美國合眾銀行 (USB) 2012 Q1 法說會逐字稿

Welcome to U.S.

Bancorp's first-quarter 2012 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 11.00 a.m.

Eastern daylight time through Tuesday, April 24 at midnight Eastern daylight time.

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

Bancorp.

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

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

Bancorp's first-quarter 2012 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 2 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 and good morning, everyone.

We are pleased to share our results with you today and I will begin with the highlights on page 3 of the presentation.

US Bank recorded net income of $1.3 billion for the first quarter of 2012, or $0.67 per diluted common share.

Total net revenue was higher by 9.1% over the same quarter of 2011 driven by 7.3% growth in net interest income and 11.3% growth in fee revenue.

Total average loans grew year-over-year and linked quarter by 6.4% and 1.5% respectively.

And we are also experiencing strong loan growth in total average deposits of 11.7% over the prior year and 2.2% linked quarter.

Credit quality continued to improve as net charge-offs declined by 8.2% and nonperforming assets decreased in total by 8.5% from the prior quarter.

We continue to generate significant capital each quarter.

Our Tier 1 common equity ratio was 8.7% at March 31, or 8.4% using anticipated Basel III guidelines, while the Tier 1 capital ratio ended the quarter at 10.9%.

Capital actions this quarter included a 56% dividend increase and we repurchased 16 million shares of common stock during the first quarter.

The five quarter trends of our industry-leading performance metrics are shown on the left-hand side of slide 4.

Return on average assets in the first quarter was 1.6% and return on average common equity was 16.2%.

We have stated that our Company can achieve a normalized ROA in the range of 1.6% to 1.9% and an ROE between 16% and 19%.

Both performance ratios have now reached their respective ranges.

Our net interest margin and efficiency ratio are shown in the graph on the right-hand side of slide 4.

This quarter's net interest margin of 3.6% was 9 basis points lower than the same quarter of last year, but equal to the prior quarter.

Andy will discuss the margin in more detail in just a couple of minutes.

Our efficiency ratio for the first quarter was 51.9% and consistent with our expectations, this ratio will remain in the low 50%s.

Turning to slide 5, our capital position remains strong and continues to grow.

At March 31, our Tier 1 common equity ratio using anticipated Basel III guidelines was 8.4%.

At 8.4%, we are well above the 7% Basel III minimum requirement and above the level at which we believe we need to be.

Turning to slide 6, on March 13, after receiving the results of our 2012 comprehensive capital analysis and review from the Federal Reserve, we announced a $0.28, or 56% increase in our annual dividend.

In addition to the dividend increase, the Board authorized a new 100 million share repurchase program.

As we have indicated in the past, our long-term goal is to return between 60% and 80% of our earnings to our shareholders through dividends and buybacks.

During the first quarter, we returned 66% of our earnings to our shareholders, 29% of which in the form of dividends and 37% in the form of share buybacks.

Average total loans outstanding increased by $12.6 billion, or 6.6% year-over-year.

As expected linked-quarter loan growth in average total loans was 1.5%.

Significantly, new loan originations, excluding mortgage production, plus new and renewed commitments, totaled over $36 billion this quarter.

This represents a 4.5% year-over-year increase in new and renewed lending activity.

Total revolving corporate and commercial commitments outstanding increased year-over-year by 25.7% and 5.1% on a linked-quarter basis while utilization remained fairly consistent at approximately 25%.

Total average deposits increased by $24 billion, or 11.7% over the same quarter last year while total average deposits grew by $5 billion on a linked-quarter basis, or 2.2%.

Turning to slide 8, the Company reported total net revenue in the first quarter of $4.9 billion, an increase of 9.1% over the prior year's quarter, but 3.4% less than previous quarter.

Recall, however, that the fourth quarter included a $263 million litigation settlement gain.

Excluding this gain, linked-quarter revenue growth was $88 million, or 1.8%.

The Company's revenue growth can be attributed to both our balance sheet and our fee businesses growing as we continue to benefit from our investments and growth initiatives over the past years.

Turning to slide 9 and credit quality, first-quarter total net charge-offs declined by 8.2% from the fourth quarter of 2011 while non-performing assets decreased by 8.5%, or 5.9% excluding covered assets.

The ratio of net charge-offs to average loans outstanding was 1.09%, improving from the 1.19% recorded in the fourth quarter.

Turning to slide 10, as the graph on the left illustrates, early and late-stage delinquencies, excluding covered assets, improved this quarter.

On the right-hand side of slide 10, you can see that the trend in criticized assets continues to show improvement.

Both of these statistics provide us with confidence that net charge-offs and non-performing assets will trend lower in the second quarter of 2012, although net charge-offs may show a more modest reduction than in recent quarters as the pace of improvement slows in the consumer categories.

Given the first quarter's credit results and the expected improvement going forward, we released $90 million of reserves compared with $125 million in the fourth quarter and $50 million in the first quarter of 2011.

I will now turn the call over to Andy.

Thanks, Richard.

Slide 11 gives you a view of our first-quarter 2012 results versus comparable time periods.

Diluted EPS of $0.67 was 28.8% higher than the first quarter of 2011 and 2.9% lower than the prior quarter.

Recall that the fourth-quarter EPS included $0.05 related to two notable items.

Slide 12 lists the key drivers of the Company's first-quarter earnings.

The 27.9% increase in net income year-over-year was the result of a 9.1% increase in net revenue and a decrease in the provision for credit losses, partially offset by a 10.6% increase in non-interest expense.

Net income was slightly lower on a linked-quarter basis.

The unfavorable variance was the result of a 3.4% decline in net revenue, partially offset by lower non-interest expense and a $16 million decrease in the provision for credit losses.

Excluding the impact of the two notable items detailed on slide 13, net revenue increased by 1.8% quarter-over-quarter and non-interest expense was flat.

Slide 13 provides you more detail about the notable items that impacted the comparison of our first quarter to prior periods.

In the fourth quarter of 2011, total non-interest income included a $263 million litigation settlement gain related to the termination of a merchant processing referral agreement.

We also booked $130 million expense accrual related to mortgage servicing and foreclosure-related matters.

On a net basis, these two items increased fourth-quarter net income by approximately $92 million and EPS by $0.05.

The first quarter of 2011 included a $46 million gain related to the acquisition of First Community Bank of New Mexico from the FDIC.

Also noted in the bottom of slide 13 are two revenue and expense classification changes that had an impact on comparisons to prior periods.

Moving to slide 14, net interest income increased year-over-year by $183 million, or 7.3%.

The increase was largely driven by the $26.1 billion, or 9.5% increase in average earning assets, as well as the benefit from strong growth in low-cost deposits.

The growth in average earning assets was driven by planned increases in the securities portfolio and growth in average total loans, partially offset by a lower cash position at the Federal Reserve.

The net interest margin of 3.60% was 9 basis points lower than the same quarter of last year, due primarily to the expected increase in lower-yielding investment securities, partially offset by lower cash balances at the Fed and the inclusion of a credit card balance transfer fee.

On a linked-quarter basis, net interest income was higher by $17 million.

Average earning assets grew by $4.9 billion and net interest margin was flat to the prior quarter.

Margin was slightly better than expected this quarter primarily due to the inclusion of balance transfer fees and lower cash balances at the Fed.

Given the current rate environment, we expect the net interest margin to be down a few basis points in the second quarter.

The investment securities portfolio at March 31 totaled $74.3 billion.

The balances were higher than December 31 as we took the opportunity to manage down our cash balances and purchase investment securities.

We expect to maintain the investment securities portfolio at or around this level for the next few quarters.

Slide 15 provides you with more detail behind the changes in average total loans outstanding.

Average total loans grew by 6.4% year-over-year.

Excluding covered loans, our runoff portfolio, average total loans increased by 8.7% year-over-year.

As you can see on the chart, the increase in average total loans was principally due to strong growth in commercial loans and residential mortgages of 17.3% and 19.1% respectively.

Commercial loan growth has continued to accelerate over the past five quarters while growth in consumer lending has been less robust.

On a linked-quarter basis, the 1.5% increase in average total loans outstanding was also primarily driven by an increase in commercial loans, which grew by 3.4% and residential real estate loans, which grew by 4.3%.

Slide 16 provides more detail on the growth in total deposits over the past five quarters.

Average total deposits grew by $24 billion, or 11.7% year-over-year.

On a linked-quarter basis, average deposits increased by $5 billion, or 2.2%.

Importantly, average low-cost deposits accounted for the majority of the increases on a year-over-year and linked-quarter basis.

Slide 17 provides more details around the changes in non-interest income on a year-over-year and linked-quarter basis.

Non-interest income increased by 11.3% over the same quarter of 2011.

Mortgage banking revenue was very strong this quarter as production increased by 58% year-over-year and gain-on-sale margins improved.

Offsetting a portion of the growth in origination and sales fee income were an unfavorable net change in MSR valuation and related hedging of approximately $32 million and an increase in the repurchase reserve.

In addition to mortgage banking, merchant processing services, deposit service charges and commercial products revenue also posted solid increases year-over-year.

These positive variances were partially offset by lower credit card and debit card fees due to legislative changes to debit card interchange, as well as the change in classification of balance transfer fees.

Offsetting the impact of these two items were legislative-related mitigation activity and higher transaction volumes.

ATM services revenue was lower as a result of the change related to revenue pass-through to others and finally, other income in the first quarter of 2011 included a $46 million gain related to the FDIC transaction.

On a linked-quarter basis, non-interest income was lower by $192 million, or 7.9%.

This favorable variance was primarily the result of the merchant settlement gain in the fourth quarter of 2011, seasonally lower payments-related revenue and the revenue classification changes partially offset by very strong mortgage banking activity.

Slide 18 highlights non-interest expense, which was higher year-over-year by $246 million, or 10.6%.

The majority of the increase can be attributed to higher compensation and benefits expense representing additional staffing in the branches, mortgage-related activities and business expansion initiatives, an increase in professional services primarily due to technology and foreclosure review projects, as well as marketing and business development expense and other expense related to regulatory insurance-related costs.

These higher costs were partially offset by a decrease in net occupancy related to the change in ATM revenue passed through to others.

On a linked-quarter basis, non-interest expense was lower by $136 million, or 5%, primarily due to the fourth-quarter mortgage servicing accrual, occupancy expense, partially offset by seasonally higher employee benefits.

The tax rate on a taxable equivalent basis was 30.9% in the first quarter of 2012 compared with 30.5% in the fourth quarter of 2011 and 29% in the first quarter of 2011.

Slide 19 provides updated detail on the Company's mortgage, purchase-related expense and the reserve for unexpected losses on repurchases and make-whole payments.

Our outstanding repurchases and make-whole request balances at March 31 was $134 million compared with $105 million at December 31.

The increase, in addition to recent changes in the GSE sampling method, specifically higher sampling sizes, caused us to increase our mortgage representation and warranties reserve to $202 million.

We do, however, expect mortgage repurchase requests to remain fairly stable over the next several quarters.

I will now turn the call back to Richard.

Thanks, Andy and to conclude our formal remarks, I turn your attention to slide 20.

The momentum continues -- words from the cover of our Annual Report that appropriately describe our 2011 accomplishments and performance and our first-quarter results demonstrated the momentum we have built over the past several years continues to build into the new year.

In the first quarter, we grew our balance sheet and our customer base.

We grew our net revenue.

We continue to invest in organic growth initiatives, as well as small, but important fill-in acquisitions, including the 10 branch banking franchise of Bank East in Knoxville, Tennessee, the Indiana Corporate Trust business from UMB Bank and an institutional trust business from Union Bank in California.

In the first quarter, our credit quality continued to improve.

Our capital liquidity positions remain strong and we grew our earnings and achieved industry-leading performance metrics for the quarter and we were able to return 66% of our earnings to our shareholders through dividends and buybacks.

We continue to benefit from our investments in growth initiatives and innovation and in acquisitions.

We continue to benefit from our prudent risk management and our diversified business model and we benefit from our markets, both established and new.

Today, we will be holding our annual meeting here in Minneapolis, our headquarter's city.

In addition to conducting the official business of the meeting, I will be sharing our story of how we have managed this Company through the downturn and we are continuing to capitalize on the momentum we have built.

I will also tell the shareholders how exceedingly proud I am of what we have accomplished and of the 64,000 remarkable and engaged employees that have contributed to our success.

I look forward to the coming year as we grow even stronger for the benefit of our customers, employees, communities and importantly our shareholders.

That concludes our formal remarks.

Andy, Bill and I would now be happy to answer questions from the audience.

(Operator Instructions).

Chris Kotowski, Oppenheimer.

Good morning.

First of all, I guess just wonder if you can give some color commentary around loan demand, trends through the quarter.

Do you still see -- are there any particular pockets of strength, weakness, sector -- either by sector or by geography?

Sure.

This is Richard.

As we have stated, 90 days ago, we thought that the trends would slow from quarter four partly because of the seasonality of the new year and we saw the ending of the quarter kind of slowing down and we turned out to be correct.

In this case, we are starting to see what I expected was a slow, but seasonal increase as we move into quarter two.

Quarter one got stronger as it aged and quarter two is looking at least as good as quarter one, if not with slight biases on the positive side.

It is across the board, Chris.

Corporate banking, commercial banking, community banking, small business, consumer credit card, they are all showing slight improvements in terms of volume and applications.

All of them are showing improvement in credit quality.

And except for commercial real estate where we see strengths on the coasts and the larger cities that kind of line the two oceans, we don't see any other distinct geography to note except a nice steady kind of even increase across all business lines across all states where we do business in all 50.

So we are feeling quite positive about the year as it ages and as spring has sprung, we are looking at things looking up pretty nicely.

I have got Bill Parker here with me to maybe bring a little more color to the quality and the application volumes.

Yes, so I'll highlight small business because we did see a pretty good uptick in our small business application volumes.

It has been double digit in all of our different areas, whether it is SBA or the branch originated small business.

So that bodes well to see some strength in the small-business markets and I will just comment on the credit and commercial real estate.

Multi-family is the one area that is very strong and particularly on the coasts.

And the other areas, class A properties are highly valued, but if you get below class A and the other asset classes, it's still -- I don't want to say weak, but it is not as strong, but overall pretty positive.

And we won't -- we have said this before.

We can compete on price and we will to the right level, but we won't engage in price competition where it doesn't make sense for our Company and we won't get our loan volume on lower (inaudible).

We simply won't do that and we haven't had to and we are not going to.

Okay.

Then the other thing I wanted to ask about was your mortgage servicing portfolio has started to grow significantly and it had been flat the prior couple of quarters.

In the last two quarters, it has kind of grown significantly.

I am wondering is that just a function of the strong production volume that we have had recently or do you see that as a particular strategic growth opportunity in that some of the larger players are probably constrained in how they can grow their servicing business?

Yes and yes.

So it is a function of -- the latter informs the former.

So we are having really nice marketshare improvement because we've stayed very active in this.

We have added a lot of resources to continue to be relevant as a mortgage originator and a servicer and because the market dynamics have changed, we have continued to enjoy even greater growth maybe than we might have thought.

We have no limits on the kind of resources that we might pursue to this level because we see a market shift that you only get once in a lifetime and we intend to enjoy it now and come out of this as probably the -- I don't know -- in the top five for sure of mortgage servicing and production and we are seeing that to come sooner than we thought.

Okay.

And specifically that -- is that something that you could imagine getting into the kind of standalone mortgage company business through acquisition or do you want to maintain mortgage production primarily out of the branches?

Well, we do it through the branches and through correspondent networks, so that is not going to change.

But like everything else, we don't want to be dominant in any one line of business.

So no more than I want to be a credit card company with branches attached to it, I don't want to be a mortgage company with a credit card business.

We really want to be a business that does the work for most of our customers, meet their needs where we know them first-hand and where there is opportunity to extend that based on marketshare improvement, we will take that as well.

But Chris, you will see us continue that kind of balanced view of revenue achieved through spread and fee income on a basis of diversity of types of business as well.

Okay, great.

That is it for me.

Thank you.

Moshe Orenbuch, Credit Suisse.

Good morning.

Could you maybe kind of flesh out some of your comments on the capital front?

I mean obviously you're now kind of -- you are past the point where you would likely see any SIFI buffer or anything like that and obviously two-thirds of the capital is a nice capital return.

But as you kind of look out there, are there acquisition opportunities that we should be thinking about or how could that evolve over the course of the next year?

This is Andy.

So our Tier 1 common Basel III standard is at 8.4%, probably a little higher than we would plan to be at and part of that is the volatility around that ratio as it relates to OCI and the available-for-sale portfolio as we enjoyed a bigger gain this quarter due to lower interest rates.

So you will see us somewhere in that 8.2% to 8.4% range depending upon that gain.

Our capital plan was approved and as we've talked about, we have a target of that sort of 30 to 40 dividends, 30 to 40 buybacks, more within that range.

That leaves us plenty of room for opportunities to present themselves in the marketplace for portfolio purchases, some small deals just like we have done in the past.

And I think we are sort of in a normal regular ongoing capital distribution methodology as we sit today with some dividends, some buybacks and some return for internal investment.

And what you saw last quarter would be a great proxy for future quarters in terms of M&A, branch opportunities where they come along, FDIC or otherwise, payments businesses, corporate trust opportunities.

The stuff you have seen us do over the last four years, five years, we see a pipeline for that opportunity and as Andy said, we have plenty of room left within our retained capital to do that.

Just a follow-up on the corporate trust, I mean there have been some recent lawsuits looking at the questions around the trustees' responsibility in some of the subprime securitizations.

Do you have kind of any thoughts as to how that might shake out?

Yes, absolutely.

I'm glad you brought it up.

And as you know, it is not new.

We have been dealing with this for as long as I have been here.

One of the benefits of corporate trust is it's a really good business.

Particularly when the market is strong, it's a good relationship and fee business and it provides -- it's a pretty high cost of entry, so you are either in it and you are good or you are not in it at all.

We have got the benefit of being in it and good, but with it comes the risk of confusion and it is a reputation risk that we manage every single day and it can be anything from foreclosed properties where we are often cited as the owner of the property or REO property where there is some problem with the quality of the structure and we are identified as the owner and it turns out we're most often the trustee.

And in fact, that causes people to be confused because that's still a complicated topic.

When a company might file bankruptcy and we are acting as trustee, it looks like we were the lender and put them into a bankruptcy and in more times than not, as you're talking about now in some of the MBS and other kinds of structured deals, we are often hired in as the appropriate legal source and the broker between two parties and often confused as the party in between.

So we will deal with that confusion because the business is so good and it has such a great upside potential and we are so deep into it, we just recognize it is something we have to manage.

And each time we get a chance to clarify and educate either for us or our civic leaders who are confused about it, we find an opportunity to do so.

But it will take quite a while for people to understand what trustee looks like.

I will close and give you my pseudo-legal point though that, as a trustee, we don't have the rights to reach in and touch the properties or change the rules of the engagement on the escrow.

It is our responsibility to execute as the law would have us and do that within the bounds of whatever the construct of the trustee relationship is.

It is not ours to overreach or to step in and fix something we weren't asked to do despite the temptation by sometimes people who want us to do that.

So we will deal with the confusion and the more times people give us a chance to clarify, the more times we will take it.

Okay, thanks.

Matt O'Connor, Deutsche Bank.

Hey, guys.

You have obviously been outgrowing the industry in the loans.

You have talked about some NIM pressure going forward.

When you put it all together, do you think you can still grow net interest income dollars from here?

I think the short answer to that, Matt, is yes.

So our NIM pressure was principally related to our increase in our securities portfolio and that is true on a year-over-year, as well as linked-quarter basis.

We took advantage of our long cash position this quarter to accelerate some of our purchases, but I think we are going to remain fairly stable in that securities portfolio going forward.

And we have a good amount of debt at higher costs rolling off in the second half of the year, so that will create some stabilization.

As I mentioned, I expect us to be down a few basis points in the second quarter, but then I expect some stabilization.

Let me also add, Matt, that I know this will be the case for everybody, but as well as we are doing on loan growth, we are doing even better in commitment growth.

And while that doesn't show up in the balance sheet, it shows up in the future and I think you are all going to be very pleased that whenever the robust economy comes back and it will, we are going to stand to enjoy a second round of I think comparative benefit because the commitment growth is so significant and yet to be tapped because utilization stays flat, we are actually quite optimistic that to answer your question with a strong yes.

Okay.

And then a separate topic, in terms of buybacks and just capital return overall, not that I am looking for a specific price in which you'd be buying back stock, but you have had some banks come out and say we'd be aggressive buyers up to here.

And I am just wondering conceptually, one, how you think about valuation and then two, one could make the argument that maybe special dividends over time might make more sense.

So how do you just think about balancing that over time?

Yes, Matt.

This is Andy.

As you know, the trade-off with the buyback is buying back the stock at times zero or the cash flows at times zero plus one and forward and we do have a specific view on that.

We look at that every month from the perspective of our Company and we have a very good view on the future.

At this price, we are still buying back our stock and there is a price well above the level we are at today that we would have consideration about holding back a bit, but we are not to that level now.

So we are very comfortable buying back at today's price.

We are also comfortable with the balance between dividends and buybacks because it gives us the opportunity to move in terms of buybacks up or down given other opportunities in the marketplace that we talked about before.

Okay, thank you very much.

Erika Penala, BOA-Merrill Lynch.

Good morning.

My first question is on home equity classification on the credit side.

I know this is a much smaller piece of your pie, but we saw from larger banks an increase in problem loans as they reclassified some of their seconds that are still paying as the first is in trouble.

Did you stick to that class or did you also stick to that same classification this quarter?

Is that already reflected in your numbers?

Erika, I am going to have Bill answer the technical issue, but, for us, I just want to highlight, it is very, very small and the numbers that you have seen from some of the larger banks are significantly greater than.

So for us, we are talking $15 million to $30 million, well below the $1 billion plus that you have seen elsewhere.

And so, for us, we believe that the classification we have today is accurate and reflects appropriately and we did do some actions last quarter that Bill can talk about.

But I will also say that if we discover that there is a prevailing view on how things should be handled, then we can do that.

So if you look at our non-performing loans, they improved by almost 8% linked quarter.

If we were taking that $15 million to $30 million, they would've improved by 7%.

So just to reiterate the immateriality of it and the fact that it's not a big number is important for me to highlight.

And Bill, you might talk a little deeper dive.

Yes, so I mean our home equity portfolio has two distinguishing features.

One, a lot of it is -- about $5 billion of it is actually lines that are in the first lien position, so there is not even another loan to look at.

So obviously that is very high quality.

And then those that we do service, about 30% of the portfolio, that is where that $15 million, $30 million comes from.

So it's just not a material number.

The other part of what that reclassification was about was really on the reserving side and I would argue the more important side.

We had implemented that sometime last year, so we feel very comfortable with the adequacy of our reserves on home equity.

Okay.

And just to veer into another topic, Richard, could you give us a sense or an update on your ability to reprice the deposit product in 2012 on the retail side?

I know a lot of banks had talked about mitigation efforts sort of in the first half of last year in anticipation of a debit interchange reform and just wanted to get a sense on how some of the -- the fee transfer to the consumer is paying out this year.

Thank you, Erika.

We have said that of the total loss of revenue that was derived by CARD Act, Reg E and Durbin that we would eventually get to 50% of that back and I think we said we were at 30% last time.

Our plan is to get to that 50% by year's end.

And I also said it won't be before year's end because we are going to be very thoughtful about this.

But I am comfortable we can do it.

In doing so, there's a couple things.

One is marketshare gain really helps a lot.

You can improve your fee revenue by just having more customers who are paying the current fees that you offer and feel good about that.

With our Checking With Choice and some of the way we have packaged our products, people are seemingly happy to pay those fees and get the services we provide, especially some of the things we are adding to the capabilities like mobile and more technology.

I would say, however, there will also be some increases in certain fee categories that we will continue to provide because we need to do that to return to the shareholders what they have been waiting for.

But we have to be very thoughtful about market positions and we are not one-size-fits-all.

We have basically business in every state.

We have 25 states where our consumer business is located and if we have to have 168 different solutions for that many different pricing markets, which is how many we have, we would do that.

So we are going to be very careful and thoughtful and look at where the market competition will allow us to increase the current fees and we are really going to go after it with some marketshare grab and continue to have more customers that pay what we think is a fair assessment for the service we provide.

Nothing magic and what I did say is we will get to that 50%, we will use the whole year to get there.

I am not rushing it.

We have got good momentum everywhere else and I am not going to mess up what is happening right now and the good momentum we have in the branches where they are getting more customers, deeper relationships and not putting them through the fits and starts of having to decide what prices we change all the time because we are very consistent and I want to give them that benefit.

Thank you.

I appreciate it.

John McDonald, Sanford Bernstein.

Hi, good morning.

Just a broader question, you guys are executing well; your profitability ratios are within the targeted ranges.

Kind of wondering where do you think you are still underearning, whether it is low interest rates or mitigating some of the Reg reform.

Where are areas that you can improve the profitability over the next couple years?

The best part of the story, and I mean the best part of this story is that we are just so not finished getting great at what we already do.

So hard as it is to talk about organic growth and pursuit of investments from prior periods, that is really what this story is all about.

And in fact, John, the reason quarter one 2012 was as good as it was was because of things we did in third quarter 2010 and the commitments we are making through employee engagement and technology.

So I would tell you we hit our peak in capital investments in 2010, but we will have to continue to work that off.

Our investments in the first five years of 2001 to 2006 were 45% less than they were in the last five years of 2006 to 2011.

So we have spent quite a bit of money, with your all's knowledge and permission, to reinvest in the Company and that is starting to show up in capital.

Acquisitions are all accretive, most of the time on day one and I think those continue to show as beneficial.

But this last part is organic growth and I know it is so unexciting to talk about, but it is exactly what is happening here.

And so from Wealth Management and building out to become a national first-class wealth manager, to adding our newest [scent], ultra-high net worth business, which is only a couple of quarters old, to this amazing buildout you have seen us take to a national level on our corporate banking capabilities, and then adding our payment skills across the globe and our consumer retail bank and small business now taking altogether new levels of performance, add it all up and that is what you get.

So I think on top of that, a stock market that is actually at best kind of flattish and interest rates, which we all know are as low as they are going to be, we have got upside on every single cylinder.

And if this is an 8 cylinder car, we are running at about 4.5 right now.

So if you like what you see now, just wait till things start getting better.

I think there is nothing but upward bias toward what we can do the old-fashioned organic way.

Okay, thanks, Richard.

That's helpful.

I had a question for Bill.

Where are you on the kind of cycle of reserve release and how do you see that playing out over the next couple quarters?

And then also if you could just comment what drove the higher reserve build for the rep and warranty?

Is that due to higher origination volume or something else?

Thanks.

Yes, so the reserve release, I mean we are in the point of the credit cycle where we will continue to get credit improvement probably for another 18 months.

We have commercial real estate assets that still need to be resolved and that is going to take some time and some of the residential mortgage portfolios are still stressed.

So that is going to take time, but the improvement is slowing.

I mean some of our portfolios are performing at extremely good credit levels.

Credit cards, auto is doing extremely well, so you're not going to see a lot more improvement in those areas.

So I think of the reserve release as something that will -- it will continue but at a lower level.

It will continue to decline.

And John, this is Andy.

Regarding the mortgage question, the principal reason for that was the recent changes from the GICs in terms of increasing their sampling size.

So I would not expect a significantly higher quarter-to-quarter loss rate, but perhaps a longer or more extended period and that is why we have a higher reserve level.

John, let me just add because God knows I have got to speak if you guys speak.

It's only fair.

I want to remind you that, as you saw our charge-offs hit a level of 1.09%, we have said to all of you for a long time that, over this cycle, this is probably a 1% charge-off bank, especially because of our credit card size.

We are hitting that 1% or getting close to it and I predict we will go below it and my goal is to do our best to make sure that our reserves within accounting rules stay to a place where we don't have to rebuild them all back later on.

As an industry, I am arguing for that as well because I think we have learned a lesson and we don't want to do that, but you have to appreciate that I think Bill and I both think that 1.09% goes to 1% and probably falls under that for a little while.

Not as a goal necessarily, but over the time and term of our long history, we think that we will be at 1% and we are getting very close to that.

Okay.

And then one just follow-up for Andy.

To the extent there is a nuance change in the GSE sampling behavior, is that then looking at a wider range of businesses, Andy or trying to put back stuff that has been paying for longer?

Any color on that?

It is just, John, going deeper in the loans that we are looking at and going back further.

So it is deeper and further in terms of the sampling size.

And there is going to be -- the more you look at, the more you may find and that is why we increased our reserve.

Okay, great.

Thanks, guys.

Ed Najarian, ISI Group.

Good morning, guys.

The question sort of asked, but maybe I'll ask it in a slightly different way.

So your 109 basis points and the charge-off ratio this quarter and given that long-term guidance of 1%, Richard, you have said in prior calls you expect it to dip below that 1% level.

That sort of looks likely now for next year.

Any thoughts as to how far you might dip below that level as you sort of continue to clean up credit and we see this big decline that we are seeing now again this quarter in the delinquency trends?

I mean could we go down to 70 or 80 basis points at some point?

I mean, Ed, I don't know where we end up.

When I say under 1%, I just want you all to know it is probably going to be -- it is going to overperform for a little while there.

It could be 90 basis points, it could be high 80s.

I don't know.

It is not going to be 50 or anything like that.

We are still making loans.

We are still taking calculated risks and you want us to do that.

But we are also not -- I am also telegraphing to you so we are not going to start reaching into riskier categories.

We are not going to start underwriting more aggressively.

We are not worried about protecting our position as one of the larger marketshare growers in the credit.

We are doing it the way we are doing it and we are not going to change.

So I am also telegraphing to you that we are not expecting it to get so pristine that you would think we are missing opportunities.

But I do think this is a high-quality book.

The stress tests would have said so each time they do it and I think you guys should be comfortable that if we fall below 1%, it is not a goal; it happens to be an outcome.

But our goal is to manage this Company right around 1% because that we think is the right level of risk and reward.

Okay.

Thanks.

And then secondarily, if I add back the repurchase provision on the mortgage side, I think I am getting to a mortgage gain on sale sort of gross number of about 230 basis points on the production.

First of all, is that about -- do you agree with that?

And then second of all, what are your thoughts on how long that can last or the pace that that might decline over what timeframe?

We all know that is a very wide number, but I think we are all struggling with how quickly and over what timeframe that declines.

So the production gain is based on net applications net of a projected fallout number.

So it is closer to 200 basis points in terms of the math.

And it is wider than I would expect it to continue in forward quarters, but we are enjoying robust business in our mortgage group.

As we have talked about, we are taking share and we are expanding our capabilities.

So I would expect the second quarter to have another strong quarter in mortgage and it is hard for me to see beyond that right now because there is just too much uncertainty out there.

But at least for the second quarter, it looks like another quarter in terms of a very wide gain on sales spread?

Our pipelines continue to be strong.

There might be some slowdown just given the -- about 75% of our first-quarter activity was refinance activity.

I would expect that to slow somewhat given that rates have stabilized, but the pipeline continues to be strong.

Right, but that is more of a comment on volume.

I am talking about the gain-on-sale spread.

Yes, in the first few months of the quarter here, I would expect it to continue strong.

Okay, all right, thanks a lot, guys.

Ken Usdin, Jefferies.

Hey, good morning, everyone.

Two quick questions on loans.

Number one, commercial real estate, an area that started to grow again a little bit for you guys and just want to understand how much of that is still moving over from the C&D book versus opportunities that you are starting to see in the marketplace.

How is the area looking as far as maybe the next part of the loan book to pick up and where are you guys in terms of your aggressiveness in that market?

Thanks, this is Bill.

It is not really moving over from the construction and development.

That continues to decline.

So the growth we have been picking up is more in stabilized properties and they are going to be class A properties, a lot of them with our institutional investors.

We have a pretty high quality group of clientele that our commercial real estate group has enjoyed many years of performance with and that is where we pick up the loan growth.

Yes, in fact -- Ken, it's Richard -- it's unremarkable in where it is coming from.

It is remarkable it is coming from everywhere and I think also the buildout of our corporate bank capabilities, as you have been hearing about the last couple of years, make us more of a one-stop shop for some of these larger real estate national companies that have used us now for higher positions, allowed us to be in the deals longer, have used us for capital market capabilities.

So for us, it is just like I said in the beginning.

It is everywhere; it is a little bit of every category; and I think it's this flight to quality that we continue to enjoy that I don't know how long that lasts, but every time we get to talk to you, it's still there and we will enjoy it until it is not.

Great.

And my second question just relates to just loan pricing.

Obviously yields came down a little bit in both C&I and CRE.

I just wondered if you had some anecdotes to share in terms of how you see loan pricing across the markets and across the commercial products.

Yes, this is Andy.

We have talked about the fact the last few quarters that loan spreads have stabilized and I would say that continues to be the case in the first quarter.

There are pockets of increased competition, particularly in the commercial area and maybe a little bit below that.

But overall, commercial wholesale loans spreads are stable.

Okay, great.

Thanks, guys.

I appreciate it.

Paul Miller, FBR.

Yes, thank you very much.

I had a quick follow-up question on the pushbacks.

You talked about increased sample size from the GSEs, a change in policy.

Can you just add some more color to that?

I don't know how else to define it other than they are looking at more loans, both from the perspective of the depth of the categories, as well as the timeframe.

So if they were looking at 10 loans before, they are looking at 12 now for whatever period-end and that is it.

So we applied a similar expectation on that increased sample size.

It could be that the increased sample size will result in actually a lower loss expectation.

We just don't know until we get through the data.

Okay.

Thanks a lot.

And then on the loan portfolio, which has grown very nicely for you guys, but one of the areas that has grown is residential.

And I think part of that is probably because of your marketshare increase in the mortgage banking space.

Is that mainly jumbo loans or is any of that 30-year conforming product?

Yes, there is definitely jumbos.

That primarily comes through our private client channels, so we do book those jumbo loans that are not GSE-qualified.

And then the other area of origination is out of our branches and we have a -- it is a refi product only.

Average loan size is less than $100,000.

These are low loan-to-value, first mortgage refinance originations out of our branch.

So those are the two main categories.

And those are likely to have a life of 10 to 15 years.

They are a schedule of 10 to 15 versus 30 years.

And what type of yield?

The spreads on those are probably 50 to 75 basis points above what you might expect from a GSE-qualified.

Okay.

And then one last question on HARP, I know there has been a lot of media reports and we have been publishing a lot of stuff about how HARP is better than expectations.

And as April 1, I believe, banks like you can start to pick at other servicing portfolios with somewhat limited reps and warrants.

I'm just wondering are you going to continue to try to take marketshare and maybe go after some of these loans and other portfolios.

Well, first of all, I'll just comment that our HARP volume has been pretty strong.

We had about a 47% application increase quarter-over-quarter, so we have seen good HARP refi production.

It is hard to say how aggressive we will be on going after the other people's business.

We have been very active in our own portfolio and we will continue to be active in our own portfolio.

That is our first priority.

Okay.

Hey, guys, thank you very much.

Mike Mayo, CLSA.

Hi.

Just to follow up on Ed's earlier question, so what -- if you are a 200 basis point mortgage gain on sale now, what would be typical?

And again, why is it greater than average and it is not just you, it is the whole industry?

Typical, Mike, would be somewhere between 1.25% and [1.25%].

It is higher right now because there is so much demand in the marketplace and there is a fairly healthy pipeline and the number of suppliers in the marketplace is down.

So it is just a function of supply and demand in the current market and that gives us some pricing opportunity.

And did you mean 1.25% to 1.50% is normal?

Yes, correct.

Okay.

And who are you getting share from in your pursuit to be top five?

Well, we are already there actually.

I was just being generous.

We are taking it from some of the larger guys ahead of us.

There is a couple of large banks that are backing it down on that business and just not putting their energy into resources.

And then on the other side, there are some smaller partners that are getting out of the business and looking like they are attriting.

So it is exactly what you see, Mike.

I don't have to name names, but you know who is in it big and who is growing and you know who is either backing down or not very present and we are getting it from there.

And then switching to your corporate banking buildout, which you have talked a lot about, but when I look linked-quarter period-end, commercial loans without commercial leases are up 18% annualized.

And we can look at average and average is up 15% annualized.

However you want to slice it, that's a big number.

And my question relates to how much of that growth is due to syndicated lending and how much of that growth is due to purchases of loans?

Well, I mean in the large corporate space, you're going to be active in the syndicated market and that complements our corporate bond issuance area.

So that is a piece of it, but we are also active in the middle market.

So our middle market group is included in those statistics.

We have ABL unit that has enjoyed nice growth, so it's really across the board.

And Mike, we haven't found much to buy.

We are not big acquirers of somebody else's loans.

There have been a couple of deals we have looked at.

We have passed on almost everything that you have seen in the public market and if there is a deal, we will cherrypick a loan or two.

It will have to mostly be a customer we already know and just a position and a whole level we are willing to take.

But it is not a growth strategy for us to go acquire portfolios.

If they come along, we will look at everything, but we are not as hungry for some of those deals as some others are.

And then lastly, as you've pointed out, your profitability ratios are within your targeted range, but are you leaving money on the table by not having a greater variety of capital market features to give your clients, especially with your corporate banking buildout?

OMG, no.

And I say that because we like -- we only do what we understand and that we can control and as trite as it sounds, I really like the consistent predictable repeatable business we have given you all.

I thought you were going to ask if we are going to stop at 16 and 1.6 and that would be no way either.

Are you kidding?

But we love what we are because I think you can count on it and you can -- it's an annuity and you can watch it grow and you can watch it adjust if you don't see any big surprises.

And adding to some of those additional opportunities are not hurting us at all because we have got all the ones we wanted to in the last few years by building out our wholesale bank and capital markets.

Nothing left we covet.

There is nothing we don't have that we want and there is nothing we have now that we don't want to keep.

So what you see is what you are going to get for quite a while.

All right, thank you.

Nancy Bush, NAB Research.

Good morning, guys, how are you?

Richard, a question for you.

We still are yet to find out about the G-SIFI.

We kind of know what it is, but not really.

Volcker is yet to come.

Are there any other major regulatory pieces outside whatever the CFPB may do that we're waiting for?

Nancy, this is Andy.

The only one that I know we are all watching is the final LCR ratio.

There is a definition out there today.

I know there is some discussion occurring with Basel and the Fed in terms of potential adjustments to that.

We have built a lot of liquidity on the balance sheet and whatever those final ratios are will guide us to whatever we finalize from the securities portfolio, but that would be the only other one I could think of.

Nancy, I was about to say, no, I don't think so and then I am getting the eye cross from Andy like I have one thing.

But let me tell you what I would characterize.

Between Volcker, Dodd-Frank, CFPB, as it relates to the financial impacts to our Company and to shareholders, substantially most of that has already been seen by those other activities of Reg E and Durbin and CARD Act and things like that.

Now it will change the course of how we run the Company because we will have to maybe dot our Is and cross our Ts twice.

We'll have to confirm certain behaviors.

We've built our capital markets business knowing that the Volcker rules were going to change.

Dodd-Frank -- probably 65% of Dodd-Frank will touch our Company and a big majority of it is going to be more paperwork transactions and managing the details, but not the financials.

And CFPB -- I remain optimistic that they haven't done anything I haven't seen yet to pick argue with and we will watch and see how they perform.

But I think if their original true goal of being transparent, clear and helping customers understand what they bought, we are going to be in great shape there.

If they get into things like price-fixing and things like that, then we will deal with that when we face it and it will affect everybody and as usual probably affect us less.

But for now, I think we're, as a management team, keeping our eye on so many things, but not sitting here worrying about the peril that it will create for the investment that you guys have in our Company.

And if it's a deal, we will manage it like we have before and we will find an offset.

So you think the regulatory regime as we see it right now is pretty much what we get going forward?

Well, I think the details are -- I mean, yes, I have got the canvas, I see the paint on the side, but no one has painted it yet.

I don't think there is a hidden trap door of any significance that we can't at least predict or work within as the next couple of years go forward.

But as you know, Dodd-Frank is only 25%, 33% done; Volcker has got a lot of TBDs; and CFPB is new.

So I am not saying it is at all known or done, but I'm telling you what I think.

Its worst-case scenarios are something we can manage.

And Richard, would you care to make an intrepid prediction about when you might get the ability to make or to decide capital actions without going through the CCAR etc., etc.?

Are we at a point now over the next several years where capital actions are done once a year based upon the results of the CCAR or is that going to change?

Yes, Nancy, I really don't have any facts around it to offer, but I would say we are going to learn a couple things this year because we know there are a couple of our peers that are seeking mid-year capital actions based on what they didn't get in the CCAR.

And I think that will inform all of us because we have no evidence that it will be anything less than an annual activity.

And then I also am betting that it will take a few more years, few meaning more than one or two, for the global regulators to believe that banks can manage themselves without oversight.

But I think the stress test is an annual event that makes sense and as long as the rules are understood and we know how to participate in predicting our own outcome and make our own decisions that are hopefully approved, I don't think it becomes a burden at all, but one that we all just have an extra step than we had before.

But I think in terms of annual nature, I think we are about to learn that this year as some of our folks look for a mid-year correction.

Thank you.

Betsy Graseck, Morgan Stanley.

Hey, good morning.

Just a quick question on the commitments.

You called out the 5% Q-on-Q growth in CRE and C&I.

And just wondering, you've been having nice commitment growth for a while now.

How long does the commitments take to translate into outstandings?

Well, currently forever.

I mean really our commitment levels -- just to give you an idea.

When I gave you 25%, this is for the large corporate and middle market client, so it is not credit cards, it's not consumer, it's not small business.

Back in 2009, that was 37%, right, so 37% of $65 million was used as a line of credit.

At last quarter, we have 25% of $90 billion.

So while the growth -- the actual loans outstanding are virtually, flat the increase in the outstandings open to buy is remarkable.

So I have got to tell you, in a recession, it really is I have no idea how long it will take.

But what I know is when it happens, it will be amazingly quick.

And you guys can watch us like a Doppler radar.

The first thing that happens when a company starts getting ready to move is the cash balances get used.

And then the line of credit gets used and then new loans are made.

And so we are still at record levels of deposit held based on companies being strong enough right now and kind of husbanding cash until they know what to do with it.

And that is the first I think canary in the mine that says no one is actually taking any big steps at this point in time.

But they are getting those lines of credit, Betsy, and they are planning to use them, I suspect, because they are paying for them and it gives them a lot of alternatives.

And I think the country's business community is much stronger than people think it is because they are cash-rich, they are line-of-credit-capable and they are ready to jump when something comes along.

We just need that trigger event and I don't see it in the near term, but it surely will happen because it is a cycle.

Okay.

I see the macro numbers in your release.

I just wondered if you, in tracking individual companies that you are extending commitments to, is that translating into loan growth at all over the past year or so and I guess your answer is not yet.

Not yet and it is a great question because I would tell you if that 25% was a few companies at 100% and the rest at zero, that would be information, but it is not.

The average company has a line of credit and uses a part of it and then the rest they leave open to buy.

And so, for us, it represents a behavior, a consistency, but an absolute growth opportunity.

Okay, thanks.

Greg Ketron, UBS.

Good morning.

Just a couple of questions.

One, of course, commercial loan growth has continued at a very impressive pace and maybe some color -- it looks like you would be gaining marketshare and maybe some color on the strategies that you are undertaking to approach the wholesale or commercial lending business.

Sure.

This is Richard.

Warning -- here comes something else that sounds not that exciting.

We work on advocacy and we have been training all of our lenders, many who have been doing this for 30 years, on a special training program that we created here in our Company on customer advocacy.

And that is, Greg, codeword for building deeper relationships and having the entire Company available informationally to a customer when we meet with them.

So we are not -- we don't have the relationship manager now calling on a line of credit and talking about a line of credit, praying for a line of credit and coming back home.

This relationship manager is working with an entire team doing pre-call activities, bringing the right people out to the client, selling the entire company, if not now later and getting a lot of market from other places.

So the relationship depth we have is intensely higher than it was before.

And to answer a question about 45 minutes ago, amazingly still infant in its growth opportunities.

So what we are doing now is just getting started on a new way of taking marketshare.

Our guys figured out that flight to quality is a real deal.

It translates to new business.

So telling the story better, helps us do a better job and so it is really training and making the entire Company available through every relationship manager.

See, I told you it wasn't going to sound exciting, but I will tell you what, it's a big deal and it's a big change from where we were a few years ago.

This has legs that could run for -- beyond the next couple of quarters?

That's right.

This has years of legs because it has got nothing but upside.

And again, if you like what you see now, just imagine what we can do when we really get good at it.

Right.

Andy, a question for you on the margin.

On the liability side, what remaining opportunities do you have, such as maybe debt restructuring or elimination, that may help support the margin for the rest of this year?

We have some TGLP paper coming off here in the May/June timeframe.

And in total, if you think about the second half of the year, another $7 billion to $9 billion of higher cost debt rolling off, some of which will be replaced, some of which will be sort of resubstituted with deposit growth that we are enjoying.

So that benefit will start to show in margin in the second half.

Okay.

So you will see your cost coming out of debt that will be replaced with lower cost funding sources?

Correct.

Okay, thank you.

Chris Gamaitoni, Compass Point.

Good morning.

I just had two questions, one around deposits.

Non-interest-bearing deposits looked like they declined about 5% quarter-over-quarter and that looks to be mostly in these community bank -- small community bank segment.

Can you just give a little color around that?

Is that people becoming more comfortable and willing to spend and thinking about their current position?

I would attribute more of it to seasonality, typical seasonality related to tax activity and just first-quarter spend.

So I don't think there is so much of a decline or a utilization as much as the seasonal impacts.

Okay.

And then on the deposit service account charges, they were down 10.5% quarter-over-quarter.

It was attributed to seasonality.

I haven't seen the same trends across other banks.

Is there a geography issue or a business change that is impacting that?

There is no geography issue.

There are fewer days, business days in the first quarter than the fourth quarter and that is the principal reason for the decline and the key driver of that number.

Okay.

And then just to clarify a statement, you talked about a significant increase in HARP volume.

Was that HARP 1.0 or was that HARP 2.0?

We implemented 2.0 in the first quarter, so it would be some of both, yes.

All right.

Thank you so much.

Thank you.

I will now turn the conference back to Mr.

Davis for closing remarks.

As always, thank you guys for your continued support.

The questions were great and they helped us clarify what is on your mind.

I'd also ask you to remain optimistic about this economy.

I mean it's starting to show some real signs of permanent, but slow recovery and we're going to be watching every step of it and being engaged in part of it and hopefully the banks in America will get a little more credit for the kind of good work we are going to do to help get America back on its feet.

So spread the good word.

That is what I would say and thanks for your interest in our Company.

Thank you all for listening and as always, if you have questions, please feel free to call me or [Sean O'Connor].

Thank you.

Thank you.

This concludes the conference.

You may now disconnect.