美國合眾銀行 (USB) 2014 Q1 法說會逐字稿

Welcome to U.S. Bancorp's first-quarter 2014 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 approximately at noon EDT through Wednesday, April 23 at 12 o'clock midnight EDT.

I will now turn the conference call over to Sean O'Connor, Director of Investor Relations for U.S. Bancorp.

Thank you, Tiffany 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 2014 results and 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 risk and uncertainty.

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, Sean.

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

I will begin our review of U.S. Bank's results with a summary of the quarter's highlights on page 3 of the presentation.

U.S. Bank reported net income of $1.4 billion for the first quarter of 2014, or $0.73 per diluted common share.

Total average loans grew year-over-year by 6% and as expected 1.3% or 5.2% annualized on a linked-quarter basis.

We experienced strong loan growth and strong growth in total average deposits of 5.1% over the prior year and 0.2% linked quarter.

Credit quality remains strong.

Total net charge-offs decreased by 21.2% from the prior year and rose modestly on a linked-quarter basis as expected due to the unusually high wholesale recoveries in the prior quarter.

Nonperforming assets, excluding covered assets, declined linked quarter by 1%.

We continued to generate significant capital this quarter.

Our common equity Tier 1 capital ratio estimated for the Basel III fully implemented standardized approach was 9% at March 31.

We repurchased 12 million shares of common stock during the first quarter, which, along with our dividend, resulted in a 67% return of earnings to our shareholders in the first quarter.

Slide 4 provides you with a five-quarter history of our performance metrics and they continue to be among the best in the industry.

Return on average assets in the first quarter was 1.56% and return on average common equity was 14.6%.

Moving over to the graph on the right, you can see that this quarter's net interest margin was 3.35%.

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

Our efficiency ratio for the first quarter was 52.9%.

We continue to manage our operating expenses effectively and in line with revenue trends.

We expect that this ratio will remain in the low 50%s going forward and as we continue to manage expenses in relation to revenue trends while continuing to invest in and grow our businesses.

Turning to slide 5, the Company reported total net revenue in the first quarter of $4.8 billion, a 1.2% decrease from the prior year and a 1.5% decrease from the previous quarter.

The decline in revenue year over year was largely driven by lower mortgage banking revenue while the linked-quarter variance reflected normal first-quarter seasonality within our business lines.

Average loan and deposit growth is summarized on slide 6. Average total loans outstanding increased by over $13 billion or 6% year over year and 1.3% linked quarter.

Overall, excluding covered loans and runoff portfolio, average total loans grew by 7.6% year over year and 1.7% linked quarter.

Once again, the increase in average loans outstanding was supported by strong growth in average total commercial loans, which grew by 8.5% year over year and 2.8% over the prior quarter.

Total average commercial real estate also increased over the prior quarters with average loans growing by 7.6% year over year and 1.9% linked quarter.

Residential real estate loans continued to show strong growth, 14.4% year over year and 1.7% over the prior quarter.

Within the retail loan category, average credit card loans and other loans and leases were higher both year over year and linked quarter.

Our average home equity lines and loans continued to decline.

The rate of decline in this category however has slowed considerably over the past few quarters.

We continued to originate and renewed new loans and lines for our customers.

New originations, excluding mortgage production plus new and renewed commitments, totaled approximately $35 billion in the first quarter.

Total average revolving commercial and commercial real estate commitments continue to grow at a faster pace than loans increasing year over year by 11.7% and 3.4% on a linked-quarter basis.

Line utilization remains at low levels and was approximately 23% in the first quarter.

Total average deposits increased by over $12 billion, or 5.1% over the same quarter of last year.

On a linked-quarter basis, average deposits increased by 0.2% with growth in low-cost savings deposits particularly strong on a linked-quarter basis.

Turning to slide 7 and credit quality, total net charge-offs declined 21.2% on a year-over-year basis and rose modestly on a linked-quarter basis due to unusually high wholesale recoveries in the prior quarter.

The ratio of net charge-offs to average loans outstanding was 0.59% in the first quarter.

Nonperforming assets, excluding covered assets, decreased by 1% on a linked-quarter basis and 11.6% from the first quarter of 2013.

During the first quarter, we released $35 million of reserves equal to the reserve release in the previous quarter and $5 million more than the first quarter of 2013.

Given the mix and quality of our portfolio, we currently expect net charge-offs and total nonperforming assets to remain relatively stable in the second quarter of 2014.

Andy will now give you a few more details about our first-quarter results.

Thanks, Richard.

Slide 8 gives you a view of our first quarter 2014 versus comparable time periods.

Our diluted EPS of $0.73 was equal to the first quarter of 2013 and $0.03 lower than the previous quarter.

The key drivers of the Company's first-quarter earnings are summarized on slide 9. The $31 million or 2.2% decrease in net income year over year was principally due to a decrease in mortgage banking revenue partially offset by a lower provision for credit losses.

Net interest income was essentially flat year over year as increases in average earning assets was offset by a decrease in net interest margin.

The $12.2 billion growth in average earning assets year over year included increases in average total loans, as well as planned increases in the securities portfolio.

Offsetting a portion of the growth in these categories was a $6.1 billion reduction in average loans held for sale reflecting lower mortgage origination activity versus the same quarter of last year and a $3.8 billion reduction in average other earning assets primarily due to the deconsolidation of a number of community development entities in the second quarter of 2013.

The net interest margin of 3.35% was 13 basis points lower than the first quarter of 2013 primarily due to growth in the investment portfolio and lower rates on loans partially offset by lower rates on deposits and short-term borrowings and a reduction in higher-cost, long-term debt.

Noninterest income declined by $57 million, or 2.6% year over year primarily due to lower mortgage banking revenue, which reflected lower origination and sales revenue.

Growth in several key categories partially offset the decline in mortgage banking revenue, including growth in retail payments, merchant processing, trust and investment management fees, deposit service charges, commercial products revenue, investment product fees and other income, which was driven by higher equity investment revenue.

Noninterest expense increased year over year by $74 million or 3%.

The increase was primarily the result of higher compensation expense and an increase in other expense, which was driven by insurance-related recoveries in the first quarter of 2013 partially offset by lower tax-advantaged project costs and lower costs related to other real estate owned.

Net income was lower on a linked-quarter basis by $59 million, or 4.1%, mainly due to seasonally lower fee revenue partially offset by lower noninterest expense.

On a linked-quarter basis, net interest income was lower due to the impact of two fewer days and seasonally lower loan fees partially offset by higher average earning assets.

The net interest margin of 3.35% was 5 basis points lower than the fourth quarter principally due to growth in lower rate investment securities, loan mix and lower loan fees.

On a linked-quarter basis, noninterest income was lower by $48 million, or 2.2%.

This unfavorable variance was primarily due to seasonally lower retail payments and deposit service charges, as well as lower commercial products revenue.

Partially offsetting the decline in these revenue categories was an increase in corporate payments, trust and investment management fees and other income, which was driven by higher equity investment and retail leasing revenue.

On a linked-quarter basis, noninterest expense declined by $138 million, or 5.1%, driven by lower professional services costs, costs related to tax-advantaged projects and marketing and business development costs.

Turning to slide 10, our capital position is strong and continues to grow.

Beginning January 1, 2014, the regulatory capital requirements effective for the Company follow Basel III subject to certain transition provisions from Basel I over the next four years to full implementation by January 1 of 2018.

Our common equity Tier 1 capital ratio estimated using Basel III fully implemented standardized approach at March 31 was 9%, off from 8.8% at December 31.

At 9%, we are well above the 7% Basel III minimum requirement.

Our tangible book value per share rose to $14.99 at March 31 representing a 13% increase over the same quarter of last year and a 4% increase over the prior quarter.

In March, we received the results of our 2014 comprehensive capital assessment review, the CCAR, including the Federal Reserve's non-objection to our capital plan.

Subsequently, we announced our new one-year buyback authorization totaling $2.3 billion effective April 1 and our intention to recommend to our Board of Directors a 6.5% increase in our common stock dividend at our June Board meeting.

Now I'll turn the call back to Richard.

Thanks, Andy and to conclude our formal remarks, I turn your attention to slide 12, Extending the Advantage, words from the cover of our Annual Report that appropriately describe our strategy for 2014.

In this slow growth economy, our prudent risk management, efficient operating platform and industry-leading profitability allow us to operate from a position of strength.

We will continue to manage, invest and innovate to further extend this advantage.

Yesterday, I had the privilege of leading our annual shareholder meeting in Kansas City.

In addition to conducting the official business of the meeting, I told our shareholders how proud I am of what our 67,000 remarkable employees have accomplished and how engaged they are in helping us to continue our success.

We remain focused on always producing consistent, predictable and repeatable results for the benefit of our customers, our employees, our communities and our shareholders.

That concludes our formal remarks.

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

(Operator Instructions).

Jon Arfstrom, RBC Capital Markets.

Hey, good morning, guys.

Richard, can you give us an update on some of your loan growth expectations and maybe touch a little bit on if there's any changes in terms of what is driving some of the commercial growth?

I would be happy to.

Thanks, Jon.

First of all, as you see, our linked quarter was 1.3% and we have been saying we are in that range of 1% to 1.5%.

Based on our ending period, not just our average and based on what we are seeing, I will expect that range to continue into quarter two at the high end.

So we are actually seeing some slight, but continued improvement along the way.

Now we've seen it across the board.

So wholesale, as you've seen in the last many quarters, has been driving the majority of that and that continues.

Leverage lending and middle-market remain mostly active, as well as loan growth in the Western markets, particularly the Western United States for wholesale and then seasonal increases in food, ag and in the retail groups.

So we are seeing seasonality and continued marketshare growth, which is not going to be stunning, but at the high end of 1% to 1.5%, that continues to show a nice trajectory and we think marketshare improvement.

Commercial real estate, Jon, strong on both coasts as it has been in the past, both East and the West, as well as Texas, particularly in new construction and some investment decisions being made by some of our customers.

The most active cities are Seattle, San Francisco, LA and Orange County, so that stays pretty much West Coast-focused.

This quarter, we had strong loan production in small businesses, up almost 30% over last year's first quarter.

That is all types of small business, particularly for those under $250,000 and SBA itself was up more than 50% over last year's same quarter.

So we are seeing small business and I think something slightly more than what you might expect to see in seasonality.

Residential mortgage, as we've said, is off from its record highs, but the portfolio continues to grow.

Home equity, while we see that continuing to be the softest spot as we are fighting to get enough acquisition to offset the runoff, we had a very strong March, which takes me some good hope into the second quarter, particularly as we introduce some new programs and some pricing in order to encourage that behavior in the spring.

And then lastly, auto loans and credit cards, they are both growing.

As you know, we indicated a number of quarters ago that we were going to double our auto loan production in the indirect auto loan and lease and we are doing just that.

We are right on track.

To give you an idea, our quarter one production for this last quarter was up 33% from the same time last year and we continue to see our rankings and marketshare starting to move as we hoped they would.

And then credit cards, year over year, also stronger; credit up 9%, debit up 6% and prepaid up over 20%.

So I would say it continues to give me optimism that we can stay on the high end of that range and continue to see that getting stronger.

I know last quarter I said the second half would be stronger than the first half and we still believe that as well and I will close with one of my reasons for that belief is I think the Fed in their current messaging continues to allow people to believe that we are getting closer and closer to the moment in time when rates will move up and I think our customers are starting to demonstrate behavior and getting really prepared for that moment and eventually they will use these unused lines of credit, they will use their deposits and they will start getting more lines and loans to, I think, accommodate that growth, which is probably a few years out, but may start to see last half of 2014.

How's that for a brief answer to a quick question?

That's wonderful.

I don't want to hog the time on the call here, but just one more thing.

And maybe it is related, but in terms of the capital plan and the build on your capital ratios and the 60% to 80% range, what is the plan for the capital that is not returned to shareholders?

Do you want to continue to build capital on the balance sheet?

Are you just signaling that maybe there is a little bit faster growth coming, there is more acquisitions coming?

Just help us understand whether or not you want capital to build or not and how you plan to utilize the excess.

Hi, Jon.

This is Andy.

First, if you think about the fourth quarter to the first quarter, part of the reason -- two reasons for the increase.

Number one is our unrealized loss went to an unrealized gain position with our securities portfolio because of the lower rates and that changed by about $300 million.

The second thing is partly offsetting our buybacks in the first quarter was an exceptionally high level of stock exercise, stock option exercises from our employee base.

I wouldn't expect it to continue at that level.

So my expectation, Jon, is that this is sort of the high point.

Our normal earning asset growth, loan growth that Richard spoke to, as well as our expected closure of the RBS transaction, the branches, will drive that down in quarters two and three.

And big picture of what will accommodate the reinvestment is our earning asset growth.

And I will just add, Jon, we don't like trapped capital, so we are real careful about that, as you know and in addition to what Andy said, we want to continue to have a little powder for acquisitions.

You saw we did a small deal with Ally Custodians of Trust on Monday.

We will continue to look for particularly payment and trust opportunities and we are still investing a lot.

I mean the one thing we are not doing, and it would be easy to do in times when everything is not as sustainable, is stop the investment in things like R&D and our payments business, particularly in mobile, we are spending a lot of time and energy and money making sure that we have the best ideas, the next new emerging protocol for customers and we are not cutting back on those investments at this stage because we think it is going to be important to stay true to that.

So the retained earnings we will use for ourselves, as well as small acquisitions.

Okay, all right, that helps.

Thank you.

Erika Najarian, Bank of America.

Good morning.

My first question, Andy, I was wondering if you could give us an update on where you stand with regards to the LCR and how we should think about securities purchases from here and maybe help us understand how earning asset growth is going to pace relative to the loan growth expectations that you laid out?

Right, so, Erika, as we talked about in the last call, we did increase our securities portfolio from $80 billion to $85 billion in quarter one.

My expectation is we will grow that to $90 billion in quarter two, so up a similar amount, another $5 billion.

We are getting very close in terms of our target here, but I am not going to give you a final number until we get the final rule because the final rule has some uncertainty, particularly as it relates to the offset on municipal deposits.

And that can throw our number one way or the other, but we are getting very close, but I would expect another $5 billion in quarter two.

As it relates to net interest margin, I would expect a decrease that you saw this quarter similar in the second quarter for some of the same reasons.

So that $5 billion increase in securities portfolio would probably drive margin down 3 to 4 basis points and the combination of loan fees and mix will be another couple basis points.

So I would expect a similar decline in quarter two.

However, because we are growing earning assets, I would expect net interest income to grow in quarter two.

And given sort of your comments, I know there is still a swing factor, is the liquidity build in the second half potentially slower than the pace for the first half of the year?

Again, Erika, it will depend on the final rules we hope to get in the summer months, but I wouldn't expect it to accelerate certainly and it will be somewhere around the same level or down.

The other thing I would remind you, one of the things we talked about also is that CAA, our Checking Account Advance product, will start to impact margin because that fee goes to loan fees, which is a component of margin.

That will start to diminish over the second quarter and then more materially in quarters three and four.

Got it.

And my second question, Richard, if I could just ask another one on commercial real estate in particular, we've had comments from large mega cap banks and large institutions during the quarter that commercial real estate continues to be a potential bright spot and that the competition is less fervent here than it is for C&I.

On Monday, we heard from another regional bank essentially saying that they are starting to see frostiness in commercial real estate.

Perhaps give us a little bit of your view on this.

Yes, sure.

I don't have anything remarkable to offer, so I wouldn't necessarily align with Monday's commentary.

We have always been growing commercial real estate.

I think you have noticed that.

We have done it in a very prudent way.

We were the ones I think alerting people eight quarters ago about certain markets that were getting frosty as it related to multi-family and just started to intersect that with what would be foreclosed properties coming back onto the market.

So we have been very, very careful not to jump into hot markets that when you predict where they will be once everything is built, they will be too overbuilt.

So we have been careful there.

I wouldn't say it is any less competitive.

I would say all of our wholesale businesses are competitive.

We are certainly seeing margin competition and as I have said every quarter and I will continue to say, because of our cost-of-funds advantage and our rating benefits, we will continue to compete on price and we may be one of those culprits for why it is more competitive on the margin, but we will not give it up if it is a great customer.

We will also not go for the customer if there is a structural need to diminish what would be a quality underwriting or something like that.

So I guess I would say I don't see anything remarkable about CRE as it relates to other C&I business, Erika, but they are both competitive and we are prepared to compete for them.

Got it.

And just a last question, and maybe this is for Andy, was there anything unusual to call out on the mortgage banking line?

There is a modest quarter-over-quarter increase and given typical seasonality, I think the market would have expected that to be sequentially.

Was there anything to call out there?

Erika, no, we thought mortgage revenue was going to be relatively flat to the fourth quarter and that is what it ended up being.

We had a little bit of a benefit on the servicing rights effective valuation, but that has to do with earnings credit rates and so forth.

So I would say no, nothing remarkable and as I look into the second quarter, I would expect a slight increase in mortgage revenue principally due to seasonality.

Great, thank you for taking my questions.

Jill Glaser, Credit Suisse.

Hi, good morning.

So could you just provide some color in terms of what you are seeing in securities reinvestment yields and loan yields and just your outlook in terms of the margin going forward?

And then just overall your ability to grow spread income going forward?

Right, so Jill, we are going to grow the securities portfolio, as I mentioned, about $5 billion on a net basis in quarter two.

The securities coming on are about 25 to 30 basis points below those that are coming off in the quarter and then we have the $5 billion of growth.

So that combination of growth and the shift in the price or the rate cost us 3 to 4 basis points.

And that is a decline we will see in the second quarter.

And then as I mentioned, the loan mix coupled with the loan fees partly due to CAA will be another couple of basis points.

So I would expect us to be down 5 or 6 basis points in the second quarter.

However, as I mentioned, net interest income should grow because of earning asset growth.

Okay, great.

Thanks.

Paul Miller, FBR.

Yes, thank you very much.

You mentioned on the first question, a follow-up, the cities that are the most -- that are growing the most.

I missed them all.

You said them too fast.

It was Seattle, Orange County --.

Yes, I only say them once, Paul.

No, I said Seattle, San Francisco, Los Angeles, Orange County.

So I went right down the Pacific coastline there.

And so can you add some color what you are seeing in Texas and in the Midwest?

Yes, so Texas is also the other market that I mentioned.

These are markets where you have got just underlying growth of populations and consumers.

So in Texas, you are going to find some of the traditional markets building out where the communities are getting larger and the sprawl continues.

And Texas has been healthy, as you know, virtually through this whole period in time.

The West Coast primarily provides for what would be some of the transition to multifamily where we feel that those are safe markets based on the composition of dwellings and also just the continued growth and migration in some of those growth markets where we see the personal and corporate needs for real estate continue to be pretty strong.

We haven't spent a lot of time and energy talking about healthcare and some of the retiree services because we are very careful on that area as well because we want to make sure that they find themselves in the right cities.

So we are not messing around in that market right now, but we are looking where development follows people.

And then you did a good job on the CRE and the competitive nature out there, but one of the areas that you've really been growing is the credit card and a lot of people showed lower credit card balances in the first quarter, but you continue to show good growth in there.

Could you add color around that?

Is that a big push for you guys?

Yes, it is.

And it is a big part of our portfolio; it's like 7.5%, which is one of the reasons why our charge-offs will always settle at a number higher than most of our peers.

I don't think anyone has a portfolio as important as we do to our mix.

We like it, so we are going to continue to grow it.

I think you know that we have a FlexPerks program, which was a derivative of when we lost the Northwest Airlines program and it is the most remarkable thing I have ever been a part of in my career when I am done here.

It continues to provide all kinds of new interest and we continue to get awards for it.

So it gets a lot of visibility without having to spend a lot of time on TV commercials and direct branding.

That brings me to the branch originations.

With 3,100 branches, we really had not turned up the opportunity for that to be a significant source of really good high-quality new cars, but we have done that in the last six quarters and that has been a remarkable contributor to the kind of growth we have had.

And then lastly, Paul, I'll just remind you, even in our FlexPerks, which I mentioned a moment ago, we have now introduced a corporate program of FlexPerks, a rewards program for corporate cards, which continue now to gain a lot of favor as we realize a lot of these corporate and small business folks are interested in finding a way to retrieve some sort of benefit from using a card and that has taken amazing success in the early stages.

So I think there is more where that came from as well.

But to say that we are spending time and energy on credit card is an understatement.

For me to go back and repeat that part of our R&D costs have been protected under the area of cards not present, which would be mobile banking and mobile payments, we are spending a lot of energy there too.

So I would expect us to exceed most of our peers going forward and there we are spending a due amount of money to make sure that we stay ahead of the game.

And then one last on the auto side.

That's an area that you have really done a nice job growing.

How is the competitive nature there?

How are you -- because everybody is focused on that, but I think you are doing the best job out there of anybody.

Thank you.

The indirect auto business for us has always been a core capability, but as you will recall when we announced our doubling impact over a couple of years, we decided we were a little further down in the FICO, so we'll call it the near prime.

But we also realized we weren't a big player in used autos.

So I will just take you through an example.

If you, Paul, are the F&I guy at the largest Chevy dealer in whatever city, you've always known that we were one of the best paper to pick for auto loans or leases for new cars.

Now that we have introduced used cars, you feel better about introducing the U.S. Bank paper across all spectrums.

And then the bonus round is you get more floor planning from that same institution because you are now wholly committed to them in a number of ways that perhaps you weren't before.

So for us, it is kind of a twofer, threefer, but we are also getting a high visibility of those dealers finding interest in taking the rest of our paper.

So we already are taking an open door and pushing it further open.

I will tell you that in the rankings we saw in fourth quarter, we've moved up 1.5% in share from eighth place to fifth place among banks and so that does reflect that our early-stage efforts are starting to show up and I would expect us to stay in the top five, which is one of our stated goals as we really double the value of this business.

We are very careful; I didn't say subprime.

Hear me clearly.

I just said something slightly below near prime, but we are going to get a lot of that in used autos as well.

So I think that is the reason you are seeing a full on kind of holistic success and I expect this to be one of our big replacement strategies for what will be a new normal for mortgage in the next couple of years.

Hey, thank you very much, guys.

Keith Murray, ISI.

Thank you, good morning.

Can you just touch on the expense outlook and obviously near term be interested in that, but longer term, when you think about the age of compliance that we are in and compliance costs going up, over the long term, do you think the efficiency ratio -- where does it bottom in the 50%s versus history?

Yes, so first of all, Keith, I'm glad you asked the question.

I probably would have found a way to ask it myself, which I have been known to do.

So thank you.

First of all, in the near term, let's talk about -- I'll remind the audience how we manage the Company.

Every single 30 days, every 68 lines of business sit with me and Andy and we look at their current performance, we look at their near-term forecast and we always look at the rest of whatever year we are under.

So we create a phrase around here called looking around corners and we pride ourselves on that and as we look around the corner, we continue to measure and manage what starts out as a profit plan at the beginning of the year and we adjust it all through the year.

And so as we see any stress on revenue, and it could be not so much on volume, but it might be on margins and on total income, then we are going to manage the same thing on expenses.

So we manage expenses 30 days at a time and we are watching every nickel and dime and it is not without surprise to you that we are very, very prudent right now.

We are watching all discretionary costs, we are measuring it very closely.

We are watching all new hires and we are being excessively prudent right now because until I see a sustained and a very robust revenue future, we are going to be very careful.

And we are actually watching our expenses to a level below where we thought they would be when we set the plan six months ago.

So hopefully that gives you all confidence that we know how to watch that.

Secondly, you know the efficiency ratio is nothing more than a result of positive operating leverage and we promised you positive operating leverage this year and we are going to deliver it.

It's not easy, but that is the whole part of watching the expenses so that they stay below the revenue growth that we are both seeing and predicting.

So you will find as long as we keep to that mandate then our efficiency ratio stays in the low 50%s because that is how the math works.

We don't have a goal for our efficiency ratio, but because our goal is positive operating leverage and we are sitting at low 50%s, you can well bet that not on a given quarter, but over the course of the year, we are going to stay in that position as well.

If you want to go longer term, the Richard Davis view of things, is as rates start to increase, as the economy starts to pick up, we become essentially much more profitable and our expenses do not grow at the same speed as our revenue and our efficiency ratio probably does fall, but it will only be results.

There is no target, there is no goal, but I think what you see now is probably one of our least attractive moments in time and the cost of compliance has, for all intents and purposes, been fully burdened in most of what you see now as we continue to look into the future with a new kind of normal for the cost of compliance and audit.

Thank you.

And I am really excited (inaudible).

And just going back to LCR for a second.

Does it at all change your view on commercial deposits and how you view them going forward?

No, it does impact how we think about different deposits in the Company and depending upon the LCR runoff assumption, certain deposits are certainly more valuable.

We try to reflect that in our pricing.

We have actually incorporated LCR into our FTP system, our funds transfer pricing system, and different deposits have different value and that is a function of LCR and we are taking that into account.

And then just last one.

I know it is early stages, but any update on reworking the deposit advance product and what are the steps that you'd have to go through on that?

Yes, we are working on it.

We are working particularly with our lead regulator, the OCC, but we haven't got a solution yet inasmuch as we are all trying to figure out what is the next best thing to try.

If you follow the real tight balance of the usery laws of some 30%-some of total APR no matter how you calculate it on any given one day, you probably can't find a product out there that is going to meet the old-fashioned test.

So depending on the willingness of the regulators to allow us to try a different combination of new products and new repayment practices, I know they are working in good faith with a number of us to try to find that solution.

I have made it clear that U.S. Bank is happy to pilot and try certain variations on a program to see what kind of loan losses we would have, offset it against some of the benefits.

I do think this industry needs a replacement for folks who have some form of advanced need on financials before they get their pay, but we haven't struck gold on that one yet.

And with a number of us working with our regulators, I think it is in the offing, but it won't be here soon as our CAA product starts to wind down.

So we will have a bit of a gap, and when it does come back it won't be at the same level of profitability.

It will be much more of a CRA kind of a program that will be intended to test and find ways to serve more customers as this recovery starts to take effect.

Thank you.

Ken Usdin, Jefferies.

Hi, good morning, guys.

This is Bryan Batory from Ken's team.

The tax rate was a little bit lower than the previous guide last quarter.

Just wondering if there was anything unusual that ran through the tax line this quarter, and where do you expect the tax rate to run going forward from here?

It was a little lower, Bryan, you are right.

And part of it is due to a small settlement -- a small state settlement that we had in the quarter.

So the TED effective rate was 28.1%.

However, I don't expect a large variation for the rest of the year and I would expect it to be somewhere around 28.5%, 28.7% for the full year.

So right around this range, a little higher, but not much.

Okay, great.

And then deposits continue to grow on a year-over-year basis, but the growth was a little bit slower quarter over quarter looking at the averages and period-end balances, particularly for not non-interest-bearing.

Are we starting to see the very early signs here of customers drawing deposit funds to fund working capital needs or CapEx or was there just a seasonality impact on deposits this quarter?

Bryan, it was more a seasonality impact.

We typically have a lower first quarter both because of our corporate trust activities, as well as wholesale activities in the first quarter.

So I don't think it is yet to the point that they are drawing down the deposits for investment.

I think it is more seasonality and I would expect it to increase in the second quarter.

Okay.

And one final question, the other fee income line was a little bit higher than trend.

I know you guys called out equity investment gains and some leasing items.

Any sense for how big the magnitude of those gains were?

You know, if anything is greater than $20 million or $25 million, we usually call it out specifically, so it was more a function of a number of smaller things and that can be lumpy in that category.

While we are talking about that category, let me bring up one item.

You may have read on Monday that Nuveen was a part of the transaction with TIAA-CREF and we have an ownership interest in Nuveen.

When it is all said and done, that will result in a positive in the fourth quarter for us.

As is typical in asset management transactions, there are components of revenue retention and customer retention that will determine the final price, but as we sit today I would expect that would create a gain of a few cents in the fourth quarter.

You will recall we divested our First American Funds though two years ago.

2010.

And that went to Nuveen which gave us an equity position and now this transaction will positively affect us late in the year.

Okay, great.

Thanks for taking my questions.

Steve Scinicariello, UBS.

Good morning, everyone.

Just a couple quick questions on the fee income areas.

Just wanted to follow up on the commercial products revenue.

I know you kind of mentioned you had some lower wholesale transaction activity.

Just kind of curious has that kind of since rebounded or what might the outlook be from here?

Right, Steve.

So it is a function of a couple of things.

One, standby letter of credit activity is down and that has been trending down for the past few quarters.

I would expect it to continue to be flat to down in the second quarter.

Second, there's some syndication revenue in that line that can be lumpy and the first quarter was particularly down.

That may come back a little bit in the second quarter.

But generally speaking, the commercial products revenue is a function of activity on the wholesale side.

First quarter is typically low.

It will come back a bit in the second quarter, but I still think certain components like standbys and other credits are going to continue to trend downward.

Got you.

And then just I know there is seasonality in a lot of the card lines, the deposit lines and some other areas.

Any reason why those wouldn't bounce back as well or is it just purely seasonal, this dipdown this quarter?

So for sure, the payments component is weakest in the first quarter across most of the categories and I would expect that to continue to bounce in the second quarter.

Deposit service charge is also lower in the first quarter, but a lot of that is also driven by incidence in activity on the retail side.

So all things being equal, we would expect a bit of an increase in the second quarter, but it will depend on customer and retail activity.

Perfect.

Thank you so much.

Brian Foran, Autonomous.

Hi, good morning.

Can you -- I guess if you separate your footprint into the cold weather bit and the warm weather bit, was the trajectory month by month noticeably different?

And to the extent the cold weather part of the footprint was weaker, by the end of March, was it kind of back to a normal level?

We really didn't -- it sounds so popular to say, but we really didn't see much.

I mean even the Pacific Southwest where you have more traditional winter and the lack of snow and things wasn't meaningfully different than the Central and Midwest plains that we do banking in.

So while there was undoubtedly some diminishment of consumer activity on those really bad snow events, but for a little of that, we are not counting on weather to be much of a factor and we certainly don't see a big pent-up catch-up on -- kind of like Cash for Clunkers, we don't see that occurring here.

And then on the payments business, you had a couple comments that seems more positive.

We've been through a kind of transition period first with the regulatory changes, then with the Department of Defense.

I mean are we at a point now where we hit that turning point and certainly the comps are easier, but the growth rate kind of returns back to normal or there's still kind of identifiable headwinds that you see in the near term that would depress results across those four line items?

Well, Brian, we are seeing the decrease in defense and government spending go down.

So while it was still down year over year, it was down a far lesser amount.

It was down maybe 5% or 6% and it was offset by increased corporate activity, which actually resulted in corporate payment systems revenue being up on a year-over-year basis, which is a positive sign.

So I think we have seen the worst of it.

I think it will start to stabilize and grow.

If I could sneak in one last one on the dividend targets long term, you have always been very consistent about this, but if you could just remind us both from your standpoint and a regulatory standpoint what would have to happen for the environment to look like a 40% dividend payout instead of the 31%?

Yes, this is Richard.

We have always -- God, we've said it since the mid-1990s -- 30% to 40% would be a dividend of 30% to 40% in buyback.

We know we are relying more on the buyback at this stage.

Two things, Brian.

One is with or without the Fed's oversight, we are going to be very prudent, being careful to make sure that everything we do is sustainable under any circumstance, stress test or not.

And so the 30% is on the low end of that 30% to 40% for dividend and I believe in the next few years we will either get permission, real comfortable permission to do whatever we want in that range or we will start seeing such a robustly strong 24-month future that we will move over that number because we would like to be above 30%, but we wouldn't get above 40%.

So it is going to be that slow trip somewhere in the middle.

Buybacks in the meantime are a very elegant solution to allow us to have that kind of permission to, as long as the price is right and the financials are right, to allow our shareholders to still get a good return, but giving us that ability to turn on and off something given the uncertainty until we see things being more I think sustained.

So we are not disappointed where we are.

All things told, we would get there in a nice slow methodical way anyway and I think our expectations will probably align pretty well with what the Fed will permit us to do as we continue to prove ourselves and prove our stress test to be accurate now five years in a row.

So we will get there over time, but we are not feeling withheld and we don't really want to send a signal that we are disappointed.

I appreciate it.

Thank you.

Chris Mutascio, KBW.

Good morning, Richard and Andy.

How are you?

Great, how are you?

I am doing well, thanks.

Andy, I had a quick question back on the mortgage side of the house.

I am looking at page 40 and it kind of gives you a nice breakdown between the origination, loan servicing and some of the inputs on the servicing asset.

The one item I was kind of looking at is the decay, the other changes in mortgage servicing rights, fair value.

That has been running plus or minus $100 million -- excuse me -- running a negative plus or minus $100 million for the last several quarters and this quarter, it was down into the $80 million range.

I am assuming that that decay is less than previous quarters because prepayment speeds have slowed.

First of all, is that correct?

Yes, that's correct.

And then is that -- I guess it is hard to predict clearly, but if the rates were to stay where they are and not even inch up on the long-term side, how would I look at the decay?

Would it stabilize at a negative $80 million or does it get lower from here?

It all depends on rates, as you just mentioned, because of prepayments, but I would expect it would be stable to maybe up a little bit depending upon what rates do from this level.

Great.

Thank you very much.

Eric Wasserstrom, SunTrust Robinson.

Hi, good morning.

Just to follow-up on a few different issues that have been raised on the call already, the decline in the credit and debit card revenue that you showed sequentially is a bit more than what some of your peers have demonstrated.

And I would have guessed that weather effects might have been part of that, but it seems like maybe weather wasn't such a driver.

So I am just curious about what, in your view, might have explained that differential versus peers?

I can't speak to the peers, but our number on a sequential basis is entirely seasonality, if you think about our credit card, retail credit card revenue.

If you look at it year over year, we are up over 11% principally driven by increased activity and increased marketshare gains.

So the linked quarter is all seasonality.

Got it.

And then just to go back to Keith's question on the payday advance for a moment.

I believe that you previously guided to a quarterly impact of around $15 million negative in NII.

Is that the case and was that evidenced in this period?

We did have a decline across the -- as expected, I would say.

So across all our key categories, I would say it was as expected.

So on the payday lending or on the CAA product, the full-year number is about $220 million.

The first quarter was little impact, the second quarter is going to be down call it $15 million.

Then it goes almost entirely away in quarters three and four.

Yes, it goes bright line at the end of May, so we just see a small slow trip down to zero as the year ages.

Got it.

So sorry, Andy, just because I was making quick notes there, that was very little first quarter, $15 million second and then sort of phased out by third?

Right.

So you think about -- let's just use numbers -- if you think about $200 million, it is sort of 50/35/0/0.

Got it.

Great, thanks so much.

Matt Burnell, Wells Fargo.

Hey, good morning, guys.

It's actually Jason Harbes on Matt's team.

So it looks like you got a pretty nice boost from equity investments and retail leasing revenue in the other fee income category this quarter.

Just curious how sustainable do you view that and are you guys still expecting overall fee income growth in 2014 in spite of the weaker contribution from mortgage?

So Jason, a couple things.

In that other category, there are miscellaneous equity gains that occur that can be lumpy quarter to quarter, so sometimes up, sometimes down.

This was a little bit of a positive quarter as we benefitted a little bit from those investments.

We really don't know what the next quarters will be until we get the results from the investments we have, so it is hard to tell exactly.

But I wouldn't expect material changes, neither up nor down, other than the gain I talked about that we expect in the fourth quarter from the Nuveen transaction.

So that is number one.

Number two, in terms of overall fee revenue, we are going to continue to have the headwind on a year-over-year basis in mortgage banking in quarter two because the decline in mortgage banking didn't really start last year until quarters three and four.

But I would expect fee growth in many of the other categories and I would expect overall fee growth in quarters three and four once we are past that mortgage headwind.

Okay, thanks.

And just I guess my follow-up would be on the impact of the affordable housing accounting rule change and specifically how we should be thinking about the noncontrolling interest line.

It looks like that's a little bit of a different number than we've seen historically.

Yes, and that was a function of the change we made in the fourth quarter.

I would say the first quarter is back to a normal level across all categories and the first-quarter impact versus the fourth quarter was about $35 million lower noninterest expense and $35 million higher taxes.

But that is now in the run rate and what you see in the first quarter now reflects all the accounting changes than what you should expect to see in future quarters.

So the only change you will see for us is really volume-related normal accounting.

Okay, thanks, guys.

(Operator Instructions).

Dan Werner, Morningstar.

Good morning.

If I had asked you guys a year and a half, two years ago what a normalized net charge-off level was, you would've said around 1% and clearly, since then, asset quality has improved and charge-off levels have come down.

If I asked you that question now, what would you consider normalized charge-off levels, both near term and longer term, what kind of answer would I get?

Long term, I am going to let Bill answer, but long-term is still 1%.

On the mix of the portfolio, it is hard to remember the old divisional days, right?

We are all extending credit at the right level and we are taking the appropriate measured risk, especially with the credit card portfolio at the level ours is and the kind of business that we will plan to conduct in the consumer areas.

1% would be over the long term.

You're actually never at 1%.

You are passing it through it one way or the other.

I know based on the math of credit -- measurements and credit quality, it could take a number of years to get to the 1%.

So we are not taking risk today to get there sooner than we should, but we are also not trying to diminish what value we get from having a 59 basis point, but Bill is the --.

Yes, so, Dan, we remeasure that every quarter and I mean it is very plus or minus a couple basis points of that 1%.

So that just goes to the consistency of our outlook for the portfolio and how we underwrite.

And as Richard said, the 1% is not a target per se.

It is a through-the-cycle number.

So in good times, it is going to be significantly less and in bad times, it is going to be higher.

(multiple speakers)

You are not going to see it for a while.

And even with our recovery and even (inaudible) taken out, charge-offs are very, very moderate at this point and very flattish.

So just undoubtedly you really kind of want all the banks to start feeling that movement northward as the credit quality becomes important, but so does the volume and the more robust nature of people seeking credit and in some cases not finding a way to pay it back.

But I don't think (inaudible) for a while.

Okay, thank you.

That was our final question.

I would now like to turn the conference back over to Sean O'Connor for any closing remarks.

Thank you all for listening to today's call and if you have any more follow-up questions, give me a call this afternoon.

Thank you.

Thanks, everybody.

Thanks, everyone.

Thank you.

This concludes today's conference call.

You may now disconnect.