let's take a deeper look at our energy book.

We view our energy portfolio which represents 1.6% of our total outstanding loans as well defined and properly reserved.

As you can see on slide 10 at the end of the first quarter we had total outstandings of $2.7 billion in oil and gas and $535 million in coal.

Total outstandings in our oil and gas portfolio are up 4% on a linked quarter basis but down 5% compared to the first quarter of last year.

Breaking down the portfolio, we have approximately $800 million in outstandings to upstream exploration and production companies, $1 billion to midstream and downstream companies and $900 million to oilfield services.

We believe this mix is favorable relative to others in the industry.

As you know, our focus remains on the services book and while we have seen some pressure on this portfolio approximately $700 million or almost 80% of the $900 million is asset-based which by definition is collateralized.

As of March 31, 2016 our loan-loss reserves for oil and gas represented 5% of outstandings in this portfolio.

These reserves include the impact of the recently completed shared national credit exam.

Utilization levels for oil and gas have remained fairly constant.

They were at 34% as of March 31 of this year, essentially unchanged from the prior quarter and the same time a year ago.

Total unused commitments were $5.4 billion as of March 31 of this year.

Redetermination of the borrowing basis for E&P loans is ongoing and we would expect to see continued reductions in lines as a result.

Approximately 38% of our oil and gas loans are criticized, up from 28% linked quarter.

Turning to coal, our portfolio significantly contributed to our provision this quarter.

Going forward, however, while coal prices remain under pressure our overall portfolio is small and our remaining risk is concentrated in a handful of specific credits.

Our reserve against this portfolio is 15% and criticized balances represent approximately 37% of outstandings, up from 27% linked quarter.

Lastly, in regard to our overall energy portfolio we continue to monitor market conditions as well as consequential impacts to other businesses.

If energy prices remained pressured this will continue to affect our provision.

In summary, PNC posted a solid first quarter driven by higher net interest income and strong expense management.

Offsetting this were weaker equity markets, lower capital markets activity, energy pressures and seasonality.

Looking ahead, we believe the economy will continue to grow at a steady pace based on an improving labor market and solid overall economic trends.

Because of this our current forecast anticipates that the Federal Reserve will raise short-term interest rates in both June and December with each increase being 25 basis points.

Our full-year 2016 guidance continues to call for modest growth in revenue and stable expenses which by definition positions us to deliver positive operating leverage.

Looking ahead at the second quarter of 2016 compared to the first-quarter reported results we expect modest growth in loans, we expect modest increases in net interest income, we expect fee income to be up 10% to 12%, reflecting the higher anticipated business levels in the second quarter.

We expect expenses to be up in the mid-single digits, primarily as a result of the higher anticipated business activity as well as seasonality.

And we expect provision to be between $125 million and $175 million which reflects our view of continued near-term energy pressures.

With that Bill and I are ready to take your questions.

(Operator Instructions) Betsy Graseck, Morgan Stanley.

Hi, it's Betsy, can you hear me?

Yes, I just wanted to get a sense, you did obviously put move significant amount -- or not a significant, but a part of your investments with the Fed into other parts of the portfolio.

I just want to get a sense of where you've changed.

It looks like it accelerated a little bit this quarter.

Is that accurate?

And is there more to do that would potentially help support the NIM as we move forward here?

Well, the bulk of what you saw in terms of growth in securities actually came from TBAs that we bought in the fourth quarter when rates were a bit higher and settled into this quarter.

So we kind of took advantage of when rates were at that point the 10 year was well above 2.

Now that they have rallied back we're kind of holding the portfolio pretty constant.

And if they stay where they are through time it would actually cause that securities book yield to decline as opposed to see the growth you saw in the first quarter.

Okay.

And then, the second question was just on the pace of NPLs.

And the reason I ask the question is a lot of us came into the quarter expecting that we would see an uptick in NPLs, part of it is the SNC-related reviews.

And some investors are asking, okay, look at prior cycles, is this the beginning of an uptick that's going to last several more quarters or a year plus?

Or are we behaving a little bit differently and trying to get ahead of the deterioration that we're seeing in the oil space, etc.?

Hey, Betsy, it's Rob.

Yes, obviously the biggest impact to NPLs is the change in the energy portfolio which we highlight in the slides.

Underlying that it's still pretty benign when we take a look at the improvement on the consumer portfolios and in some parts of the commercial portfolio that's offsetting that.

So that's why you're seeing sort of stable levels.

But if your question is have we seen the end of NPLs coming from energy, the answer to that is no.

Even inside of our ABL book where we might have very small charge-offs because it's secured, we expect that we're going to have a number of credits that we're going to have to liquidate inside of that book, particularly in the services sector which is what they bank.

So you'll see NPLs continue I think on the energy book.

To the best of our ability and consistent with the SNC review we're fully reserved for what we know today.

Right.

So pace of change can you just give us a sense on that as we sit here?

Look, one thing I'd say about this quarter was there was a couple lumpy credits that you'd like to think aren't going to come through like that again but I can't promise that.

I would expect that this will play out through time.

This quarter we had a couple of lumpy ones that --

All in the energy.

Yes, all in energy.

Got it.

Okay, that's helpful.

Thank you.

That's the biggest point.

I mean we dig through all related areas and reserve for those, too.

But beyond what we're seeing in energy, and as I mentioned in my comments some of the specialty steel guys that supply the energy sector, there just really isn't credit pressure showing up in the C&I space or real estate, and certainly in the consumer space consumers are really strong.

And ex-energy why I see the NPLs going down a little bit.

So there is opportunity to in fact essentially increase the loan growth rate given the fact that you've got a pretty modest outlook for credit at this stage, especially since some players have been exiting?

Well you're not going to see us grow the loan book inside the energy space anytime soon I don't think.

And we've been focused on dropping and continue to focus on specifically dropping our coal book.

But beyond that we are seeing a pickup for example in our ABL book as there's pressures in other areas of leverage lending just on ability for people to get deals done.

We've seen more and more deals come into our ABL book.

If you dug into that you'd see the spreads in that book are up pretty substantially quarter on quarter you know as we're getting pricing power back.

Pricing power and growth in the generic C&I space we're continue to win customers but it is very competitive.

And as you know we don't really change our credit box and we remain focused on the right return on the capital we deploy.

So that will just play out through time.

Got it.

Okay, thank you very much.

Gerard Cassidy, RBC.

Thank you.

Good morning Bill, good morning Rob.

Can you guys give us any color?

Obviously the CCAR was pushed back a quarter and the curveball this year was the negative rate environment.

Could you share with us how it went in your preparation for that in terms of the handling of the negative rate environment from a systems standpoint?

Hey Gerard, good morning, it's Rob.

So we did submit our capital plan and as you know in the one scenario around negative interest rates we had to build out a plan for that.

To your question around operating capabilities, we believe that we can do that.

It would require some manual workarounds but part of the drill was to be able to show that we could handle it.

That doesn't mean that we anticipate it but generally speaking if that were to occur we think we've got the manual workaround to be able to support it.

Great.

And then Bill, in the past on these calls you've talked about an ideal fully phased-in Basel III Tier 1 common ratio and below 10% or below 10.1 where you are today.

What do you think it's going to take for PNC to be able, because currently no you're paying out close to earnings in your combined ratio of dividends and buybacks, what do you think it's going to be able to take for you guys to go over that 100% level?

Not to say that you ask for it this year but what's going to be able to get you to do that?

So many factors in that question.

One is we have to ask for it as you mentioned.

That's the most important.

But the other thing just to remind you we focus on the end result of the stress, not the starting point.

So in a benign environment you know with a consistent Fed stress we had said that we could operate below the 10% which is what you are referring to but we got there by looking at the results post-stress.

I'm not going to comment on this year's CCAR.

We submitted it, we'll wait and see what they say.

But through time and the right environment we ought to be able to drive that ratio down and the way we would do it is by going beyond the 100% in ask.

Again I say that through time.

The Fed has been pretty explicit that there isn't a hard boundary at 100% payout.

So it's a question of having the right environment and asking for it.

And regarding the post-stress capital ratio which I think currently is 4.5% last year, you guys obviously were well above that, do you have a comfort level?

Or do you want to be 200 to 300 basis points above whatever the post-stress requirement is after you go through CCAR?

We do.

We obviously have a buffer built into our capital policy beyond the minimum of the 4.5%.

I would remind you last year in the published results, and correct me if I am wrong here, Rob that while we were well above that minimum that had the phase-ins --

That's right, the transitional --

The transitional calculations.

And of course we're always thinking towards the fully implemented when we actually run our capital plan.

Sure.

And then just lastly coming back to the energy portfolio, could you share with us what percentage of the portfolio is participations in syndicated credits?

And second of the increase in the provision, how much of it was due to the syndicated portion of that portfolio?

I don't have that offhand.

I think generically what you'd find is the midstream and services are more direct.

And since we were newer into the reserve base stuff probably more of that is participations.

But we'd have to dig that out (multiple speakers) later on.

We can get back to you.

Okay, great.

I appreciate it.

Thank you.

Scott Siefers, Sandler O'Neill.

Good morning, guys.

Rob, I was hoping you could talk a little bit about on the expected makeup of the provision guidance, the $125 million to $175 million.

I guess as I look at things the cross-currents seem to be the non-energy portfolio is behaving great but the provision is starting to creep up.

And then obviously the smaller portion of the portfolio that is energy has understandably much higher credit costs associated.

So as you look at that $125 million to $175 million how much would be your best guess for how much is energy related versus non-energy, to the extent you can talk about it?

I can give you some direction in terms of the way that we think about it.

You're right, at a base level, energy aside at a base level we have said for some time we would expect credit costs to normalize off the very, very low level that we experienced in 2015 that I mentioned in my opening comments, but not at a rapid rate.

I think when you take a look at the second quarter, most of the variance will be driven by what results from the energy portfolio and that's why we've built that into our guidance.

And inside of that, particularly as it relates to our coal portfolio, it's a specific handful of credits.

And how some of those might behave the lumpiness of that is where you're going to see the variance.

One of the things we struggle with is provision has generally been so low that a single credit can double provision because we're operating off of such a low base.

So it gives us some pause, frankly, as we think out and put guidance on what provision will be at quarter out.

Obviously we jumped our range from where we were a quarter ago because we were surprised by a couple of credits and thought it made sense to both bring it up a little bit and widen the variance of it a little bit.

All right, that's perfect.

Thank you.

And then just one quick follow-up, Rob, could you offer maybe a little more color as to kind of the activities or market assumptions that you have embedded into the fee guidance in the second quarter?

Sure, sure.

That's a good question.

So our guidance is up 10% to 12% and if you just sort of break the components down I will help you with that map.

The asset management as you know is comprised of both our equity investment in BlackRock as well as our own asset management group.

The BlackRock piece, as you heard this morning BlackRock had an episodic-oriented first quarter.

They do expect some tailwinds going into the second quarter that if they go back into the normal range of what they had had, which they expect, you get to a 10% kind of number, maybe a little better.

Our asset management business is probably in the mid- to high single digits based on the pipeline.

So asset management because it's weighted more toward BlackRock in terms of the second quarter in that range.

Secondly, the corporate services probably growing double digit.

If you take a look into that our M&A business, our markets related were down.

Business pipelines are very strong there so we would expect that to grow within the guidance range.

Consumer services, which has been growing year over year, we expect that to continue probably in the mid- to high single digits that we've experienced.

And then Residential Mortgage, which is small, coming off a seasonally low quarter we would expect production gains, although small in the absolute dollar sense to be comfortably in the guidance percentage range.

That's the math.

Perfect, that's great.

Thank you very much.

(Operator Instructions) Paul Miller, FBR & Co.

Yes, thank you very much.

I've been jumping all over the place today, so I don't know if you answered this question or not.

I know you guys did a really good job talking about your energy exposure.

But what about the second derivative, especially in parts of the Ohio Valley and Western Pennsylvania where I think it's more energy-related than anything else?

Are you seeing any material weakness in some other commercial credits outside of energy and especially CRE?

No, we're not.

And the one place, and I already mentioned it, where we are seeing contagion and we've thought about this and sort of count it as part of our exposure in some cases is inside the metal space.

So the suppliers to energy obviously get impacted, and that's included in some of our reserve build and frankly some of our charge-offs.

We're watching -- just as an aside, inside our local economy, Ohio, Pennsylvania, it's quite strong.

So notwithstanding the pullback in shale and the investment there's no particular weaknesses in the locals surrounding region.

We're obviously watching CRE in certain markets.

You think about exposures that would be down in Texas.

We have some real estate exposures down there that we're watching carefully, but thus far real estate continues to behave very well.

And I think I caught the tail end of the comments because I had to jump around on some calls but are you still in your guidance expecting some rate hikes in 2016?

Yes, we still have two in there.

As a practical matter only one matters because you know the second one would be at the end of the year, it would be it would impact 2017 as opposed to what we do this year.

But that is in there.

Okay, hey guys, thank you for picking up.

John Pancari, Evercore ISI.

Good morning.

A couple of things on energy.

How much of the first-quarter provision was related to coal versus energy, Do you have that?

Or coal versus oil and gas?

Yes, yes, about half.

About half, John.

Yes, half of the 80.

Okay, got it.

And then separately, also on the energy front, do you have the energy NPL or the NPL ratio that is for coal and then for oil and gas?

Well, we have the criticized that we talked about which in both cases is about 37%.

Okay, but the actual amount that's on non-accrual, do you have that?

I have that broken out.

We didn't break that out in the disclosure.

All right, that's fine.

Of the total energy, though, you can extrapolate that.

The total energy nonperforming loans, it has been roughly in the first quarter about half.

Got it.

Okay, all right, and the efficiency ratio held relatively stable this quarter and generally in line with what we were expecting.

Can you just give us your updated thoughts on the efficiency ratio trajectory over time through the back half of this year and possibly some color into 2017, how we could think about it?

Well, sure.

So we don't manage the efficiency ratio.

We're sort of more geared toward trying to deliver positive operating leverage, which we're still positioned to be able to do.

Expenses in general we had a good quarter.

Our continuous improvement program which is designed to generate expense reductions is running a little bit ahead of where we expect it to be.

So that's helping out in the first quarter.

But we are still guiding because of the seasonal factors and investments that we plan to make.

And hopefully and what we anticipate in terms of higher expenses around greater levels of business for expenses to be stable in 2015 and in line with the positive operating levers that we anticipate.

Okay, stable expenses in 2016 versus 2015?

Yes, stable 2016 compared to 2015.

Yes.

Got it.

Okay, that's it for me.

Thank you.

Matt O'Connor, Deutsche Bank.

Hi, good morning, this is Rob Placet from Matt's team.

Just on your outlook for 2Q net interest income, I was just curious how much of an increase you'd consider modest this quarter?

So our guidance was for a modest increase here in the first quarter which was $6 million.

So that's one data point.

Okay, so similar increase?

Yes, I think that's right.

And then on your energy exposure, total exposure of $8.1 billion, I was curious how big of a risk you view line drawdowns in your portfolio and have you seen any of this behavior to date?

In terms of the $8.1 billion and you need to break it down obviously into the components I talked about in my opening comments.

We watch utilization rates and they've been remarkably steady.

So we're at roughly 35% in terms of the utilization.

That's where we were in the fourth quarter and that's where we were a year ago.

So we don't see any big change there.

We would expect over time for some of that exposure to come down because with the redetermination that I talked about in E&P and just some of the general contraction, the utilization rates could change.

One of the issues, it's kind of a misleading number particularly for the asset base book because in effect there is a borrowing base that they can borrow against and only up to that amount independent of what the original line was.

So while much of the DHE in the asset-based book, the draw rates or whatever they are, their ability to actually draw to that amount would be entirely dependent on having valuable collateral to back that loan.

So I think we're going to see as a practical matter the outstandings as values fall and the asset-based book fall and we'll see the lines fall and perhaps outstandings inside as we go through the reserve determination in the E&P book.

Okay, thanks very much.

Ken Usdin, Jefferies.

Hey, thanks a lot.

Just a follow-up on the balance sheet mix and composition, Bill, to your point earlier about the TBAs that kind of that closed in the first quarter and led to a bigger portfolio, just with rates having moved down on the long end I just wanted your updated thoughts on using cash from here, what you're doing with securities portfolio runoff and how you want to try to balance that mix right now?

We're basically treading water.

So we grew and we saw the first bump in the backend late in the fourth quarter and as things have rallied we've effectively been replacing runoff if that.

And we'll continue to do so until we see some opportunity here.

Okay, and then as far as your loan outlook, loan growth has been pretty good and it looks like it's still been pretty diverse.

You had taken a little bit of a pause prior just given that we were seeing some competition and we were kind of long in the cycle.

How do you just look at the competitive landscape in terms of pricing and where you're seeing growth in the commercial side of the loan portfolio as far as your expectations going forward?

It really hasn't changed.

The specialty segments continue to grow, generic middle-market commercial is a tough fight.

So you see growth and we would expect it to accelerate in our asset base book perhaps in equipment finance.

Obviously inside of the real estate space we had strong year-on-year and quarterly growth principally as a result of changing the mix from new project loans to permanent financing term loans.

As you are aware the disruption in the CMBS market and the risk retention rules kind of coming online have driven a lot of that product at good price and structure towards the bank.

So we would expect to see that continue.

Yes, and Ken, just in addition to that on the large corporate loan book we've seen some growth.

Okay got it.

Thanks a lot, guys.

Erika Najarian, Bank of America.

Hey, good morning.

Just a quick follow-up question.

Bill, could you remind us where you are on your systems upgrade project, please?

Everybody always wants to know what inning we're in but rather than talk about that let's talk about what we've accomplished.

We have one new data center up and running.

We've got the second one basically turned on and are starting to plan out migration activities to that.

We're largely through the upgrades to application so that they can run in a virtual environment.

We've done the bulk of our investments in cyber and fraud.

So we're pretty far along and making good progress.

I think in dollars, Rob, if you want to comment last year was our biggest --

That's right.

Our biggest spend, yes.

So in terms of dollars in the innings we're getting to the later innings.

Of course we will pick up some of the depreciation that goes with that along the way.

But we're on our way and by the end of this year, Bill, that second data center will be up and running.

Yes.

And just as a follow-up to that, thank you for giving the color on where you are on the spend.

The reason I ask is it seems like investors are not just interested in that question not just because of how they are thinking about the incremental spend from here, but also I'm fielding questions on whether or not being done or mostly done with the project changes the way you're thinking about your M&A strategy.

And so, Bill, would appreciate your thoughts on that.

You know, it's probably a year ago I made the comment, and I wish I didn't, but I made the comment that we would have the technical ability in terms of having the systems ready to do an integration if we wanted to do that.

But we don't want to do that.

So our attitude on M&A in terms of buying other banks remains the same in that we're basically out of the market.

I don't see value there.

I think there's many other things that we can spend our capital on to offer a better return to shareholders.

You know the thing --

That was clear.

Thank you.

Just as an aside, one of the things that I think people miss as it relates to a lot of the work we're doing in the core infrastructure is what it ultimately allows us to do with customers in terms of product offerings and customer services.

You know, we held -- we actually had an API fest internally here last week where we had employees form teams and opened up all the API for our online, mobile and online banking capabilities and turned them loose to create new service apps for customers, all of which is fantastic but none of which works unless you have an environment that allows you to quickly deploy these new products.

And that's what we're building and that's where I think the big benefit ultimately comes from for all the money we've spent inside the technology space.

Got it.

Thank you.

(Operator Instructions) Kevin Barker, Piper Jaffray.

Good morning, thanks for taking my questions.

I noticed in the auto portfolio you were fairly aggressive in growing that portfolio in 2012 and into 2013 but have since pulled back and have seen very little growth compared to the rest of the industry in the last couple of years.

Obviously your FICO score is very high, near over 750 on average.

Could you just give us a feel for what you're seeing in the industry and what are the reasons why you're not as aggressive as you were in the past?

We're exactly where we were in the past, we're just not growing at the same pace.

We haven't changed our credit box and everybody else has.

By the way that's a pretty consistent practice for us across all of our lending types.

So we've tried to hold true to where we see real economic return in the auto book and we've seen other people as you know drop into the subprime space and go increasing into leasing where we don't play.

The one thing that has grown for us this quarter inside of auto is actually the direct book, you know where we have something called a check ready product where customers in effect get the car loan without going through the dealer.

That continues to grow at a very healthy clip.

But beyond that, we see other people lengthening tenor, going subprime in terms of FICO, higher advance rates --

Taking risks that we don't want to take.

Yes, and you see the delinquencies tick up across the industry as a result.

Is this something you're seeing particularly from the nonbanks?

Or are you also seeing several large banks that are competing in --

You know the answer to that question.

So I'm not going to answer.

Well, I appreciate the color.

Thank you very much.

Matt Burnell, Wells Fargo Securities.

Good morning, thanks for taking my question guys.

Just a question on the consumer growth.

That's been much lower than what you've seen on the commercial side despite what appears to be a bit more demand on the consumer side.

So I guess I'm curious, maybe Rob, can you give us a little more color as to what's going on specifically within the consumer portfolio and why it appears you all are growing that portfolio a little bit slower than peers?

And I'm wondering if there's a decline in the government insured portfolio within other consumer that's maybe hiding some of the core growth there?

Education.

Well that's true in the student loan book that continues to run off.

But there's two big runoff and education lending as we run off the old government guaranteed book and continued declines inside of the home equity space.

Largely while we continue to originate there at a healthy clip just the size of the book that came with a combination of PNC and National City, remember they had a large national business, our production isn't keeping up with --

The maturities.

So it's dropping as they hit maturities.

We've seen drops in small business lending and largely that's around our ability bluntly to make money against some of the loans we see being made.

It's a tough business to get a good return on without a lot of cross-sell and a lot of that business has become loan only going to the small banks and our books declined as a result.

And then just the other two categories, auto we just talked about which is risk management, and then credit card although it's relatively small for us the growth has been pretty good year over year.

And we would expect that to continue.

And if I could just follow --

The final one thing is while we have grown some residential mortgage loans on balance sheet, we haven't been balance sheeting a lot and our production isn't that much.

So a lot of the consumer growth you're getting when you look at other banks is actually coming from simply retaining self-originated mortgages.

Sure, that's fair.

And then if I can just as a follow-up, Bill, I think you mentioned earlier in your comments about a repricing across some of the commercial areas which I took to mean an upward repricing.

Can you give us a little more color on that and how those repricing efforts are being responded to by clients?

So I was specifically referring to what's going on inside of the asset based lending space.

Most of the rest of C&I frankly somewhat illogically has held pretty constant, notwithstanding what we've seen credit spreads do in the capital markets.

But inside of ABL as credits either move from being a cash flow credit, get refinanced in ABL or people start to get into trouble and trip a covenant or trip something our ability to charge fees and ratchet spread is pretty aggressive.

It's part of the original loan terms.

It's a practical matter.

Clients who use that product know how it works, so I suspect they don't particularly like it, nobody likes to pay more but that's the environment we're in --

Contractual agreed pricing.

Yes, and by the way, you know it is entirely consistent with many cycles we've been through in the past.

ABL does really well when credit conditions get tight is what we're seeing.

And then just to tag onto that, in terms of the energy portfolio, how do you manage the overall exposure relative to your loan agreements and when customers want to tap those unused lines, your being able to control that in terms of the covenants that you have that you have in your documents?

You almost have to go sector by sector and credit by credit.

So there's high-grade energy credits inside of that services book that basically can draw when they want.

There's asset-based credits inside of the services book and midstream who have to have collateral value to allow the draw to occur independent of what the line is.

So in simplest form an asset base I can give you a $20 million line but if you have $10 million of collateral we'd probably let you draw $8 million.

And of course in the reserve base stuff it's a function of the forward in effect projected value of the reserves coming out of the ground that give rise to that borrowing base.

So it's across-the-board dependent on credit structure and ultimately whether as is with some of those credits whether they are really high investment grade.

Okay, thanks very much.

Bill Carcache, Nomura Securities.

Thank you.

Good morning, guys.

Bill, can you broadly discuss the clearXchange opportunity and in particular do you envision the existing ACH system remaining in place and clearXchange basically just being a superior real-time P2P money transfer offering that would exist above and beyond that?

Or it is the vision that ACH would eventually go away and be replaced by clearXchange?

I don't know if I can do it briefly.

First off, what is going on with the merger of EWS and clearXchange, you know there's six banks plus ourselves who collectively purchased this.

We are creating a real-time P2P payment network that's going to be a ubiquitous offering that we would like to get out into every bank's hands in the country, such that whether you're a PNC client or a Bank of America client or a Fifth Third client you have the same app that is pre-populated with information in a secure way to allow you to make payments person-to-person.

Entirely different than what we're doing at the clearinghouse as it relates to real-time payments and the potential down-the-road substitutability of ACH.

So ACH has now gone, there is now same day ACH, you will have seen the clearinghouse announced the build of a real-time payment system that today we envision certain use cases for you might see it for payroll, you might see it simply when somebody wants to make a payment that they don't want to wait a day on.

Whether or not that takes some or all of the volume off of ACH through time we will wait and see but today those are kind of two very different things.

One thing focused on consumer payments, P2P, make it really easy for consumers in a secure way to move money around.

The other one mostly focused sort of in institutional payments.

Understood.

Thank you.

That's very helpful.

And separate follow-up question, Rob, for you, in response to the response that you gave to the earlier question about utilization and line drawdowns, can you discuss how you guys factor in the probability of utilization rates rising as we move deeper into the credit cycle?

Yes, we haven't focused a whole lot on that.

Obviously we take a look at utilization for trends in terms of where they are.

The percentage itself, that is something that you would want to monitor, but again if exposure comes down and percentage goes up that's different than if it's the other way around.

But to be very clear in a generic credit book we on a portfolio basis assume as part of our reserve and amount of a draw diversified across our credit book.

As it relates specifically to energy we're obviously looking credit by credit and thinking about what might be drawn, what the reserve redetermination is going to do on all of the above.

But remember inside of the generic reserving process we have a factor as does everybody else that assumes some amount of draw.

And it's a function of type of client, collateral, a whole bunch of different factors that go into the modeling for that.

Yes, I think that's a good way to put it, that it is done on an individual basis --

In energy.

In energy and reserved appropriately.

That's very helpful.

Thanks guys.

That's all I had.

There are no further questions on the phone line, sir.

Okay, thank you operator.

And thank you all very much for joining us on this quarter's conference call.

Thanks a lot, everybody.

This concludes today's conference call.

You may now disconnect your lines.