美國合眾銀行 (USB) 2014 Q2 法說會逐字稿

Welcome to the U.S. Bancorp second-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 at approximately noon Eastern Daylight Time through Wednesday, July 23 at 12 midnight Eastern Daylight Time. I will now turn the conference call over to Sean O'Connor, Director of Investor Relations for U.S. Bancorp.

Thank you, Jackie, 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 second-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'll 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. Bancorp reported record income of $1.5 billion for the second quarter of 2014, or $0.78 per diluted common share. Total average loans grew year over year by 6.8% and 2% linked quarter.

We experienced strong loan growth and total average deposits of 6% over the prior year and a 1.9% linked quarter. Credit quality remained strong. Total net charge-offs decreased by 11% from the prior year and rose modestly on a linked quarter basis. Nonperforming assets, excluding covered assets, declined compared to both the prior year quarter and on a linked quarter basis.

We continued to generate significant capital this quarter. Our common equity Tier 1 capital ratio estimated for Basel III standardized approach as fully implemented was 8.9% at June 30. We repurchased 15 million shares of common stock during the second quarter, which, along with our dividend, resulted in a 75% return of earnings to our shareholders in the second 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 second quarter was 1.6% and return on average common equity was 15.1%. Moving to the graph on the right, you can see that this quarter's net interest margin was 3.27%, in line with our guidance.

Our efficiency ratio for the second quarter was 53.1%. Excluding the impact of two notable items in the second quarter, our efficiency ratio was 51.3%. We expect this ratio will remain in the low 50%s going forward 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 second quarter of $5.2 billion, a 4.9% increase from the prior year. Excluding the impact of this quarter's Visa sale, total net revenue increased 0.5% from the prior year. The increase was mainly due to the higher net interest income, as well as increases in a majority of fee revenue categories, partially offset by a reduction in Mortgage Banking revenue.

Average loan and deposit growth is summarized on slide 6. Average total loans outstanding increased by over $15 billion, or 6.8% year over year, and 2% linked quarter. Overall, excluding covered loans, or runoff portfolio, average total loans grew by 8.3% year over year and 2.2% linked quarter. Once again the increase in average loans outstanding was led by strong growth in average total commercial loans which grew by 12.4% year over year and 5.9% over the prior quarter.

Total average commercial real estate also increased over the prior quarters with average loans growing by 6.9% year over year and 1.1% linked quarter. Residential real estate loans grew 10.5% year over year and 0.4% over the prior quarter. Average credit card loans increased 5.9% year-over-year and were flat on a linked quarter basis.

Within the other retail loan categories, auto loans and leases were higher both year over year and linked quarter, while average home equity lines and loans continue to decline. The rate of decline in this category, however, has slowed considerably over the past few quarters.

Total average revolving commercial and commercial real estate commitments continue to grow at a fast pace, increasing year over year by 12.7% and 3.1% on a linked quarter basis. Line utilization increased slightly and was approximately 24% in the second quarter. Total average deposits increased $15 billion or 6% over the same quarter of last year. On a linked quarter basis average deposits increased by 1.9% 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 11% on a year-over-year basis and rose modestly on a linked quarter basis. The ratio of net charge-offs to average loans outstanding was 0.58% in the second quarter. Nonperforming assets, excluding covered assets, decreased by 1.6% on a linked quarter basis and 8.1% from the second quarter of 2013.

During the second quarter we released $25 million of reserves, $10 million less than in the first quarter of 2014 and $5 million less than in the second 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 third quarter of 2014.

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

Thanks, Richard. Slide 8 gives you a view of our second-quarter 2014 results versus comparable time periods. Our diluted EPS of $0.78 was $0.02 higher than the second quarter of 2013 and $0.05 higher than the previous quarter.

The key drivers of the Company's second-quarter earnings are summarized on slide 9. Second-quarter results included two previously disclosed notable items. The Company reached a $200 million settlement with the US Department of Justice to resolve their investigation into the endorsement of mortgage loans under the FHA's insurance program.

Also in the quarter, and prior to the settlement, the Company sold 3 million shares of Class B common stock of Visa resulting in a pretax gain of $214 million. Combined these notable items had no impact to diluted earnings per common share for the second quarter. Excluding these notable items the Company achieved positive operating leverage both on a year-over-year and linked quarter basis. The $11 million, or 0.7%, increase in net income year over year was principally due to an increase in total net revenue and a lower provision for credit losses.

Net interest income was up 2.7% year over year as an increase in average earning assets was partially offset by a decrease in the net interest margin. A $24 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 $4 billion reduction in average loans held for sale, reflecting lower margin origination activity versus the same quarter of last year. The net interest margin of 3.27% was 16 basis points lower than the second quarter of 2013, primarily due to growth in the investment portfolio and lower average rates and lower rates on new loans, partially offset by lower rates on deposits and short-term borrowings and a reduction in higher cost long-term debt.

Noninterest income increased $168 million or 7.4% year over year, primarily due to an increase in other income due to the Visa sale. Including the Visa sale increases in the majority of fee revenue categories partially offset the decline in Mortgage Banking revenue.

We saw growth in retail and corporate payments, merchant processing, trust and investment management fees, deposit service charges, commercial product revenues and investment product fees. Noninterest expense increased year-over-year by $196 million or 7.7% due to the FHA DOJ settlement.

Excluding the settlement, noninterest expense was essentially flat as lower employee benefits expense driven by lower pension cost was offset by higher compensation expense reflecting the impact of merit increases and higher staffing for risk and compliance activities. Net income on a linked quarter basis was $98 million or 7% higher mainly due to an increase in total net revenue.

On a linked quarter basis net interest income increased due to higher average earning assets and an additional day in the quarter partially offset by lower loan rates. The net interest margin of 3.27% was 8 basis points lower than in the first quarter, principally due to growth in lower rate investment securities and lower rates on new loans, mainly due to higher growth at wholesale as compared to retail loans.

On a linked quarter basis non-interest income was higher by $336 million or 15.9%. This favorable variance was primarily due to the Visa sale, seasonally higher payments revenue and growth in all other fee categories. Higher Mortgage Banking revenue was principally due to a favorable change in the valuation of mortgage servicing rights net of hedging activities.

On a linked quarter basis non-interest expense increased by $209 million or 8.2% due to the FHA DOJ settlement. Excluding the settlement noninterest expense was essentially flat, lower employee benefits expense was offset by higher professional services and marketing and business development expense.

Turning to slide 10. Our Capital position is strong. 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.

Basel III includes two comprehensive methodologies for calculating risk weighted assets, a general standardized approach and more risk sensitive advanced approaches. As of April 1, 2014, the Company exited its parallel run qualification period resulting in this capital adequacy now being evaluated against whichever Basel III methodology is most restrictive.

The most restrictive methodology for our Company is currently the standardized approach. Our common equity Tier 1 capital ratio estimated using the Basel III standardized approach as if fully implemented at June 30 was 8.9%. At 8.9% we are well above the 7% Basel III minimum requirement. Our tangible book value per share rose to $15.26 at June 30 representing a 13.2% increase over the same quarter of last year and a 1.8% increase over the prior quarter.

Turning to slide 11. In June the Board of Directors declared a 6.5% increase in our common stock dividend. As a result in the second quarter we returned 75% of our earnings to shareholders. Dividends accounted for 31% of the return to shareholders and the 15 million shares of stock we repurchased in the second quarter accounted for the remaining 44%.

I'll now turn the call back to Richard.

Thanks, Andy. To conclude our formal remarks I'll turn your attention to slide 12. Again in the second quarter we focused on Extending our Advantage, which is our theme for 2014. Our advantage is real and it extends to every one of our businesses.

Our prudent risk management, our efficient operating platform and our industry-leading profitability allow us to operate from this position of strength. The Chicago area Charter One bank franchise acquisition that we completed in late June is just one example of that strength. As we move through the second half of 2014 we'll continue to look to extend our advantage.

Our 67,000 talented and engaged employees remain focused on delivering 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). Erika Najarian, Bank of America.

My first question is the outlook on commercial loan growth for the rest of the year. Obviously your gains on an organic basis continue to be quite impressive. And the commentary from the large banks that have reported before you has been quite positive for the year.

And I was wondering, Richard, if you could add your commentary in terms of what you're hearing from customers in terms of CapEx for the next six months.

I'd be happy to, Erika, thank you. First of all, you're right, we've had some remarkably consistent and industry-leading growth in average loans. And with the commercial, kind of the Wholesale Banking being up 5.9% linked quarter that would be one of our best quarters we've seen in a long time.

I'll first tell you that we're seeing it particularly in the middle market where we really want to see kind of the core growth in the country as we see Middle Market businesses starting to expand in a more organic basis. Credit structures are firming up at the expense of pricing. I typically tell you we don't lose on pricing, and we don't, because we have a cost advantage. But we do see a pricing compression both in the Middle Market and the leveraged space.

But particularly I see that as a good sign of some forms of green shoots and growth. In the larger and investment grade credits, structures and pricing remain much more stable. But they're also more event driven than they might be organic driven.

Loan demands for second quarter were particularly high and in the second quarter we expect it to moderate slightly but still be at a substantially higher growth rate. In other words, the 5.9% will probably moderate to something more between 3% to 5% as we look into the next quarter. And our loan growth is strong across the country, there's no regional definition.

Retail, food and ag continue to be strong and we see some weaknesses coming in oil, gas, energy and utility. So it's probably where you'd expect it to be and our reflection of loan growth and our forecast I think is in line with what you see and read about in the current economy.

Finally, we're seeing new credit opportunities being driven by refinancing but also I'm seeing, as I said earlier, organic growth. You know, what's interesting is people are starting to increase inventory we think to build for a better economy and a better outlook in quarters three and four.

I've long believed that as the Fed starts to get closer to what is a reality of increased rates and at least the belief that they are imminent that that starts to increase economic activity at the coal sale side as people prepare for a better economy. We also expect increased M&A activity to continue.

And finally, we see companies looking to banks to create alternative avenues of funding that they want to prove to the rating agencies that they have a diversified source of funding. So I think banks might be back in favor again for reasons that makes sense, but especially as rates continue to be low people don't want to miss that window before it closes.

So in total I'll answer even more than you asked. We were at the 2% linked quarter loan growth. We offer you guys kind of a range of 1% to 1.5% and then we move around that as the quarter seasons. We're going to bring you back down to that 1.5% as a starting point as the quarter three begins and we'll start to iterate that as we get further into the quarter.

But I think the 2% might be a high quarter for us this year, but we're still expecting it to be substantially impressive and somewhere between the 1.5% range as we get further along into quarter three.

Thank you for that. And as a -- again, I wanted to ask about another area of strength. The year-over-year gains in card balances certainly outperformed, even on a core basis to your larger competitors. And I'm wondering if you could give us sort of a sense of how that correlates with sales volume versus actual balance growth? And how much is this taking wallet share away from the larger competitors?

Erika, this is Andy. I would say it's a combination of all those things, it's market share growth as well as core customer growth. So same-store activity, same-store sales on both the merchant and card side was up about 4.5%, a little stronger in Europe than in North America but in North America right around 4%. And if you look at our card fees, both on a linked quarter and year-over-year basis, it's reflective of the increase in same-store sales and customer spend.

And then if you look at balances, balances were relatively flat on a linked quarter basis. Part of that is seasonality, but you see that growth year over year. The level of spend continues to increase. The level of utilization so to speak is flat to down a little bit.

Got it. And just one last question for you, Andy. I was wondering if you could give us an update on where you are with regards to potential or LCR compliance with the proposals. And also how much further pressure we should expect on the margin as we think about maybe potentially building the securities book further out for HQLA?

Sure, Erika. So, in terms first of all in LCR, we are very close to that number. As you know, we ended this quarter at $90 billion in securities. We will plan to grow to $95 billion in the third quarter. So up $5 billion more, similar to what we saw in the second quarter.

And once we get to the end of the third quarter I'll let you know, but we're going to be very, very close as our expectations -- the final rule will come out here in the next few months and that will guide us to what our final number is, but we're very close.

In terms of margin, our margin was down 8 basis points linked quarter this second quarter. And there are three components. The first is the securities build I just spoke to which cost us about 3 basis points. The second was the reduction in CAA, checking account advance fees, which runs through loan fees, and we have talked about that. That cost us about 2 basis points.

And then finally the loan mix. Most of the growth that occurred this quarter was in the wholesale category. In fact, wholesale overall was up about 4% and retail was relatively flat. Wholesale has a little lower yield and that cost us about 3 basis points. So that is the 8 basis points in quarter two.

As we look into quarter three I would expect the same securities impact, about 3 basis points, I would expect a similar loan mix impact of 2 to 3 basis points. And CAA in quarter three will cause a reduction of about 5 basis points in margin because our $39 million will go to effectively zero.

So you add all that up it's 10 to 11 basis points. But importantly net interest income will still grow in quarter three versus quarter two.

And this is Richard. And importantly, after that CAA the $39 million going to zero we're done. So that impact is over. And as Andy said, at this call, 90 days from today we'll hopefully have both the rules and know where our final liquidity build is and we can either call it done or call it near done and give you final guidance. But for that all that leaves is the mix.

And we're all hopeful that we'll continue to do well on commercial and that the consumer will start to bid its own place in growth and in that case the margins will firm up. So we've telegraphed to you all that once those two activities of CAA and liquidity build are over we think that the margin flattens out and is very small movements along with the vagaries of the mix.

Thank you for such complete answers. I appreciate it.

Bill Carcache, Nomura.

As we look ahead to the period where the Fed -- I guess excess reserves decreases the Fed drains liquidity from the system. Could you talk a little bit about presumably in that kind of environment the strong deposit growth that you've been enjoying decreases?

And perhaps maybe if you could comment -- give some color on the pecking order of your funding preferences as we look forward to a stronger loan growth environment. And perhaps also comment on whether you see banks having to -- some banks having to raise more expensive funding to remain LCR compliant.

So, Bill, I would say our focus has been on the core deposit category. You've seen good growth in that category across DDA as well as interest-bearing deposits. And then across both the retail as well as the wholesale and corporate trust side of the equation.

We have a great funding source in our corporate trust business which represents about 15% of our deposit base including our DDA balances. So we have strong core deposits and strong opportunity for continued growth and that would be our principal preference in terms of growth as we look at increased rates.

So secondarily, we have ample access to the wholesale markets in terms of debt issuance. And as you know, we have one of the lowest spreads out there in terms of our opportunity there. So that would be secondary though to deposit growth.

And finally, we have an entity called The Money Center which is short-term balance sheet growth in terms of deposits for wholesale customers which just offers us another opportunity of wholesale growth. So those are our sort of order of opportunity. I will also tell you that we're positively biased to increase in rates.

As you see from our Q and our disclosures, 1.75% or so in terms of a 200 basis point parallel shift. And in addition, we have about $100 million in waivers that will come through in fee income to the extent rates go up 75 or 100 basis points.

That's very helpful. Thank you, Andy. And one last one for Richard. Richard, can you offer some perspective on some -- you gave some very helpful color in your commentary. But perhaps anything that you're seeing now that gives you greater confidence in the sustainability of the recovery given some of the head fakes that we've seen to date.

I will, Bill. This is more of the Richard Davis view of the world, just so you know. And it's consistent, but I've always thought in this recession, as we finally come out of it, that it's going to be the businesses that blink first. In other words, it is not consumer driven like it has been many times past because the wealth affect still isn't present given the housing values and some of the skittish nature of consumers having gone through this recession.

So I'm seeing more and more that consumerism will be incentivized by price lowering and by new activities and new product innovation by the wholesale side and we're seeing that. That's why I kind of don't mind -- I don't like the mix version, but I like wholesale growing. It makes sense to me that it's growing faster and first in this recession recovery than the consumer.

That also aligns with what I think we would all agree that under Janet Yellen we're seeing more and more, while she will talk about how careful she wants to be about increasing rates. We're taking away some of the time specificity that used to be there, we're not linking it to unemployment rates, we're not linking it to points in time. But we are linking it to a sense of how much longer can rates be low and what kind of levers would it give the Fed to start moving rates up.

I think there's enough sentiment in our customers' view that that is coming to an end and that does encourage and incentivize people to take action and make some decisions that they've been sitting on for many, many years. Those are both, I think, sustainable kind of actions that will provide us with the kind of next generation of slow but steady growth back into the consumerism we're looking for.

So businesses lead out based on a belief that things are coming to an end on low rates, consumers follow, then we're back into maybe a different kind of a recovery, but one that we'll, I think, welcome greatly.

That's great. Thanks very much, gentlemen, I really appreciate it.

Ken Usdin, Jeffries.

Hi, good morning, guys. It's actually Bryan from Ken's team. My first question is on expenses. So ex the DOJ charge they were pretty flat quarter over quarter and year over year. So just wondering what the outlook is for cost in the back half of the year and if there's an expectation that you'll continue to drive positive operating leverage.

Yes, we do expect positive operating leverage. If you back out the two notable items this quarter, as Richard mentioned in his comments, we did have positive operating leverage both on a linked quarter as well as year-over-year basis.

We would expect to have that for the full year and we would expect to have our efficiency ratio continue to be in the low 50%s just like what you saw this quarter.

Okay, great. And then next on the discontinuation of the deposit advance product, I think previously you guys had stated that there's not a ton of offsets either with new lending products or fee-based products that you can offer. Just wanted to get your updated thoughts there. Are there anything you're looking at today that could offset some of that revenue give up in the net interest income?

Yes, Bryan, I'll tell you I don't see it, not in this category. We're going to be looking more to mobile banking and some of the new innovative deposit products to offset that category. But to the extent that we would have to live within some of the new rules that have been created for that kind of a product, it would almost be a breakeven product.

And we may still well come out with something because we want to continue to be good stewards of helping people, first time customers and help people that have certainly less means than the average. But at the same time it's not going to be a moneymaker. So I wouldn't consider it a replacement for any kind of a fee category.

I will say that U.S. Bank is working on and will probably have a product that will be sufficient to meet a different set of customer needs than we were meeting before. But I think we'll start turning our attention more to things like mobile banking and mobile payments and some of our payment categories to replace what will be kind of a forever lost income benefit from that original checking account advance.

So, we'll see it. It will take longer to replace than it would've been just a straight up product, but I wouldn't count on it.

Okay. And the tax rate jumped up a bit. Was there anything unusual there? And is the outlook still for 28% going forward?

Yes, nothing unusual, 28% to 29% for the full year.

Great, thanks for taking my questions.

Jon Arfstrom, RBC Capital Markets.

Just to follow-up on the expense question, Richard or Andy. Where are we in terms of the expense environment for U.S. Bank? I know that periodically you have the plan B, which is a more strict approach based on the revenue environment. But just out of curiosity what is the message internally on expenses?

Yes, thank you, Jon. Look, we are on plan B right now. There's plan C and D, by the way, but we're on plan B. Our employees have been really -- they trust us and I appreciate that a lot. In other words, we've said to them, look, the plan that we expected last November when we built 2014 was revenue up X and expenses up slightly less than X. And as you well know, I think quarter one was a loss quarter, we're not going to see that made up.

And so we've asked everybody to reduce their expense growth, still to grow but a lower level as we expect revenue to grow but at a lower level. We are in the middle of that now. And what that just means is we're not taking any risk with discretionary expenses, we're asking people to watch their nickels and dimes and to keep a close eye on FTE.

That's not sustainable, but we also don't think it's going to need to be. But we'll continue to employ it until the economy starts to show a little more robust in sustainability.

Having said that, I think we've mentioned before the key elements of expense growth are pretty much already in place at the Company. A, our CapEx, which is always a big number, we've used the last few years to really catch up from the many years before that and we've hit our peak years behind us.

But we have the amortized cost that we'll continue to [feather] through the next few. But we've hit our peak and that starts to move down over the coming years. We don't see any kind of a retrace back to a high level. We've got the compensation in the FTE. But for these acquisitions and new partners we bring on we've got a really nice steady state.

Our compensation is at parity with our peers. Our performance plans pay people for performance, we've been paying above target for the last few years because we performed at that level. So there is not a big issue there.

And then finally on just general operating costs, we have one operating system, we've always had one operating system. When we bring in a company we bring it to the same singular view of operating integrity. So we don't have multiple accounting firms and accounting systems and multiple technology systems that we have to integrate.

So on one hand I told you what you all tell me, which is you guys don't have much upside in reducing your expenses because you're already efficient. And I will say, that is true and you're welcome. We work hard at that and we protect it. And I think by staying in the low 50%s as we've committed it's a good indicator to use.

We will let revenue be the driver to expenses, but there's nothing substantial that we're holding back on or wish we had the opportunity to spend money on, it's pretty much at the run rate. The last big dog in this hunt is whether or not compliance costs are fully burdened.

And I'm not going to be dumb enough to say I think that we're done, but I believe that based on everything I'm looking at we've come to a place where our operating expenses aligned with compliance audit and operating integrity is pretty much where it needs to be for a while separate some surprise and that we've, I think, put in place for the last couple of quarters. So I don't see a big jump.

Okay, that is helpful. Maybe a question for Bill Parker just on credit. I know it's really kind of a non-issue at this point, but I remember (multiple speakers).

What? You want to talk about credit? Gee, that is so 2010.

That is part of this is that I remember when you broke through 100 basis points of charge-offs and that seemed like a big thing and you talked about maybe being a 90 to 100 basis point charge-off bank. Now it seems like we're bouncing around 60, is this the trough, Bill? Does this feel like normal where it's going to bounce around? Or what are the puts and takes in terms of the loss outlook?

Well, in terms of the environment we're in, which is a stable economy, a modestly improving economy. Yes, our outlook for our losses are fairly stable. The one area we still have some room for improvement, and based on the decline in delinquencies that we saw this quarter, would be in residential mortgage.

So there is still room for improvement there. But for this type of environment, that 90 to 100 that you mentioned, we refine that every quarter. Right now it's 96. But that's a through the cycle measure, it looks at good times and the bad times.

That's probably (multiple speakers) now.

Yes. So right now where we're at is a comfortable spot for this type of environment.

Okay. And, Bill, anything making you nervous or anything where you're holding the line in saying, no, we're not going to do that?

Well, I wouldn't be doing my job if there weren't some of those. But in general we have not materially changed any of our underwriting standards. The only thing we did coming out of the downturn was do some controlled expansion on our indirect auto portfolio that's gone well. We've had strong originations in that space, but it's all very high credit quality.

Okay. All right, thank you.

Dan Werner, Morningstar.

I guess relative to -- with credit quality, kind of expanding on that. With commercial loan growing and kind of driving the loan growth here and stable credit quality, you're still releasing reserves here. Should we expect that to continue or reverse going forward as loans continue to grow here?

Well, someday, yes, and I can't tell you the exact inflection point. But I mean our reserve release this quarter was $25 million. So very, very modest, less than or about a penny a share. So whether we release a little or start adding a little depending upon the strength of loan and commitment growth, I would say it's not that relevant to the earnings potential going forward.

But we watch that. We still have a little bit of credit improvement to go, and so we watch that and balance that with our loan and commitment growth.

And, Dan, it will be a super easily telegraphed very soft turn in the corner when that happens in the inflection. So you won't be surprised by one quarter over the next, this is a very slow process. And eventually I'd love to be adding to loan losses because the loan growth is so robust and because we should prepare for years forward. So that to me at the end of the day won't be a bad outcome. But we are not there yet.

Okay, and then a second question on mortgage revenue. I had in my notes to expect like between $225 million and $250 million in revenue. Is that still consistent or relatively the range that we are going to see for the rest of the year?

Yes, I think that is in the range. So as you look into the third quarter versus the second quarter -- this is Andy -- we would expect mortgage application volume to increase slightly, typical seasonal increases, but the servicing revenue will come down a bit. So I would expect it to be flat to down a bit from this quarter.

Okay. Thank you.

Keith Murray, ISI.

Good morning. If you'd touch on the fee momentum, it looked like you had pretty broad momentum in fee categories this quarter. You obviously just touched on the mortgage outlook. But can you just give a sense of which line items or which categories ex seasonality in 2Q you feel like there is good underlying momentum that could carry through in the back half of 2014?

Sure, this is Andy again. So across our payments businesses, we saw growth in all four categories. I would say most of the government pressure that we had seen in corporate card is behind us. In fact, government actually grew this quarter as well as corporate.

So corporate fees are good, merchant processing fees continue to grow, card fees continue to grow. Our trust in investment management is doing very well, both on the wealth management side as well as the corporate trust side. Commercial product fees, which is a reflection of corporate and wholesale activity continues to grow.

Investment management is growing. So we are actually seeing growth across many categories of our fees, and including deposit service charge, which is more seasonal and based on days. But really, I wouldn't say there are any particular weaknesses in strong growth across all, and I think all of them are quite leveraged to an economic recovery. So to the extent the growth accelerates, I think we will see even accelerated fee growth.

And I would add to that, Keith, with interest rates and FX volatility so low that's the area where that volume continues to be under some pressure. But as Andy said, it's very positively [indexed] toward [an improving] economy. Derivative backlog is good and corporate bond fees are on track.

So we're seeing some of those coming back to some level that makes sense as the economy starts to warm up a bit. But that would be the laggards as we go through the list of key businesses that we watch.

Thank you. Maybe one for Bill. Can you give an update on the SNC review? Was any of that in this quarter? I'm assuming it's going to be in the third quarter for you guys, but just any thoughts on the process this year versus the past, etc.

Yes, I'm glad you asked that, actually, because (multiple speakers) usually we do get the results in August, but this year we got them early. So we have processed everything, it's in our results. Any changes for us were completely immaterial, we had excellent results.

We have not seen the OCC's or the regulator's industry publication, which gives some insight into where they saw stress, so I'm really just speaking for our portfolio. But we're in and done with it and no material impact.

Okay, thanks. And then last one. It looked like GAAP assets were up about 10% year over year, the Basel III risk-weighted assets were up around 7%. Is this just a mix thing meaning more securities, highly rated securities, or is there any kind of optimization going on that you guys are focused on?

It's exactly what you said, it's the securities growth at a lower risk-weighted asset.

Great, thanks very much.

Brian Foran, Autonomous.

So on the loan growth, I mean clearly you guys are doing very well. I guess one of the things I scratch my head on is when I benchmark you to the large domestic banks in the H.8 or what's come out so far in the quarter, clearly the 6.7% year-over-year growth ex Charter One is best in class.

But then when I benchmark you to kind of headline numbers for the system it's about in-line and it seems like the disconnect, A, clearly there's the small bank trends which you've talked about in the past. And I was hoping you could update us on where you see that level of competition.

But then, B, there is this kind of new trend of foreign banks really growing quite rapidly, at least at the total system data. And I was wondering if you could also offer any thoughts you have there. Is that something that is material and you're seeing in your markets? Or is that more happening in the capital markets and leverage lending and not really affecting you?

Yes, sure. This is Richard. So first of all, I guess I think of four categories. I think of the G SIFI kind of domestic banks, I think of the regional thanks like us, I think of community banks and I think of the foreign banks. And our intelligence, neither the community banks nor the foreign banks are taking any market share or creating any impairment to our growth.

So I can't really look at all the data that you're looking at. On the H.8 we typically are about half to twice better than those averages as we track it ourselves. So it's consistent with what we're seeing. Community banks are -- they're not as diversified. So they'll go down the path on one or two loan product types and we'll fight a good fight in certain smaller markets.

At the end of the day when you're looking for a customer with a need for more than just one loan or one type of loan we typically win the day on that. And the foreign banks, maybe it's because we're more centrally located in the middle of the country and even to the West Coast, but they're simply not creating a burden to us that we've noticed at this point. And they have in the past, so both of those categories have harmed us in the times before.

I think I'll take you back though to the long-standing rationale that we've used to take it outside of the, gee, I wonder what they're doing to -- oh, that makes sense, category. And that is our funding advantages are just substantial. I mean they are just real, they're very real and they're very big. And you compare to any of those other three groups from the large money center banks to the community banks to the foreign banks, we beat them every time.

So, but for this management team getting greedy or sloppy and letting too much of that benefit go away altogether, we're letting it dole itself out into higher pricing benefits to the highest quality customers, which is why we can have high quality, have growth and have it on the low risk side and use some of that advantage. So hopefully that makes sense as to why we're doing it.

There's no magic here and there's no sustainability risk of this going away unless we were to harm our own ratings and we're not planning to do that either. So hopefully, Brian, that gives you a little more color.

That does, thank you. All of my other questions have been asked. Thanks.

Nancy Bush, NAB Research.

(Technical difficulty) express a little bit of concern about the behavior of consumer deposits as rates rise and wonder if you've given much thought to the issue, if you guys are testing. If you see the need for any new or different products this time around or if you expect things to be pretty sticky.

Nancy, this is Andy. I do think we're going to see a decline in deposits overall more than what we had seen historically when rates start to move up. And we actually model that in our rate sensitivity when we give you our numbers. The best example I think is our DDA levels have gone from about $50 billion to almost $74 billion.

And I do expect, because there's low opportunity cost of that DDA today, as rates move up we're going to see some decline there. So we are modeling it that way, we are preparing for it that way and we also have a number of consumer products that we're testing in different markets in terms of the little higher rate to continue to grow core deposits.

I'll add to that, Nancy. I should hope deposits start to fall because that would be a great indicator that people are using their cash. As you know, then they'll use the line they've been paying for and then they'll get a new line. That brings me to utilization a little bit. We're seeing utilization continue to be slowly but surely getting better, slowly to the operative.

We're not seeing a huge turn, but actually this last quarter was the first increase in our wholesale utilization since 2008. Small as it might be that's a pretty big dern deal. And that's along with the potential of deposits trying to come out. Those would be actually good signs I think of consumers and businesses using their money and then some of our money to kind of fund their growth.

But I will say we also have this advantage that we want to remind people of on the core deposit side with our corporate trust business which has a fair amount of contractual difference and distinction. 15% or so of our non-interest-bearing comes from that safer category.

And no matter what the stress test that we provide will result in, it allows us with a little bit more of a foundation core of deposits that advantages us again with this corporate trust business that we don't talk enough about, but provides a distinction and a uniqueness to our portfolio.

Thanks for pointing that out. And Richard, your thoughts about the payments businesses right now? Are you seeing any opportunities? Are you more or less excited as you see better economic activity to add to the payments portfolio?

Yes, I'm really loving it, I'm glad we have it. One of the things I've often said to you, Nancy, directly and to others is if you like us now you're going to love us all when things get better. One of the things that we haven't talked much about is the R&D that we've been spending on mobile payments, not banking so much as payments, which is a space we should be leading in.

And there are so many derivatives of what could possibly happen next as people want to pay for things and track things and move things. And we're in just about every single prototype we can think of, testing all kinds of different programs. And I'll look forward to the chance to showcase some of those outcomes.

You know, it's our style not to talk about the things we're piloting because I want to try them first. And why would I telegraph that to others. And if they don't work then you'll never know and if they do we'll brag about it endlessly. But I think payments is going to be that next step.

And I think in my response to the question that Bill or Brian asked, I think it's going to be the replacement fee opportunity for banks as we get to more core checking costs and start getting paid for helping people see, track and move their money more naturally and more quickly in this environment.

So I like payments for that reason and I like our diversified. Andy told you government's turned the corner, at least stopped shrinking. Corporate is getting as strong as some of these other green shoots we've seen in C&I. And the consumer, based on credit volume year over year, was up 9%, debit was 5% and prepay, which is our favorite new space, which we have cradle-to-grave is up 22%.

So for us the payments was a good place to be and, like the balance sheet, if you like it now you're going to love it later because I think it's entirely vexed favorably toward an increasing economy. So we'll cross our fingers.

I have to throw in one thing, Richard. I haven't heard the word dern since the last Hopalong Cassidy movie I watched.

I haven't seen one of lately. And I can't tell you it came from LA, so I'm not sure where it came from. I'm sitting next to Bill, Bill would use dern.

All right, thanks much.

Thanks, Nancy. Jackie, do you have any others?

Not at this time.

All right.

Thank you for joining our call. Please call me this afternoon if you have any other questions. Thank you.

Thanks, everybody.

Thank you. This concludes today's conference call. You may now disconnect.