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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded. I will now turn the call over to the Director of Investor Relations, Mr. Brian Gill. Sir, please go ahead.

Thank you operator and 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 would like to turn the call over to Bill Demchak.

Thanks Brian and good morning everybody. As you have 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 likely have 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, noninterest 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 and 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 in 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. Now within our retail bank, we saw good…

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 four 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 derecognition of purchased 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 data 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 towards 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…

[Operator Instructions]. Your first question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question.

Hi. It's Betsy. Can you hear me?

Yes.

Hi. Yes. I just wanted to get a sense. You did obviously put or move significant amount or not significant, but a part of your investments with the Fed into other parts of the portfolio. So I just want to get a sense where you have changed? It looks like you have 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?

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 tenure was well above two. Now that they have rallied back, we are kind of holding 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 case of NPLs. And the reason I asked the question is, a lot of us came into the quarter expecting that we would see an uptick in NPLs, part of it this SNC related reviews and some investors are asking, okay, well if this 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 are seeing in the oil space, et cetera?

Yes. This is Rob. See, 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 improvements on the consumer portfolios and in some parts of the commercial portfolios offsetting that. So that's why you are 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 are going to have a number of credits that we are going to have to liquidate inside of that book, particularly in the services sector, which is what they bank. So you will see NPLs continue, I think, on the energy book. To the best of our ability and consistent with the SNC review, we are 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 would say about this quarter was, there was a couple of lumpy credits that you would 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 energy.

Yes, all in energy.

Got it. Okay. That's helpful. Thank you.

Yes. That's the biggest point. We dig through all related areas and reserve for those two, but beyond what we are 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 you see the NPLs going down.

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

Well, you are not going to see us grow the loan book inside the energy space anytime soon, I don't think. And we have been focused on dropping and we continue to focus on specifically dropping our coal book. But beyond that, we are seeing pickup, for example, in our ABL book as there is pressures in other areas of leverage lending just on ability for people to get deals done. We have seen more and more deals commendatory ABL book. If you dug into that, you would see the spreads in that book are up pretty substantially quarter-on-quarter, as we are getting pricing power back. Pricing power in growth in the generic C&I space, we will continue to win customers, but it is very competitive. And as you know, we don't really change a credit box and we remain focused on the right return on the capital we deploy. So that will display out through time.

Got it. Okay. Thank you very much.

Next question, please.

Our next question comes from the line of Gerard Cassidy with RBC. Please proceed with your question.

Thank you. Good morning. Bill and 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.

Yes. Hi, 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 buildout 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 have got the manual workarounds to be able to support it.

Great. And then Bill, in the past on these calls, you have talked about ideal fully phased-in Basel II Tier 1 common ratio below 10% or below 10.1% where you are today. What do you think is going to take for PNC to able to, because currently now you are paying out close to earnings in your combined ratio of dividends and buybacks, what do you think it is going to be able to take for you guys to go over that 100% level, not to say that you asked for it this year, but what's going to be able to get you to do that?

There are so many factors in that question. One is, we have to ask for it, as you mentioned. In fact, 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, with the consistence 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 am not going to comment on this year's CCAR. We submitted it. We will 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 and again I say that through time. 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 obviously have a buffer built into our capital policy beyond the minimum of the 4.5%. I remind you, last year in the published results and correct me if I am wrong here, Rob, but while we were well above that minimum that had the phase-ins.

That's right. The transitional.

Transitional calculations and of course we are 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?

Yes. I don't have that offhand.

I think generically what you would find is the midstream and services are more direct and since we were never into the reserve based stuff, probably more of that is participations. But we would have to dig that out.

Okay. Great. I appreciate it. Thank you.

Next question, please.

Our next question comes from the line of Scott Siefers with Sandler O'Neill. Please proceed with your question.

Good morning, guys. Rob, I was hoping you could talk a little bit about 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?

Yes. Well, I can give you some direction in terms of the way that, at least that we think about it. You are right. At a base level, energy aside, at a base level, we have said for some time, we would expect credit cost to normalize off the very, very low levels 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 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 are going to see the variance.

One of the things where we struggle with is, as provision has generally been so low that single credit can double provision, just because we are operating off such a low base. So it gives us some pause, frankly, as we think out and put guidance on what provision will be a quarter out. Obviously we jumped that range from where we were a quarter ago because we were surprised by a couple of credits and thought it made sense to bring it up a little bit and widen the variance up a little bit.

Okay. 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?

Yes. Sure, that's a good question. So our guidance is up about 10% to 12%. And if you just sort break the components down, I will help you with that math. 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 head this morning, BlackRock had an episodic oriented first quarter. They do expect some tailwinds going into the second quarter that if go back into the normal range of what they 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 are 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 have experienced. And then residential mortgage which is small, coming off a seasonally low quarter, we would expect production gains, although small in absolute dollar sense to be in comfortably in the guidance percent range. So that's the math.

Okay. Perfect. That's great. Thank you very much.

Sure.

Next question, please.

[Operator Instructions]. Our next question comes from the line of Paul Miller with FBR &Co. Please proceed with your question.

Yes. Thank you very much. I have 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 are not. And you know, the one place and I already mentioned it where we are seeing contagion and we have thought about this and sort of counted 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 are watching, just as an aside and inside our local economy, Ohio, Pennsylvania, it's quite strong. So notwithstanding the pullback in shale and the investment, there is no particular weaknesses in the local surrounding region. We are 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 are watching carefully. But thus far real estate continues to behave very well.

And then, 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. It's a practical matter, only one matters because you the second would be, at the end of the year 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.

Sure.

Next question, please.

Our next question comes from the line of John Pancari with Evercore ISI. Please proceed.

Good morning.

Good morning, John.

Good morning, John.

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. About half, John.

Half of the 80%.

Yes. That's right.

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 talk about, which in both cases is about 37%.

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

I don't have that as broken out.

We didn't break that out in the disclosure, John.

Okay. All right. That's fine.

Of the total energy, 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 then 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 are sort of more geared toward trying to deliver positive operating leverage, which we are 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 expected 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 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 leverage that we anticipate.

Okay. Stable expenses in 2016 versus 2015?

Yes. Stable 2016 compared to 2015.

Got it. Okay. That's it for me. Thank you.

Sure.

Next question, please.

Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

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 would consider modest this quarter?

Yes. Well, so our guidance was for 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.

Okay. 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?

Well, in terms of the $8.1 billion, you need to break it down, obviously in the components I talked about in my opening comments. We watch utilization rates and they have been remarkably steady. So we are at roughly 35% in terms of 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.

Yes. One of the issues, it's kind of a misleading number, particularly for the asset based book because the fact 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 dry 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 are going to see as a practical matter, the outstandings, as values fall and the asset based book fall and we will see the lines fall and perhaps outstandings inside as we go through the reserved determination in the E&P book.

Okay. Thanks very much.

Yes.

Can we have the next question, please.

Our next question comes from the line of Ken Usdin with Jefferies. Please proceed.

Hi. Thanks a lot. Just a follow-up on the balance sheet mix and composition. Bill, to your point earlier about the TBAs 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 to get your updated thoughts on using cash from here, what you are doing with securities portfolio run-off and how you want to try to balance that mix right now?

Yes. We are basically treading water here. So we grew when we saw the first bump in the backend, late in the fourth quarter and as things have rallied, we have effectively been replacing run-off with that and we will continue to do so until we see some opportunity here.

Okay. And then as far as just your loan outlook, loan growth has been pretty good and it looks like it has 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 are seeing growth in the commercial side of the loan portfolio as far as your expectations going forward?

Yes. 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 your aware, that the disruption in the CMBS market and the risk retention rules coming online, have driven a lot of that product at good pricing structure towards the bank. So we would expect to see that to continue.

Yes. And Ken, just in addition to that, in the large corporate loan book, we have seen progress.

Okay. Got it. Thanks a lot, guys.

Next question, please.

Our next question comes from the line of Erika Najarian with Bank of America. Please proceed.

Hi. Good morning.

Hi Erika.

Just a quick follow-up question. Bill, could you remind us where you are on your systems upgrade project, please?

Everybody always want to know what inning we are in, but rather than talk about this, I will talk about what we have accomplished. We have one new data center up and running. We have got the second one basically turned on and are starting to plan out migration activities to that. We are largely through the upgrades to applications so that they can run in a virtual environment. We have done the bulk of our investments in cyber and fraud. So we are 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 are getting to the later innings. Of course, will pick up some of the depreciation that goes along the ways, but we are on our way and by the end of this year, Bill, that second data center will be up and running.

Got it. 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 am fielding questions on whether or not being done or mostly done with the project changes the way you are thinking about your M&A strategy. And so, Bill, I would appreciate your thoughts on that.

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 and that we are basically out of the market. I don't see value there. I think there is many other things that we can spend our capital on to offer better return to shareholders. Just as an aside, one of the things that I think people miss as it relates to a lot of the work we are doing in the core infrastructure is what it ultimately allows us to do with customers in terms of product offerings and customer services. We actually had an API test 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 turn 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 are building and that's where I think the big benefit ultimately comes from, for all the money we spent inside the technology space.

Got it. Thank you.

Next question, please.

[Operator Instructions]. Our next question comes from the line of Kevin Barker with Piper Jaffray. Please go ahead.

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 are seeing in the industry and what are the reasons why you are not as aggressive as you were in the past?

Well, we are exactly where we were in the past. We are 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 type. So we have tried to hold true to where we see real economic return in the auto book and you have seen other people, as you know, drop into the subprime space and go increasing into leasing where we don't play. But one thing that has grown for us this quarter inside of auto was actually the direct book 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 tenure, going subprime in terms of FICO, higher advance rates.

Taking risk we don't want to take.

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

Is this something you are seeing particularly from the nonbanks? Or are you also seeing several large banks that are competing in the market?

You know the answer to that question. So I am not going to answer it.

Well, I appreciate the color. Thank you very much.

Next question, please.

Our next question comes from the line of Matt Burnell with Wells Fargo Securities. Please proceed.

Good morning. Thanks for taking my question, guys. Just a question on the consumer growth. That's been much lower than what you have seen on the commercial side despite what appears to be a bit more demand on the consumer side. So I guess I am 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 am wondering if there's a decline in the government insured portfolio within other consumer that's maybe hiding some of the core growth there?

Well, that true in the student loan book that continues to run off, but there is two big run off in 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 have 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.

Yes. The file one thing is, as you know, 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 are getting, when you look at other banks is actually coming from simply retaining self originating 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 have 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. As a fact of the matter, clients who use that product knows how it works. So I suspect they don't particularly like it. Nobody like to pay more, but that's the environment. And by the way, it is entirely consistent with many cycles we have been through in the past. ABL does really well when credit conditions get tight. That's what we are seeing.

Right. 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-credits. So there is high-grade energy credits inside of that services book that basically can draw when they want. There is 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 simplest form in asset base, I can give you $20 million line, but if you have $10 million of collateral, we probably let you draw $8 million. And of course, in the reserve based 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.

Next question, please.

Our next question comes from the line of Bill Carcache with Nomura Securities. Please proceed.

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 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, there is six banks plus ourselves who collectively purchase this, we are creating a real-time P2P payment network that's going to be ubiquitous offering that we would like to get out into every banks' hands in the country, such that whether you are 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 are doing at the clearinghouse as it relates to real-time payments in the potential down the road substitutability of ACH. So ACH is 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 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 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 an institutional payments.

Understood. Thank you. That's very helpful. And a separate follow-up question, Rob, for you. In response to the response that you gave to the earlier question about utilization and line draw-downs, can you discuss how you guys factor in the probability of utilization rates rising as we move deeper into the credit cycle?

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

To be very clear, in a generic credit book, we on a portfolio basis, assume as part of our reserve an amount to withdraw diversified across a credit book. As it relates specifically to energy, we are obviously looking credit-by-credit, 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 and reserved in energy and reserved appropriately.

That's very helpful. Thanks guys. That's all I had.

Next question, please.

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

Great. Thank you, operator and thank you all very much for joining us on this quarter's conference call.

Thanks a lot, everybody.

Thank you.

This concludes today's conference call. You may now disconnect your lines.