美國合眾銀行 (USB) 2010 Q1 法說會逐字稿

Welcome to U.S.Bancorp's first quarter 2010 earnings conference call.

Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer, and Andy Cecere, U.S.

Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question and answer session.

(Operator Instructions) This call will be recorded and available for replay beginning today at approximately noon eastern time through Tuesday, April 27 at 12:00 midnight eastern time.

I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S.Bancorp.

Thank you, Ashley and good morning to everyone who has joined our call today.

Richard Davis, Andy Cecere and Bill Parker are with me today to review U.S.

Bancorp's first quarter 2010 results and to answer your questions.

Richard and Andy will be referencing a slide presentation during their prepared remarks.

A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com.

I would like to remind you that any forward-looking statements made during today's call are subject to risks and uncertainties.

Factors that could materially change our current forward-looking assumptions are described on page two of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC.

I will now turn the call over to Richard.

Thank you, Judy.

Good morning everyone, and thank you for joining us today.

I'd like to begin on page three of the presentation and note some of the highlights of our first quarter 2010 results.

U.S.

Bank reported a net income of $669 million for the first quarter of 2010, or $0.34 per diluted common share.

Earnings were $0.10, or 42%, higher than the same quarter of last year and $0.04 higher than the fourth quarter of 2009.

Total net revenue of $4.3 billion in the first quarter was 11.3% higher than the same quarter of 2009.

With an industry leading efficiency ratio of 49% in the first quarter, we achieved positive operating leverage on a linked quarter basis.

We experienced strong year over year average deposit growth of 13.7%, while average loans grew by 3.9%.

Growth in both categories benefited from recent acquisitions.

As expected, net charge-offs and nonperforming assets, excluding covered assets, increased this quarter, but at a more moderate rate with both categories rising by approximately 2%.

Importantly, the provision for loan losses declined on both year over year and linked quarter basis, as increase in net charge-offs is more than offset by decline in reserve build.

We maintained our strong capital position with a Tier 1 capital ratio and Tier 1 common ratio increasing to 9.9% and 7.1% respectively at March 31.

On slide four, we show our performance metrics over the past five quarters.

Return on average assets in the current quarter was 0.96% and return on average common equity was 10.5%, above the returns posted in each of the past four quarters.

The first quarter results included two significant items which were net security losses of $34 million, and provision expense in excess of net charge-offs of $175 million.

Excluding these significant items, which Andy will discuss in a few minutes, return on average assets and return on average common equity would have been approximately 1.19% and 13.1% respectively.

The five quarter trends of our net interest margin and efficiency ratio are shown in the graph at the right-hand of slide four.

Our net interest margin of 3.90% improved over the prior quarter by seven basis points, primarily due to the lower funding costs.

Our first quarter efficiency ratio of 49% was essentially flat to the prior quarter.

Turning to slide five, our capital positions remain strong.

As previously noted, our Tier 1 capital and Tier 1 common equity ratios rose to 9.9% and 7.1% respectively at March 31.

Additionally, our tangible common equity to tangible assets ratio rose 3.8% from March 31, 2009, to 5.6% at March 31, 2010.

Our Company continues to generate significant capital each quarter, due to our diverse mix of businesses, a number of which are less capital-intensive than our traditional balance sheet businesses, in addition to our superior efficiency ratio and ongoing profitability.

Given our ability to generate significant capital, even under adverse economic circumstances, we believe we have the capacity to return more of our capital to shareholders through an increase in our dividend rate.

However, as I've indicated in the past, we must continue to defer a dividend action until we see clear evidence that the economy has recovered and is sustainable and we receive clear regulatory capital guidelines and approval.

We are aware of how important the dividend is to our shareholders and I can assure you that we will continue to work closely with our regulators to help facilitate their decision-making process.

Moving on to slide six, average total loans outstanding increased by $7.2 billion year-over-year.

As noted on the slide, excluding acquisitions, total average loans declined 2.9% year-over-year.

On a linked quarter basis, total average loans increased by 0.6%, driven again by acquisitions.

The lack of growth in average total loans outstanding, excluding acquisitions, was largely due to the lower usage of revolving lines of credit by our commercial and corporate customers.

Utilization of outstanding commitments by these borrowers declined from an average of about 30% in the fourth quarter of 2009, to approximately 28% in the first quarter of 2010.

Despite this reduction in the balance of average loans outstanding, we are continuing to see the benefits of flight to quality as we gain new customers, and believe that our balances are declining less than those of our peers.

We continue to originate and renew lines and loans for our customers who want and need credit.

In factoring the first quarter of 2010, U.S.

Bank originated nearly $9 billion of residential mortgages.

We originated over $4 billion of consumer loans including installment loans, student loans, lines of credit and home equity lines and loans.

We originated new prime-based credit card accounts with lines totaling $2 billion and we issued $6.6 billion of new commitments and renewed $14.6 billion of commitments to small businesses, commercial and commercial real estate customers.

Overall, excluding mortgage production, new originations plus new and renewed commitments were over $27 billion, somewhat lower than the previous quarters total, again indicating that the demand for new loans remains subdued.

We continue to be open for business and eager to meet the credit needs of our current and new creditworthy customers.

Total average deposits increased by $22 billion over the same quarter last year, and $1.6 billion on a linked quarter basis.

Excluding acquisitions, the growth rate was 4.5% on a year-over-year basis.

On a linked quarter basis excluding acquisitions, average deposits declined by 1.7%, primarily due to lower average DDA balances and wholesale banking and in corporate trust.

Importantly, however, savings deposits, which include interest, checking, regular savings and money market savings, were higher than fourth quarter by 3.4%, reflecting a number of our recent growth initiatives including our new S.T.A.R.T program, Start Savings Today and Rewards Tomorrow and our consumer and small business product packages.

Turning to slide seven, the company reported total net revenue in the first quarter of $4.3 billion.

The growth in core revenue was driven by earning asset growth and expanding net interest margin, our fee-based businesses, growth initiatives and acquisitions.

Moving on to credit as we turn to slide eight, as we predicted for you last quarter, the rate of increase in net charge-offs moderated on a linked quarter basis.

First quarter net charge-offs of $1.135 billion were 2% higher than the fourth quarter of 2009.

This percentage increase was lower than the 7% increase recorded between the third and fourth quarters of last year.

Nonperforming assets, excluding covered assets, increased by $91 million or 2%.

This percentage increase was also lower than the fourth quarter's linked quarter growth of 5%.

Notably, excluding covered loans, early and late stage delinquencies in all major loan categories improved during the first quarter.

This first quarter's nominal increases in net charge-offs and nonperforming assets, in addition to the favorable change in early and late stage delinquencies, indicates that we are nearing the inflection point in credit quality.

Accordingly, we expect a level of both net charge-offs and nonperforming assets to be relatively stable in the second quarter.

Turning to slide nine, you can see that, as expected, given the moderating but still upward trend in both net charge-offs and nonperforming assets we increased the allowance for credit losses this quarter by recording a $175 million incremental provision for loan losses.

This represented approximately 15% of the current quarter's total net charge-offs of approximately $1.1 billion.

This compares with an incremental provision equal to 25% of net charge-offs in the fourth quarter of 2009, and a 67% of net charge-offs in the first quarter of 2009.

This incremental provision rates the Company's allowance for credit losses to period-end loans at March 31, excluding covered assets, to 3.2%, up from 3.04% at December 31.

The ratio of allowance to nonperforming loans, excluding covered assets, ended the quarter at 136%.

With the expectation that the level of net charge-offs and nonperforming assets will remain relatively stable during the second quarter, the amount of reserve build as a percentage of net charge-offs is also expected to decline.

The following eight slides provide credit-related information about each of our major loan portfolios and I will highlight just a few items on each.

Slide ten provides more detail on the commercial loan portfolio, which has declined from an average of over $49 billion in the first quarter of 2009, to approximately $41 billion in the first quarter of 2010, primarily due to the lower line utilization and soft demand for new loans.

The net charge-off ratio on the portfolio increased to 2.41% in the first quarter, but the early and late stage delinquencies, as well as the nonperforming loans to total loan ratio, improved on a linked quarter basis.

Overall, asset quality measures are improving for the commercial loan portfolio.

Slide 11 provides additional information on the commercial leasing portfolio.

Delinquencies and the level of nonperforming loans have stabilized in this portfolio, primarily due to the improvement in BEFG, our business equipment finance group, where losses peaked in the first half of 2009.

Moving on to slide 12 and the Company's commercial real estate portfolio, average total commercial real estate loans have increased over the past year, primarily due to the growth in CRE mortgages, or a lack of permanent financing previously available in the CMBS market, has allowed to us extend financing.

Net charge-offs on the CRE mortgage portfolio remain low at 73 basis points of average loans outstanding and key credit metrics reflect stable trends.

The net charge-off ratio on the commercial real estate construction portfolio, however, remains elevated.

Delinquencies on that portfolio have, however, improved significantly year-over-year and property values are stabilizing.

Turning to the residential mortgage portfolio detail on slide 13, the net charge-off ratio edged lower in the first quarter to 2.23% of average loans outstanding.

Importantly, early and late stage delinquencies for the residential mortgage portfolio improved significantly.

This improvement was seen in both the traditional branch originated portfolio and in our consumer finance group portfolio, where loans with higher LTVs and lower FICO scores reside.

Our Company has been actively working with mortgage customers to renegotiate loan terms since late 2007.

Beginning with our own modification programs, and now including both the FDIC's modification program and HAMP.

Since 2007, including loan service for others, we have modified over 33,500 residential mortgage loans totaling approximately $5.8 billion.

Slide 14 summarizes the performance of our home equity portfolio.

The majority of this portfolio, 87%, was originated through our retail branch network.

This traditional portfolio has performed well during the cycle, as demonstrated by the current quarter's net charge-off rate of just 1.25%.

The remaining 13% of the portfolio is primarily broker-originated and is managed by the consumer finance group.

Both segments contributed to the improvements in delinquencies in net charge-offs this quarter.

Credit card loans are detailed on slide 15.

Average loans outstanding grew by over 20% year-over-year, but declined slightly from the fourth quarter of 2009.

The net charge-off ratio during the past three quarters has been impacted by a portfolio of purchases made in September of last year, and we have adjusted for the transactions that are charted on the right side of the slide.

Similar to the other major loan categories, early and late stage delinquencies improved, while net charge-offs increased over the prior quarter, reflecting loan growth trends over the past number of quarters.

Going forward, losses on the credit card portfolio are expected to stabilize, but remain elevated as long as unemployment remains high.

Given the high quality of our portfolio, however, we expect to continue to perform significantly better than the industry average.

Slide 16 provides additional detail on the retail leasing portfolio.

Net charge-offs and delinquencies have significantly improved since the first quarter of 2009.

As better used car prices have significantly reduced end of term valuation and credit losses.

Finally, slide 17 summarizes the credit information on the other retail loan portfolios, a breakdown by product of which is provided in the pie chart on the right.

Early and late stage delinquencies improved in the first quarter, while net charge-offs remain stable.

Similar to retail leasing, the auto loan portfolio loss rate improved as used car prices rebounded from their lows.

I will now turn the call the over to Andy.

Thanks, Richard.

I will take just a few minutes to provide you with more details about the results.

I turn your attention to slide 18 which gives a full view of our first quarter 2010 results compared to those reported for the fourth and first quarters of 2009.

Earnings per diluted common share were $0.34 for the first quarter of 2010, $0.04 higher than the prior quarter and $0.10 higher than the first quarter of 2009.

The key drivers of the Company's first quarter results are detailed on slide 19.

The $140 million, or 26.5% increase in net income year-over-year was the result of an 11.3% increase in net revenue, driven by a 14.7% increase in net interest income, and a 7.3% increase in noninterest income.

This favorable change in total revenue was partially offset by a 14.2% increase in noninterest expense.

Provision for credit losses in the first quarter was slightly lower than prior year's quarter as the $347 million increase in net charge-offs was more than offset by a decrease of $355 million in incremental provision, as the need for additional reserves declined.

Net income was $67 million or 11.1% higher on a linked quarter basis.

Seasonally lower net revenue was offset by lower operating expenses and again, a favorable variance in the provision for credit losses.

A summary of the significant items that impact the comparison of our first quarter results to prior periods are detailed on slide 20.

The two significant items in the first quarter of 2010 were the net security losses of $34 million, primarily representing impairment on our SIV exposure and provision in excess of net charge-offs of $175 million.

Note that the first quarter of 2009 included a $92 million gain on a corporate real estate transaction which impacts the year-over-year comparisons of the other income line.

Turning to slide 21, net interest income increased year-over-year by $308 million or 14.7%, primarily due to a $13.5 billion increase in average earning assets, $13.3 billion of which was acquisition-related.

Net interest margin was 31 basis points higher than the first quarter of 2009, primarily due to our ability to replace wholesale funding with low cost deposits and achieve overall lower funding costs.

On a linked quarter basis, net interest income was higher by $43 million, primarily to a $3.4 billion increase in earning assets, which was acquisition-related, and a seven basis points increase in net interest margin.

The net interest margin improved due to the change in mix between wholesale funding and low cost deposits, and overall lower funding costs.

Assuming the current rate environment and yield curve, we expect the net interest margin to decrease modestly to the mid-380s in the second quarter of 2010, due to the impact of recent legislation on our credit card portfolio yields.

Slight 22 provides additional detail on our growth in average earning assets this quarter.

Year-over-year average total loss grew by 3.9%.

Excluding acquisitions, average loans declined by 2.9%.

Average investment securities increased by $3.9 billion or 9.2%.

Linked quarter average total loans grew by approximately $1.3 billion, again due to acquisitions, while average investment securities rose by $2.1 billion or 4.7%.

Slide 23 breaks down the growth in average total loans by category.

Looking at the chart on the left, you can see that the decrease in total average loans, excluding acquisitions, was essentially due to the 15.8% drop in average commercial loans, as retail, residential mortgage and commercial real estate were all higher on a year-over-year basis.

The majority of loans related to the FBOP and Downey PFF acquisitions were reported as covered loans and the $10 billion year-over-year increase was due to the acquisition of the banking operations of FBOP Corporation.

On a linked quarter basis, the decline in average loans, excluding acquisitions, was again driven by the decrease in commercial loans partially offset by increases in commercial mortgages, residential mortgages and other retail lending.

Moving to slide 24, you can see the very favorable growth in low cost deposits over the past five quarters.

Average total deposits grew by $22 billion or 13.7% year-over-year, partially due to acquisitions.

Importantly, low cost core deposits, noninterest bearing, interest checking, money market and savings, excluding acquisitions, grew by 23.5%.

This growth reduced the need for wholesale CD and foreign branch time funding contributing to the net interest margin expansion.

On a linked quarter basis, average deposits, excluding acquisitions, declined slightly, principally due to low noninterest-bearing account balances in the corporate trust and wholesale banking divisions.

Slide 25 presents in more detail, the changes in noninterest income on a year-over-year and linked quarter basis.

Noninterest income in the first quarter of 2010 was higher by $130 million or 7.3% than the first quarter of 2009.

Excluding the $72 million favorable change in significant items, noninterest income was higher by 3.1%.

This positive variance was driven by a 7.5% growth in payment-related revenue, 24.8% growth in commercial product revenue, illustrating the success of recent investments and growth initiatives, and higher other revenues due to lower end of term lease residual valuation losses.

These favorable variances were partially offset by a decline in mortgage banking revenue which was $33 million lower than the first quarter of 2009, principally due to a 33% reduction in production volume, partially offset by higher servicing revenue and a favorable change in the MSR valuation and related hedge.

On a linked quarter basis, noninterest income was lower by $98 million, reflecting the fact that the first quarter of the year is the weakest revenue quarter for our Company.

Excluding the $124 million favorable change in the significant items, noninterest income was lower than the prior quarter by 10.2% and was driven by seasonally lower payment revenue and deposit service charges which declined by 4% and 13% respectively.

An $18 million reduction in mortgage banking revenue, primarily due to a 19% reduction in production volume, partially offset by favorable variances in servicing revenue and the MSR valuation and related hedge, lower commercial products revenue and trust and investment management fees which declined by 13% and 5% respectively and finally, a decline in other revenue due to the fourth quarter 2009 contract termination gain and an unfavorable change in end of term valuation losses.

Acquisitions had a minimal impact on the variance in fee revenue on a year-over-year or linked quarter basis.

Finally, on slide 26, we have provided highlights on noninterest expense which was higher year-over-year by $265 million or 14%.

The majority of the increase can be attributed to acquisitions, which accounted for $121 million of the increase, higher costs related to investments in tax-advantaged projects which accounted for $42 million of the increase, FDIC insurance expense, in the first quarter of 2009 we used the last of our four credits, and other loan expense primarily to costs associated with other real estate owned.

On a linked quarter basis, noninterest expense was lower by $92 million or 4.1%, the net result of lower costs related to investments in tax-advantaged projects which accounted for $58 million of the decrease, a decrease in marketing and business development expense, which declined by $45 million, and seasonally lower legal and professional services expense partially offset by higher compensation and benefits related to incentive accruals and the seasonally higher payroll taxes, and finally, acquisitions which increased by $53 million.

Finally, the tax rate on the taxable equivalent basis was approximately 24% in the first quarter of 2010.

As you turn to slide 28, I will turn the call back to Richard.

Thank you, Andy.

Our Company's first quarter results once again demonstrated the strength of our franchise and the advantages of our diversified business mix.

We posted strong year-over-year revenue growth, maintained our industry leading efficiency, we achieved linked quarter operating leverage and we saw a reduction in credit cost for the second consecutive quarter.

We continued to lend, gather core deposits and expand our banking franchise.

We remained profitable, generating significant capital and strengthening our already solid capital and liquidity positions.

We are well-positioned to capitalize on the economic recovery as we continue to enjoy the benefits of the flight to quality and we continue to invest in organic initiatives, M&A and joint ventures and those investments including hiring the best employees and developing and empowering our leaders.

We will continue to opportunistically acquire and we benefit from core businesses that are scalable and can leverage as the economy recovers.

We are more than just a traditional bank dependent on loans, deposits and a favorable interest environment to grow.

We also bring so much more to the table with our breadth and scope of our franchise and product offering including global payment capabilities for our wholesale and retail customers, corporate trust services and more.

It is this diversification of products and services, in addition to our prudent risk management, that has allowed to us continue to grow profitably during the past very challenging two years.

The financial services industry continues to face an uncertain economy, regulatory and legislative environment.

The world has changed and there is much more to come.

We are actively participating in the dialogue to ensure that the financial services industry and U.S.

Bancorp play a vital role in the economic reform and the recovery.

Our company is confident and focused on the future.

We know tat the momentum we have created has positioned U.S.

Bancorp well to grow and prosper for the benefit of our customers, our employees, our communities and, importantly, our shareholders.

That concludes our formal remarks.

Andy, Bill Parker and I will now been happy to answer questions from our audience.

(Operator Instructions) Our first question comes from the line of Matthew O'Connor with Deutsche Bank.

Please go ahead with your question.

Good morning.

Hey, guys.

Good morning, Matt.

Could you just talk a little bit about the revenue outlook and ability to capitalize on banks pulling out or cutting back on a number of product areas?

We're seeing cards, home equity, CRE, a number of the big banks pulling back there.

And you guys generally have been gaining share while looking for more and wondering how much we'll see in the near term here.

Thanks, Matt.

This is Richard.

I think we're actually continuing to see a robust forecast in that area.

We are benefiting from flight to quality and at the same time we've taken the measures to improve our corporate bank capability to be fully capable of not outsourcing any activities, anything from syndications to high bond businesses -- high quality bonds businesses to eventually municipal bonds and things like that.

So, I think our timing is perfect to step into places where some of the companies have either backed down or actually exited.

As a result, we're also getting more non-lending that comes with it, because, as you come into a deal where a client says, I need you to now be part of my syndication and if you're willing to be the last in, they're more often than not willing to let you have other business along with that.

So we're enjoying the benefits of the payments and the trust along with just the classic balance sheet banking.

And I think our timing is actually quite good.

In answer to your question specifically, it's actually building momentum.

So I think we'll continue to see our books strengthen with new customers, as well as the ones we have continuing to deal with this downturn pretty successfully.

And on the lending side specifically, obviously there's two factors going on here, there's the market share gains and just the weak demand.

But when do you think we'll actually start to see some net loan growth for you guys?

Yes, so, I don't think it's for a little while longer.

I am going to be a little less robust in my forecasting for the current economic situation, but last we looked, housing prices are at record lows and they're staying there and unemployment is at record highs and it's staying there, and our customers are a reflection of that world.

And until we see either or both of those starting to move in a positive directions, which eventually they both will, we are going to be likely to see our customers continue to withhold using the lines of credit they've already been extended, and certainly new customers are not jumping in for large capital expenditures or big hiring activities.

At the very early part of the cycle, we're starting to see more M&A, more IPOs, more interest at the early stream of companies starting to get healthier but those are not the systemically core activities that cause long-term organic growth and we are not seeing that kind of activity yet in the actions of our customers.

So I am going to say a couple of quarters until you see a real strengthening of the core earnings based on loan growth and not just from line usage but from people coming back into the game.

Okay.

Thank you very much.

Yes.

Our next question comes from the line of John McDonald with Sanford Bernstein.

Please go ahead with your question.

Hi, John.

Yes.

Hi, good morning.

I wonder if you could comment a little bit on credit.

Other banks are showing declines in their charge-offs and NPAs and are starting to drawdown reserves.

Obviously, every bank's different.

Just wondering what's your sense of why you're a little different there, maybe a function of how bad things got for other banks or loan mix, if you can comment on that?

Sure, thanks, John.

I'll go first.

I'll have Bill follow up.

I've got to tell you, I'm actually quite surprised by the number of banks that have chosen to go from adding to reserves to not even meeting them, but going to a recovery of reserves.

So I can't speak to their modeling, but I am surprised.

I think we're all in the same environment, and for me until you get to a place where you're really assured that things are getting better, I think it's prudent to have strong reserves for loan losses that have yet to happen.

So, in our case, and I'll speak just to us, we feel that while we are getting very close to that flattening point where loan losses, charge-offs, NPAs are flat, which then portends that we can bring down reserve builds and eventually maybe bring them to equal, I don't see a time where reserve recovery is part of our future.

I said before, this management team is doing its best to make its estimates on where the loans will end up, where the losses will be and where we want to have the cushion to go into the next cycle.

And we want this to be a fortress balance sheet and the way we see it is we're continuing to appropriately do the math and the predictions say we need to continue to strengthen our reserves for the future.

Now, if there is an amazing recovery with both a speed and slope that I don't expect, then perhaps we'll get to that point where one day we'll be able to recapture some reserves.

But we're not intending to do that.

We think we're putting in our best dollar, hoping it is the right amount and giving us at least a prudent position to start the next cycle with a very strong balance sheet.

So speaking less for them and more for us, but I must say I'm surprised that that many people went that quickly to equal and then recovery.

It's a surprise to me.

And Bill, you might speak to our details.

Yes.

Hi, John, it's Bill.

Just -- you mentioned the fact that our loss rates are significantly lower than most of our peers.

And I think that's part of it.

I mean, we've gone up less.

Well, looks now that we're stabilizing so we'll start hopefully to be coming down soon, but we're not coming off of those very high peaks that some of our peers are.

Okay.

And then question on regulatory reform, Richard, what are the biggest issues for you guys in your business model?

Where do you have the strongest views?

And then also, Andy mentioned the impact to the margin for the card legislation, if you could just remind us the totality of the impact of card legislation and Reg E as best you guys can tell.

Ok.

I'll go first.

I'm actually very concerned about the pending reforms that are about, I think they're imminent in the next probably few weeks and I concern myself for a couple of reasons.

One is we're building these solutions at a time when everyone is very stressed and concerned, and these will be decades kind of decisions, so we better be careful and make sure that we get it right.

I'm all for consumer protections being strengthened.

I'm all for line down authority and the systemic importance of companies, that we cannot have the taxpayers bail out anybody again.

I'm all for all of that.

If I had one thing to put at the very top of the list it's to protect preemption.

And let me just say very clearly, this is not a help the banks protect themselves, this has nothing to do with that.

Preemption is a situation that allows banks to provide products to our customers and they don't have to worry about whether they work in different states and different ways.

It is a chance to say that if there is something a state doesn't like, the current rules allow for them to challenge that and protect their state customers or their state citizens.

But right now, to change the preemption to allow the states to have a providing overriding view of whether or not things are safe for their customers will create an amazing amount of confusion for both us and for them and I hesitate to say, John, it will reduce the number of products that are available.

So, we are substantially online, most of us are with virtually all of the things that you are seeing in reg reform, but there are some nuances, not the least of which is the concern for loss of national uniform standards or preemption and the concern that we don't have a circumstance where the prefunding of losses or the slush fund or whatever you want to call it, is burdened by some of those -- many of us who actually will never intend to use it and perhaps are being taxed on form of a levy that isn't really fair.

So, we'll limit our issues on those couple of points, because I think otherwise why wouldn't we want the stronger protections, why wouldn't we want the non-banks to finally have the same oversight we've all enjoyed and why wouldn't we want to be assured that our industry is stronger going into this next time where the taxpayers will feel a sense of confidence and the shareholders will feel a better sense of confirmation in the stability of our industry.

And so, I welcome the majority of them, but I do worry about preemption and I do think that a back-paying tax of any sort is unfair.

And Bill, go ahead and talk about the real dollar amount.

And John, from a dollar perspective, the card app legislation will cost us about $100 million in 2010.

It started in the middle of the first quarter and then will continue through the remainder of the year.

The overdraft legislation, in addition to some of the changes that we made, will cost us $200 million to $300 million in 2010, impacting us most specifically in the second through fourth quarters and that's principally in fee income.

And the card legislation is a mix, Andy, of the NIM and fee both?

It is a mix, John, but it's more heavily weighted towards the margin component.

Okay.

And John, let me remind as well the audience, in the beginning of this month we started our migration toward new overdraft and NSF fees.

We actually made some changes in the first quarter.

We made more on April 1, where we started to limit of number and dollar amount of overdrafts, and then at the end of June or July 1 and August 15 with the new fed rules, we'll be prepared to move into the final stage.

So, you'll see some disruption in run rate or linked quarter impact in quarter two versus quarter one.

You saw a little in quarter one versus quarter four and then when we get to the run rate in the second half, we'll have a better sense of how those customer behaviors will play out.

I will repeat what I said 90 days ago, and that is, we have, I think the luxury and I think, the prudence to not force customers into a decision.

We are going to watch and check their behavior.

We are doing a fairly good job of serving their interests now and we will create an outcome that allows them to pick how they want to deal with their banking relationships and we'll be very smart to watch what the other actions of the community of banks do and then respond to the best and most favored treatment.

We are lucky enough that we have that luxury of time and I believe waiting to see what the right answer will be.

But will you see negative biases kind of linked quarter for the next couple as relates to overdraft and NSF fees.

And does [pam] see either of those pieces of legislation or regulation affecting your payments businesses in either a positive or negative way?

That's a great question.

Actually, that's part of our study of customers and merchants to find out how they feel about if customers are going to be -- let's say they don't opt in and there's a significant higher level of denial at point of sale, how do the merchants want to step in?

Will they step in for their best customers or will they suffer a certain level of breakage that they haven't experienced before?

I think in any case it's got a slight negative bias because less things will be less transacted until people figure out how they want to operate their checking accounts.

But I don't think its a very significant one and we haven't placed any dollar or financial detriments to it at all in the future, and if we learn more we will telegraph that.

We don't see it as a problem yet.

Okay.

Thanks, guys.

Yes.

Thanks, John.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Hi, John.

Hi, John.

Good morning.

A couple questions for Bill.

In the release, you talked a little bit about how the modification for residential and card customers, you expect that growth trends to continue.

Can you talk a little bit about which part of the business is driving it and if you've seeing any light at the end of the tunnel?

You are talking about residential modification?

Yes.

Yes.

So, that's both in our finance company and our home mortgage company that originates more the Freddie/Fanny products and we did about $1 billion total HAMP in first quarter.

About 250 of that was on balance sheet, mostly in our finance company.

We expect that number to be about the same in the second quarter, but there's already some evidence that we're working through the pipeline and that number should start to decline.

And then the other question, provision was up in the wholesale business a bit.

Yes.

Can you talk a little bit about what drove that?

Well, there was a little bit of lumpiness in some of our more leveraged portfolios.

But other aspects of the overall portfolio, the middle market corporate book that we're actually showing improving quality trends.

But we did have a couple of larger charge-offs in the quarter.

No real trend to speak of?

No.

Okay.

Great.

Thank you.

Our next question comes from the line of Paul Miller with FBR Capital Markets.

Please go ahead with your question.

Well, thank you very much.

Can you talk about the loan pricing out there?

I mean some banks are out there saying utilization rates are increasing and you said they are relatively flat.

Are you seeing overheating and pricing cap rates dropping?

Well, I tell you what, we still do see the demand coming down so I'm surprised to hear somebody saying that otherwise.

I tell you what, we are seeing, the market has become more balanced.

The nice thing, first and foremost Paul, is the banks are getting paid for risk premiums again.

People expect us to charge for that.

Customers want a traditional bank, the alternatives are lesser than they used to be.

So the margins are stronger than they were and I think they'll firm.

There will be moments in time when, depending on who's in the market, if you are in a community market or if you're in a large market, depending who might be a more aggressive player, you can see unrealistic pricing again like we saw a few years ago.

But for all intents and purposes, we are seeing a nice firming up of reasonable and rational pricing, and most of the banks that we compete with seem to be taking that at that same measured approach that I would expect.

Andy, you might mention that on the margin side.

Right.

So, Paul, we continue to see that loans that are renewing and new bookings are at a bit of a better margin than what is running off so that phenomenon has been occurring for the last four or five quarters.

I don't think it's going to continue to be at the same levels, but firming up of loan pricing I think is one of the factors in our improvement in our net interest margin in addition to our lower cost funding.

The other thing that I would highlight is we are seeing utilization down a bit.

It was 30% on average for the fourth quarter.

It was 28% on average for the first quarter of this year, and you compare that to a year ago it was 37%.

So it continues to fall, albeit as a slower level.

Is there some regions doing better in their loan pricing and utilization or are they pretty much cross your footprint?

I don't think there's a significant geographic difference.

Okay.

Hey, thank you very much, gentlemen.

Thank you.

Our next question comes from the line of Heather Wolf with UBS.

Please go ahead with your question.

Good morning, Heather.

Hi, good morning.

Just a couple more follow-ups on the modifications.

First, can you talk a little bit about the sort of inflows and outflows to that 1.6 billion that you are showing on slide 13?

And can you also talk about redefault rates and where you see those going?

Let me talk about redefault rates first.

There's a couple different ways to measure it.

There is some industry data which looks at 12 months out and so two payment delinquencies 12 months out, that's, we are at 30% and industry statistics are at about 40%.

And then we also look at those that ultimately go to foreclosure and for that our rate is about 20% for the overall residential mortgage portfolio.

So those are a couple of statistics on the restructured loans.

And, again, what I talked about on residential mortgages is that the on balance sheet we did about 250 million of HAMP in the first quarter.

We expect a similar amount in second quarter.

But there are signs that that dollar amount is already declining.

It may have already peaked.

And were there any outflows or do you follow the once a TDR always a TDR accounting?

Yes, once it's a TDR, it's always a TDR.

Okay.

And one last question, of this 1.6 billion is any of this covered by your loss sharing?

Are any of the potential redefaults covered by loss sharing?

Not in these statistics here, no.

That would be the Downey portfolio which is under the covered asset section.

Okay, so this is just modifications on your book.

Yes.

Old fashioned stuff, yes.

Got it, thanks so much.

Thanks, Heather.

Thanks.

Our next question comes from the line of Ken Usdin with Bank of America.

Hi, guys.

It's actually Ian Foley for Ken.

How's it going?

Good morning.

Good.

Quick question, wanted to dive into the fee items a little bit and just talk to outside of some of the seasonality what kind of areas came in stronger or weaker than you would have expected?

This is Andy.

So the particular area of strength was our payments group.

We saw our payments in total go up 7.5% versus a year ago.

Categories like merchant processing versus a year ago is up over 13%.

We saw same-store sales increase 3.3%.

So I think that's a reflection of us continuing to gain share and strength across all those categories.

Commercial products year-over-year was up.

That's again a function of us building the businesses that we've been talking about and the wholesaling and the corporate banking group and those are areas of strength.

Seasonally, the first quarter versus the fourth quarter is lower, really across almost every category, probably $75 million to $100 million.

So we would expect a decline in the first quarter that we saw.

In addition, mortgage production is down a bit.

Last year, we had a production level of about $13 billion in the first quarter.

This year was just about $9 billion.

So that's another key factor in the year-over-year results.

Thanks, guys.

Thank you.

Our next question comes from the line of Chris Whalen with IRA, Please go ahead with your question.

Good morning, guys, nice quarter.

Thank you.

Richard, how much of your growth is coming from taking share as opposed to the economy recovering?

I'm not so much looking for statistic as just your gut.

Yes, yes.

My gut is 50/50.

We have worked really hard when basically no one was really paying attention in the last few years recrafting this whole company's ability to work with customers at a deeper level, build a full-on first class corporate bank across the nation, not across the footprint, reconstruct our wealth management.

Chris, all the things that honestly, I'll be able to talk about in a couple of years and describe to you all why we came out of this so much stronger, but at this early stage for all of them, they are demonstrating high performance and we're so really lucky.

This company has benefited from the relative outcome of a negative environment we couldn't have changed on our own anyway.

So, we're taking advantage of it.

We've got a lot higher quality people that we've brought into these new business lines.

We've changed the culture to deal more with relationships than individual transactions.

And I will tell you, those are the things that are probably 50% of our strength right now.

And what I like about that the most, is when I go to bed tonight I'm going to know that it's the reason that we are going to be so much stronger in the future.

It's not a one quarter event, it's a momentum toward an entirely new, run rate.

And then the last piece that I said in my prepared comments, but I want to put it in my own words again, this is a big deal to be a company that doesn't rely just on the balance sheet.

I think in the near term, at least call it the next few years, lending overall will be slightly depressed, deposit gathering will be probably slightly more positive, and margins overall will probably firm up, but they will move around as well as with rates moving up and down.

I love the fact that we've got this other diversified earnings stream in the trust and the payments businesses, that -- they're not counter-cyclical, but they're definitely not aligned exactly with the behaviors of balance sheets and I think that's going to portend as the recovery hits an extra cylinder that gives this Company a stronger future going out.

Just follow up on that -- in terms of interest rates, if we are at the peak or we hope we are at the peak in terms of credit loss, what do you see in terms of the evolution of NIM going forward?

And particularly, a lot of institutions, as I think we're all aware, are wide open right now trying to maximize net interest margin.

How do you guys look at the interest rate risk environment in terms of re-pricing your liabilities and the attitude of customers in terms of yield?

Because they've all been starved to death by the Fed and as soon as the funds are able to offer them another quarter of a point how do you think that's going to affect your stability in terms of both core and more volatile liabilities?

Chris, this is Andy.

We've been positioning our balance sheet.

We never really position it significantly, assuming rates will go a certain way.

We are always fairly neutral, but we have moved to being asset sensitive and we continue to position that way.

So what that means is, for example, in the securities portfolio, our purchases are more -- are floaters than fixed, give up a little bit of yield in the short term, but I think we position ourselves appropriately for the long-term and that's the way we are thinking about it.

Thank you, guys.

Chris, I'm going to add to that.

This is Richard.

As you recall, too, a few years ago, we were starved on interest margin and protecting it so literally that our deposit rates were at the very low, probably (inaudible) and in this last couple of years we found ourselves now above the median and competing.

Not just -- we're not losing on price, we are now competing on quality and we've got price as a nonissue.

That's a pretty big deal and this Company is constructed the way we run it now to be able to move lock step with rate changes and not need to withhold those benefits when they come along.

We're going to get the benefit on the lending side.

We'll give it on the deposit side.

We've come to learn that you don't build a bank without getting new customers.

You start most often with a deposit and then you have a fighting chance to work with them through a relationship and that's another one of those underlying benefits that we've built over the last couple of years and I think will show themselves over the next couple of years.

Excellent.

Well, thank you, guys.

Yes.

Thank you.

And our next question comes from the line of Nancy Bush with NAB Research, LLC.

Please go ahead with your question.

Good morning, Nancy.

Good morning, guys.

Quick question on commercial real estate and your outlook on credit quality there, and I'm talking about nonresidential development, CRE, because there have been many predictions of disaster, this is a lagging indicator, et cetera, et cetera.

Could you just talk about that?

We haven't really had a disaster in nonresidential CRE and can you just talk about why not, why the predictions have been so wrong?

I'll go ahead.

This is Bill.

If you go back to the early 90's cycle, that was one where there was really massive overbuilding, and this cycle it's really more of a demand issue.

And I do think in general, underwriting was better than it was in the early 90's cycle.

In our particular portfolio, we have seen stress on some of the construction portfolio as that came online.

Some of the certain office retail and some of the really soft southwest markets.

But the permanent -- the mortgage portfolio, the diversified, our biggest asset class is affordable housing.

That's been less impacted by some of this downturn.

I think there's enough -- we've already seen values starting to stabilize and we have recourse on our facilities.

So I don't view this as being that armaggedon scenario that some have predicted and I think we'll just -- it's going to be soft for probably 18 months, but I think it's fairly stable.

Richard, a question for you.

There's been a great deal of speculation about USB's possible entry into the southeast.

Is that a geographic region that -- where you absolutely have to be?

Could you do that through an FDIC-assisted deal which didn't give you huge presence in the region and then build upon that?

Could you talk about your appetite for doing a non-contiguous acquisition?

Thank you, the question was asked perfectly.

Very low appetite for a non-transformational deal out of market.

Or the opposite of that is, I would only go out of market for a transformational deal.

We really aren't finding our customers uninterested in banking with us because we're not in the 26 states that we don't currently have a retail presence.

As you know, Nancy, we made a commitment to get stronger and deeper in the 24 states we are.

The FDIC transactions are built perfectly for that and we will look forward to having more opportunities.

If were were to go out of state, contiguous or jumping states, it would have to be a substantial transaction.

One that, number one, everybody would say, wow, that makes so much sense.

Number two, it would be a price point that would have to make sense and good for our shareholders, and we both know it would have to be a capital rate activity that we would only do if it was so reasonable and so useful to the Company's future that it made sense.

So it would have to hit all those hurdles, and if it isn't going to be transformational, we don't see a need to do out of market in order to be successful in the next decade.

We just -- it would be an opportunity missed if we didn't pursue it.

But I don't know if that's ever going to come across.

So we're more than happy to be focused on organic growth and old fashioned quarter by quarter business that I think we're starting to demonstrate.

Thank you.

Thanks.

And our next question comes from the line of Chris Kotowski with Oppenheimer.

Please go ahead with your question.

Hi, Chris.

I just want to go back to the slide on page ten about the utilization rate and how it keeps going down.

I would have thought, or one would have hypothesized, that normally line utilization should be tied to retail sales, inventory, receivables and so on, or to inventories and receivables.

And those shouldn't vary be going up with an economic rebound.

Can you explain the disconnect?

Yes, this is Bill.

What we've seen, really starting late last quarter, is corporate America and middle market companies are -- they bounce on it very effectively in reducing their costs, primarily through job layoffs, but they are generating a lot of cash.

So the fact that there was inventory build up occurring here in the first quarter, they have not needed traditional bank sources of funding.

So that the companies that we deal with, they are very flush and they are waiting for clear signs of that economic recovery.

So, Chris, Bill is the smart guy, I am the layman guy.

I tell you what, you think about it, these businesses in America have figured out an entirely new level of productivity and efficiency.

And I think we all surprised ourselves.

This bank is one of those.

We took a 5% expense reduction last February across the board to protect jobs but to protect our future.

And we did that because the world is different and we all surprised ourselves.

Our customers are saying, I did this for a couple of quarters and I'll be darned, I can actually be more efficient, I can get along a little further than I thought.

So they are very hesitant to turn back on the spigot to start spending money unless they're absolutely sure they see it.

In many recoveries past, I believe that businesses went first and followed by customers and consumers who followed them because the products were there and all of a sudden the world got better.

I think it's reversed this time.

They're waiting for the consumers to move to consume their products, after which point it's undeniably clear that they're ready and waiting and then inventories are too low.

And then, and only then, they'll pop.

So I'm believing that we're in a new paradigm where the recovery will be, in part, a bit different than it has in the past and probably slower based on the prudence of businesses that have learned to be very efficient.

And eventually they'll just say, look, I've got to spend money.

But boy, our utilization rate is the best proxy for that because they've got the loan, they've got probably preferred rates, they're our best customers and they are still paying it down until which time they don't need it.

Secondly, we'll be the first to see it because as cash balances -- as they're rich with cash, we're holding it.

And so we'll be able to see them move from cash balances down first.

Second is the actual use of our credit.

So there are actually two steps to occur and we haven't seeing the cash balances starting to fall either.

So I think that's why I answered the question earlier that it's a few quarters out until we see it show up on the bank's balance sheet as a loan.

Okay.

And then, I guess my second big picture question is that, I've seen the interest rate disclosure in your 10-K, but I guess I still think when I look at a company like yours with so much in core deposits on the right-hand side and so much in what should theoretically be variable rate loans on the left-hand side, one would think that you really would be fairly dramatically asset sensitive.

And yours is a company that used to have a company that used to have a 425 to 450 basis points margin and -- Is there something structurally different in the world now that in a higher rate environment generally would prevent from you getting back to that kind of level a few years down the line?

In say, an environment where rates are two, three, 400 basis points higher over time?

Chris, this is Andy.

We try to manage the balance sheet so we're not dramatically anything.

And we try to keep it fairly neutral.

We are asset sensitive a little bit, as we talked about.

There are a lot of mechanisms that you can use to manage the balance sheet rate sensitivity and I'm very comfortable with the disclosure we have in terms of our positioning should rates rise.

Okay.

All right.

Thank you.

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

Please go ahead with your question.

Good morning.

Good morning.

Thanks for taking my questions.

Just an administrative question on the net interest margin.

The increase in the net interest margin, and forgive me if you've already covered this, was up about seven basis points over the quarter.

That seemed to be largely due to the consolidation of assets on the balance sheet and that's one of the reasons why you're targeting a somewhat lower net interest margin in the second quarter?

You know, Matt, that didn't really have a large impact.

The principal reason for the improvement was a little bit on the wholesale -- on the funding costs, a little bit of the mix of funding, a more move towards core deposits and a little bit on the loan repricing that we talked about.

Those are the key factors.

The principal reason that we are expecting a little bit of a decline in net interest margin really relates to CARD act and some of the legislative changes around that and that's the reason for the low to mid 380's.

Okay.

And can you give us the amount of the reps and warranties expense in the quarter?

Reps and warranties expense?

Give us more.

In terms of mortgages that have been put back to you by the GSEs or other parties?

Oh, I see.

Thank you, Matt.

That's insignificant for us.

We've had a very good origination process.

We are very good at dotting the i's and crossing the t's and that has not been an issue for us.

Thanks.

And then one last question related to Nancy's question on acquisitions, but at a somewhat different take.

Given the landscape has really for in consumer finance rather than traditional mortgage lending, I've got to think the events of the past couple of years have made that market much more wide open for competitors such as U.S.

Bank.

Is there any appetite in your -- for you to purchase perhaps some more consumer-oriented finance franchise rather than a bank at this point given the somewhat lower competitive pressures in that business?

No, the answer's no.

I owe you more than that, but, a couple reasons, Matt.

We have a wholly-owned finance company in the bank that we started in 1993.

Actually, I was part of that, at the old Star Bank and we have a very broad network of correspondence and brokers that we've worked with now for almost twenty years.

We could turn that volume up in a second if we wanted to, and as you know our credit in that portfolio is less quality than the bank but it was much better, I would say, more like near prime kind of business.

So we don't have any interest in finding another avenue.

I certainly wouldn't do a branch network.

We actually had one years ago and closed it down because it's not conducive for those kinds of customers.

Your branch is really the best place for deposit gathering.

So if we wanted to turn on the spigot for consumer finance you wouldn't believe how much we could do.

So what little we're doing is a reflection of our fact that we only want to do it through the very finest people.

We need to do a lot of it originated through our own customers and be very prudent about who we deal with outside.

And what you see will probably grow over time, but we're not going to take advantage and I do think, by the way, you're onto something and that is that as the world starts to evaluate these consumers and small businesses that have failed, who's going to be the first to say, I'll look the other way and bring them back to a credit and it isn't going to be us.

So, if someone is going to do that, they're going to say, I'll waive our bankruptcy, I won't make you go years.

Remember our parents used to tell us watch your credit history, it's your whole reputation.

I'm sad to say I think one of the first things we'll see is people jumping back in and allowing failed clients to get back in and to me that's a mistake.

But we'll be very careful and you won't see that move much more than increments over quarters.

Thank you very much.

Yes.

Our next question comes from the line of Moshe Orenbuch with Credit Suisse.

Good morning, Moshe.

Good morning.

I am showing that he has withdrawn his question.

And our next question comes from the line of Chris Mutascio with Stifel Nicolaus.

Please go ahead with your question.

Good morning, Chris.

Hi, Chris.

Hello?

Hi, Chris.

Okay.

Andy, most of my questions have been asked and answered but I've done a remarkably poor job in forecasting your other fee income line item.

It bounces around a lot.

I know in the release you talked about three things, one was the payments-related gain in the fourth quarter.

I think you talked about the lower equity investment income and the impact of retail lease residual valuation losses that have -- between fourth quarter and first quarter.

Can you go over those swings with me on those three individual line items?

Sure, Chris.

So in the fourth quarter of 2009, we had a payments related gain of about $30 million that was more of a one time event, not repeated in the first quarter.

The equity gains -- we have an equity investment portfolio, PEMB, that was down a little bit quarter over quarter, under $10 million or $15 million.

And finally in the least residual category we continue to see improvement.

The improvement in the fourth quarter was more dramatic in terms of auto prices and so we had a little bit more positive fourth quarter than the first quarter and that was the other factor.

If you take those things out, it was fairly stable.

But those are three sort of unique events that impact other revenue.

So the 135 or so in terms of $135 million in the quarter for the other kind of fee income line item, is that a -- I know it's lumpy, but is that a decent run rate to look forward in subsequent quarters?

It was nothing unusual.

Let me say it this way.

There was nothing unusual.

Okay.

All right.

Thank you very much.

Sure.

Our next question comes from the line of Meredith Whitney with Meredith Whitney Advisory Group.

Please go ahead with your question.

Good morning, Meredith.

Good morning.

Good morning.

How are you?

We're good.

I wanted to take the opportunity because a lot of good questions have been asked, but to get more of a landscape-type feel because you see so much of the consumer and the consumer activities and small business activities.

There have been some mixed messages so far from companies that have reported in terms of where spending has come from and from retail sales numbers, it looks like all but Wal-Mart, spending's coming from everywhere.

If you take out gas, can you bifurcate the consumer?

Because it seems that the lower end still has less access to credit and shouldn't be spending that much?

Is it all driven by the high-end?

Or could you add some color to that?

And then I have a follow up, please.

Yes.

I'll start and then have Andy pick it up.

We do have a great view of the world as -- at least the retail consumer world.

Our merchant acquiring portfolio is one-third airlines, one-third hoteliers and one-third retail and our credit card business is pretty robust.

So what we're seeing is a lot more activity in the debit card, not credit, makes sense, right?

They're using money they have and you've all seen how consumers have getting more prudent.

And we've seen on a year-over-year basis on our merchant-acquiring, Meredith, a 13% increase quarter one last year to quarter one this year.

That's a nice spread between travel and retail activities.

But those are primarily the first large signs of year-over-year quarter-to-quarter growth we've seen, and it's primarily found and demonstrated in the debit side.

So, we're also seeing consistency in people not using their credit card.

Andy, you might want to pick up on corporate cards are very strong.

The government, I'm happy to report, is spending their budget and the money is being spent as we predicted.

But the credit activities are still going to be slow and I think you'll see the [NSFOD] reflect some of that lesser buying as well.

Right.

That's right, Richard.

So, we had our corporate card activity increase principally due to government spend.

Same-store sales again, 3% up year-over-year, that compares to 3% down in the fourth quarter, so we are seeing some improvement there.

And I would say that that improvement Meredith, was rather broad-based.

It was both domestic and international in our merchant acquiring portfolio in Europe and across most categories.

So not, not a significant upward tick but, across the board everything was a little bit more positive.

But, theoretically, those that have less in their savings accounts or checking account can spend less.

So there should be a natural divide towards the higher end in spending.

I guess it kind of drill down in terms of where spending's really coming from if you take out gasoline.

Yes.

I am taking out gasoline every time I answer.

We get paid a great deal more on the actual transaction than the size of it.

So everyone still goes to the grocery store.

They still go to the gas station.

They still swipe their card.

And that's one of the benefits of a merchant acquiring portfolio, that we get paid as much for the transaction as we do the size.

So, I'm probably less clear on the impacts of smaller ticket size in debit than I would be of credit because it's the outstanding that it creates.

But you're right, the people have less money.

They're being more careful.

But I'll tell you they're actually spending it more often.

So, they're going to the ATM machine, to keep it simple for me.

They'll go there and pull out $20 five times in a week, then they'll pull out $100 on Monday, because they're just not sure what it will look like by the time payroll comes around.

So we're seeing activity's actually starting to pick up.

We're not necessarily seeing average balances.

And on the credit side, we're obviously seeing them slow down and be careful of spending money they don't have.

Ok, so when I do checks in terms of different regions, you feel real populous rage amongst small business owners and consumers, vitriol against Wall Street as community banks are closing and whatnot.

How are you addressing those needs?

Is that where you're picking up market share?

Is there, what does the small business lending environment look like as they fund themselves primarily through credit cards going forward?

And then I'm done.

No, no.

Those are good.

So, the small businesses used to fund themselves in great part sole proprietors with their home equity, which is an ATM, and they typically would use their credit card.

So, I'll tell you what.

We are getting a flight to quality, as some customers in small business that are looking for a place that they feel safer at.

But we're not seeing a great deal of growth in small business qualified customers.

I mean if they are, it's a perfect reflection of this economy and either those who are looking for a loan, who need it the most, are probably the least qualified and we're certainly not making that loan.

We want to help them out.

We are giving a lot of guidance but we're not making that loan.

And I'll tell you, if they don't have the access to the credit card and they don't have home equity, that is what you're hearing from Main street.

And that is, we need loans, we want loans.

And I'll tell you what, we want to make them, but it would be imprudent for us to make them at a time in the cycle where they're least qualified.

And so the best we can do is give them guidance on how to become more attractive as a future lending candidate.

But we typically will say no unless they're qualified and we're not changing our underwriting.

So, we're seeing a relative flight to quality, but an absolute shrinkage in qualified people who are looking for a loan that they can actually pay back.

Okay.

So, in other words, you see a growing percentage of sort of a de-banked --

Yes.

I do.

-- factor?

Okay.

All right.

Thank you.

Thanks, Meredith.

Our next question comes from the line of Betsy Graseck with Morgan Stanley.

Please go ahead with your question.

Good morning, Betsy.

Good morning, Betsy.

Good morning.

Thanks.

Two questions.

One is on the administration's proposal recently for HAMP to have another way of restructuring loans to include principal forgiveness if the borrower qualifies.

And could you just give us a sense as to how you're thinking about that program and how that could potentially impact your portfolio?

Bill, why don't do you that?

Yes.

So are you talking about the 2MP or the ones on firsts?

Both.

Well, they're different, so don't --

Yes, they are.

Yes.

Correct.

Well, my question was specifically on the first, but what's the overlap to the 2MP would be helpful, too.

Yes.

So, on the 2MP for our portfolio, we have very few purchase money seconds.

And I think that is more what that portfolio or what that program was designed for were the first and seconds were done together and really act like one mortgage.

So for us it was almost 90% of our portfolio coming out of the branches where it's just traditional home equity.

We don't feel that that program is really appropriate or designed for our type of portfolio.

On the other program, I mean, there's the home affordable foreclosure alternative, that's the one that's to encourage short sales or to make sure short sales don't get in the way of a transaction that's beneficial to the homeowner.

That's something we're already working on.

We've already been doing short sales and we continue to do that.

The other one is the enhanced, what I'll call the enhanced HAMP.

That's the one that they say might get in place by August or September.

Got you.

Where they have temporary relief for if you lose a job, et cetera, et cetera.

That thing has got -- there's a lot of details to be worked out on that.

So it's not clear to us exactly how all that would work at this point.

Okay, so -- go ahead.

To summarize, the 2MP are -- which is the HAMP for seconds, we're not opting in.

And we're not because our portfolio doesn't really lend itself to that.

But I also just want to say, when you opt into a program and the rules keep changing, you regret having opted in because you just can't predict, and we're in the business of giving you guys a fairly good predictable company.

And so, I'm telling you what -- this Company would do everything that's right for all the people that deserve it.

But in some cases, we're going to do it because it's right,not because we're mandated and the rules changed.

And I'm very strong on that, because we don't deserve to be told how to run the Company when we're trying to do what's right.

And sometimes the rules are actually prohibitive of letting us work around some other constructs for customers that have unique circumstances.

And I do think that Bill's point, the enhanced HAMP that's coming along, we are in HAMP and we will provide support for everything we are asked to do.

But we are going to continue to be vocal in making sure that the rules aren't creating outcomes that make it harder for consumers to get what they want and/or that they don't create incentives for healthy consumers who find themselves in harm's way to play into the game of the new rules.

That's a really unintended consequence that we've got to watch for.

Okay.

Now that's very clear.

Thank you.

And then the second question I had was just on the dividend and the dividend outlook.

Could you just give us some updated views there?

Sure can.

This is sadly an update of no new information.

It's a repeat of what I said before.

We believe a couple of key paradigms.

And one is that we are able to increase our dividend based on our forecast of our earnings and based on the stress test upon which we know there are a number of variations and versions that we are using.

We can substantially increase our dividend and be fine with the earnings.

But we understand the government's need, number one, to be absolutely positive this recovery is sustained and on it's way.

And therefore, we understand that they don't want to be giving anybody permission to do that in case things would turn around.

And I think we need to follow that logic.

And secondly, I understand that they're still waiting, I think, at the levels that you and I both know, both at the domestic and global levels to decide what the final definition of capital will be, and then what the final number will be, in fact, which final ratio it will be.

So, we're soon to find out what the ratio will be used.

Whether it will be core or the new definitions that are now out for comment.

Whether it will be domestic, and I understand that's going to be a little longer than I'd like to wait, but I understand that we're in queue with that knowledge that that has to be understood as well.

So I'm waiting for permission.

I'm waiting for guidelines.

If it was my own information that I have at hand and I could do it by myself, I would raise the dividend now.

But I -- it would be imprudent to do so and I'm not going to challenge the regulators.

We're working well with them.

We understand that they're giving us all the information along the way.

And we're not going to either sit back and wait around without making it known that we're out here and that we're eager to do it.

Okay.

All right.

Thank you.

Yes.

And our next question comes from the line of Carroll Berger with Soleil Securities.

Please go ahead with your question.

Hi, Carole.

Hi, Carole.

Hi, there.

How are you?

Just to clarify on your last statement.

You make it sound like the regulators at this point, don't want you, or are telling you not to raise the dividend.

Is that what you meant to say?

Sure.

I did.

I think people didn't realize probably, that in all the years we've all been together, and I've known you for many of those.

We always needed to get permission to raise the dividend.

It's just that everyone was making, at the time, the dividends were always probably 40% or 50% of totally -- or total earnings.

And nobody ever needed to see the work.

When the world turned down, and companies started to lose money and some were not able to cover the dividend, it became clear that the rules that we weren't all talking about were present again.

And that is, the Federal Reserve has the right to decide and approve on any dividend action at any time.

And that's what we're dealing with.

And so the Fed has been very clear in telling us that whether you are ready in your own mind, we need to be sure that this economy is ready for you and anyone else that we might permit and we're not ready to give you that answer.

And so --

Okay.

And have they given you any indication of what metrics they're looking at to decide that?

No.

And that's my point earlier to Betsy's question.

I think they would agree that there are a number of uncertainties in terms of which ratio we'll use, whether it will be a national or a global construct, how long we'll have to get there.

And now, as you know, with Basel III, or whatever you want to call it, now there's even a question of what will be the definition of core capital before we even decide what the number is.

So all the moving parts are obvious to all of us and so its not -- I'm not surprised that we can't get an answer because I understand the prudence of making sure that we don't do something we, as an industry, that we would regret.

On my hand though, I have to be a vocal advocate for my company and make sure that we're not collateral damage in the waiting game.

And so, we're good partners with our regulators, we're making it very clear we're anxious, we want to move on.

We give them our numbers, we show them our stress tests, and we continue to argue the merits of -- let us move forward, and at this point, they're saying not yet.

And we're waiting for better guidelines.

Okay.

My other question was, both on deposit pricing and loan pricing, do you think that the consolidation that we have seen is going to make a difference going forward in the fact that we probably have more rational prices in the marketplace?

And if you wanted to, could you comment on taking WaMu out of the game and replacing it with JP in your marketplace?

Sure, Carole.

This is Andy.

And I'm not talking specifically, but your statement is absolutely correct.

I think if you look at the last eight quarters or so, deposit pricing has become much more rational.

At the same time, we've moved up, from the lower quartile to the median in our peer group, and I think the combination of lower rates and the fact that deposit pricing has become more rational allowed us to do that with very little impact to margin.

I will say, Carole, the world is uneven and so the community banking markets really have 1,000 of our 3,000 branches are later in the cycle.

And I will say wouldn't surprise you that some of the banks that are starting to stress, their last ditch effort is to be very aggressive on deposit pricing or to be very unrealistic in loans.

And so, until things are cleared up, it's probably a year or two from now when the majority of FDIC transactions have been recognized and reckoned with, I think we'll see in different markets unreasonable pricing.

But in the big markets, and the banks you're talking about, we're seeing a much more solid, rational performance in pricing.

And it gives us all a better sense of dealing with a community of banks that are all working together.

To not coalesce, or to price together, but to working where we get paid for the risk and we do the right job of giving people the discriminate value for relationships and more business gets better pricing.

Okay.

And just for my own edification, when you said you moved up the rankings in terms of deposit pricing, have you moved up or has everybody else moved down?

It's definitely both.

We've definitely -- we've made a very discriminate move in the last eight quarters to pay up on deposits and many have come down.

And I think, partly because of the earlier conversation, there's an entire range.

We can be in the top half and not need to be overpriced or taking the kinds of risks that we might have had to a couple of years ago.

Thank you.

Yes.

Thanks, Carole.

Thanks, Carole.

And there are no further questions in queue at this time.

Well, let me just close.

I want to thank you all for your interest in our company and your support.

I want to characterize that it's not very sexy, and that's present company excluded, of course.

But this is a company that's simple and straightforward, and I think predictable.

And I hope that that has value to all of you and therefore, to our shareholders.

There's so much volatility and so much noise.

We're very proud of what we've been able to accomplish in the last couple of years.

And let it be that each quarter will continue to be predictable and hopefully, repeatable and simple.

I do think, that from the earliest question this morning, if we are building the company that I know we are, you'll see the real benefits in years forward when you'll appreciate the kind of efforts we made at a time when so many others were working on other things.

And I'm excited about -- I think today was a very good demonstration of our core, simple bank, but I think it portends that we've got a really good future based on some things that are starting to emerge that I'm looking forward to sharing with you in future years.

So, Judy, do you want to close?

Yes.

Thanks everyone, for listening, and as always, if you have questions, please feel free to call.

Thank you.

Thanks.

Thank you.

And this does conclude today's conference call.

You may now disconnect.