美國合眾銀行 (USB) 2015 Q1 法說會逐字稿

Welcome to the U.S. Bancorp's first-quarter 2015 earnings conference call.

Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer, and Kathy Rogers, 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 Standard Time through Wednesday, April 22 at 12:00 midnight Eastern Standard Time.

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

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

Richard Davis, Kathy Rogers, Andy Cecere and Bill Parker are here with me today to review --.

Operator, we have a crosstalk.

Someone is not on mute.

Could you double check that before we proceed?

Please hold.

Everything is clear.

Thank you very much.

Thank you.

Richard and Kathy 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 (technical difficulty) and 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, and good morning, everyone.

It's great to be here and to talk about U.S. Bancorp.

I want to begin our review with the results and a summary of the quarterly highlights on page 3 of the presentation.

U.S. Bank reported net income of $1.4 billion for the first quarter of 2015, or $0.76 per diluted common share, a 4.1% increase year over year.

Total average loans grew 5.1% year-over-year and 0.8% linked quarter excluding the impact of a reclassification of certain municipal loans to securities at the end of the fourth quarter.

In addition, we continue to experience strong long growth in total average deposits -- strong growth in total average deposits of 8.1% over the prior year and 1.1% linked quarter, the strongest first-quarter deposit growth we've seen in several years.

Credit quality remains strong.

Total net charge-offs decreased by 18.2% from the prior year and declined 9.4% from the prior quarter.

Total nonperforming 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 Tier 1 capital ratio estimated for the Basel III Standardized Approach, as fully implemented, was 9.2% at March 31.

We repurchased 12 million shares of common stock during the first quarter which, along with our dividend, resulted in a 70% 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 1.44% and return on average common equity was 14.1%.

Moving over to the graph on the right, you can see that this quarter's net interest margin was 3.08%.

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

Our efficiency ratio for the first quarter was 54.3%, equal to the prior quarter.

We expect this ratio to decline and 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 first quarter of $4.9 billion, a 1.9% increase from the prior year.

The increase was due to the higher net interest income as well as higher revenue in most fee businesses, partially offset by lower loan fees due to the previously discussed wind down of Checking Account Advance.

Average loan-to-deposit growth is summarized on slide 6. Average total loans outstanding increased by $12 billion or 5.1% year-over-year, and 0.8% linked quarter excluding the impact of a reclassification of certain municipal loans to securities at the end of the fourth quarter.

Average total loans grew by 0.6% linked quarter on a reported basis.

Again this quarter, the increase in average loans outstanding was led by strong growth in average total commercial loans, which grew by 15.1% year-over-year and 2.4% over the prior quarter.

Residential real estate loans were relatively flat year-over-year and declined modestly on a linked-quarter basis.

Average credit card loans increased to 2.4% year-over-year and were seasonally lower on a linked-quarter basis.

Total other retail loans grew 3.5% year-over-year and 0.4% over the prior quarter, mainly driven by steady growth in auto loans.

We continue to originate and renew loans and lines for our customers.

New originations, excluding mortgage production plus new and renewed commitments, totaled approximately $38 billion in the first quarter.

Total average revolving commercial and commercial real estate commitments continue to grow at a fast pace increasing year-over-year by 11.7% and 1.9% on a linked-quarter basis.

Line utilization was relatively flat in the first quarter.

Total average deposits increased almost $21 billion or 8.1% over the same quarter of last year and 1.1% over the previous quarter.

Excluding the Charter One acquisition, the growth rate remains strong at 6.4% on a year-over-year basis.

Growth in low-cost interest checking, money market and savings deposits was particularly strong on a year-over-year basis.

Turning to slide 7 and credit quality.

Total net charge-offs declined 9.4% on a linked-quarter basis and 18.2% on a year-over-year basis.

The ratio of net charge-offs to average loans outstanding was 0.46% in the first quarter.

Nonperforming assets decreased by 6.2% on a linked-quarter basis and 15.2% from the first quarter of last year.

During the first quarter, we released $15 million of reserves, $5 million less than the fourth quarter of 2014 and $20 million less than the first quarter of 2014.

Given the mix and quality of our portfolio, we currently expect the total nonperforming assets to remain relatively stable in the second quarter of 2015, while we expect the level of net charge-offs to increase modestly in the second quarter, mainly due to lower expected recoveries.

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

Thanks, Richard.

I'll turn you to slide 8. This gives you a view of our first-quarter 2015 results versus comparable time periods.

Our diluted EPS of $0.76 was 4.1% higher than the first quarter of 2014 and 3.8% lower than the prior quarter.

The key drivers of the Company's first-quarter earnings are summarized on slide 9. The $34 million or 2.4% increase in income year-over-year was principally due to an increase in total net revenue driven by increases in net interest income and fee-based revenue and a decline in the provision for credit losses partially offset by an increase in non-interest expense.

Net interest income was up 1.7% year-over-year as an increase in average earning assets was partially offset by a lower net interest margin including lower loan fees.

Approximately $50 million of the reduction in loan fees was due to the previously discussed wind down of our Checking Account Advance, our short-term small dollar deposit advance product.

The $34.6 million increase in average earning assets year over year included growth in average total loans as well as planned increases in the securities portfolio.

Also at the end of the first quarter, approximately $3 billion of student loans were transferred from the loan portfolio to loans held-for-sale.

The net interest margin of 3.08% was 27 basis points lower than the first quarter of 2014.

This is primarily due to the growth in the investment portfolio at lower average rates as well as lower reinvestment rates on investment securities, lower loan fees and lower rates on new loans and a change in loan portfolio mix, which is partially offset by lower funding costs.

Noninterest income increased $46 million or 2.2% year-over-year, due to higher revenue in most fee businesses.

We saw growth in retail payments, trust and investment management fees, deposit service charges, treasury management fees, investment product fees, mortgage banking and other income which was driven by higher equity investment gains.

Merchant processing revenue, while relatively flat on a year-over-year basis, was negatively impacted by foreign currency rate changes.

Excluding this impasse, merchant processing fees grew approximately 5.5% on a year-over-year basis.

Noninterest expense increased year-over-year by $121 million or 4.8%.

The increase was primarily the result of higher compensation and benefits expense and higher other expense.

The increase in compensation expense is primarily the result of the impact of merit increases, acquisitions, higher staffing for risk and compliance activities and the variable cost related to higher mortgage production volume.

Increased benefits expense is due to higher pension costs of about $25 million for the quarter.

Other expense is higher primarily due to mortgage servicing related activities.

On a linked-quarter basis, net income was lower by $57 million or 3.8%, mainly due to lower net interest income and seasonally lower fee-based revenue, partially offset by a decrease in non-interest expense.

Net interest income was lower due to the impact of two fewer days in the quarter and a lower net interest margin.

The net interest margin of 3.08% was 6 basis points lower than the fourth quarter.

The 6 basis point decline includes approximately 2 basis points related to the unusually high interest recoveries in the fourth quarter, which, as you recall, we discussed at the earnings call in January.

Higher interest recoveries continued in the first quarter benefiting net interest income by approximately 1 basis point.

The remaining decline in net interest income was principally due to growth in lower rate investment securities and lower reinvestment rates, lower rates on new loans and a change in the loan portfolio mix, along with the impact of higher cash balances at the Federal Reserve as a result of continued deposit growth, which, as Richard mentioned, was exceptionally strong in the first quarter.

On a linked-quarter basis, noninterest income with lower by $216 million or 9.1%.

This variance was principally due to seasonally lower fee revenue in the fourth quarter 2014 Nuveen gain.

On a linked-quarter basis, noninterest expense decreased by $139 million or 5.0%.

The decrease is due to seasonally lower cost related to investments in tax advantaged projects, the impact of the notable fourth-quarter 2014 charitable contribution and legal accruals and lower marketing and business development expenses.

Professional services also declined due to seasonally lower spend in many of our businesses.

Partially offsetting these reductions were higher compensation and benefits expense due to increased pension costs, seasonally higher payroll taxes and increases in variable compensation related to higher mortgage volume.

Turning now to slide 10, our capital position is strong.

Our common equity Tier 1 capital ratio, estimated using the Basel III standardized approach as if fully implemented at March 31, was 9.2%.

At 9.2% we are well above the 7% Basel III minimum requirement.

Our tangible book value rose -- per share rose to [$16.50] at March 31, representing a 10.1% increase over the same quarter of last year and a 3.4% increase over the prior quarter.

Our return on tangible common equity was 19% for the first quarter.

In March, we received the results of the 2015 comprehensive capital assessment and review, or the CCAR, including the Federal Reserve's non-objection to our capital plan.

Subsequently, we announced our new five quarter buyback authorization totaling approximately $3 billion effective April 1 and our intention to recommend to our Board of Directors a 4.1% increase in our common stock dividend beginning with the second-quarter dividend payable in July.

I will now turn the call back to Richard.

Thanks, Kathy.

Turning to slide 12 you'll see the cover of our 2014 Annual Report and its theme: The Power of Potential.

At U.S. Bank we stand at the intersection of people and potential each and every day.

And we're privileged to serve as a catalyst for all of our customers, whether consumer, small business, wholesaler or institutional, to assist them by providing the financial tools and resources they need to achieve their full potential.

This positions us well for growth as our customers seek a strong banking partner to help them as they pursue their goals.

Next week we will be holding our annual shareholder meeting in Louisville, Kentucky.

I look forward to telling our shareholders how proud I am of what we've accomplished and of the 67,000 remarkable and engaged employees that have contributed to our success.

We remain focused on producing consistent, predictable and repeatable financial results for the benefit of our shareholders.

That concludes our formal remarks.

Andy, Kathy, Bill and I would now be happy to answer your questions.

(Operator Instructions).

Jon Arfstrom, RBC Capital Markets.

Thanks.

Good morning, guys.

Good morning, Kathy.

Richard, maybe start with this -- just your view on the state of the economy.

You talked a little bit about your position for growth when the economy gains momentum.

Curious, are you still as optimistic as you've been in previous quarters?

Do you feel like the economy is gaining momentum?

And then maybe update us on your loan growth outlook?

Yes, I will.

Thanks, Jon.

I remain very optimistic for the economy and for the great citizens of America; a little less optimistic for the bankers until the interest rates start to move up.

So if you think about it, consumer confidence continues to move up and particularly small business.

Even corporate confidence continues to move up.

But part of that confidence is found in their ability to operate more effectively during their day with more money in the bank, more of a reserve in their minds that they've got a backstop of equity in their homes and the belief that right now they don't need to be indebted.

So for bankers that might not be as positive as it is for consumers and for businesses, but it does reveal itself as people husbanding cash and feeling a little bit better about their situation than they did a few years ago.

As rates start to move up, I am still convinced of two things.

One will be that when there is a real sense that it's about to happen there will be a tsunami effect, particularly on the corporate and wholesales side, of people wanting to lock down low rates before they finally get stuck having missed that opportunity.

And I think consumers will move from those who have heretofore been saving looking for some money, now they will start making some real money in their savings accounts and their endowments and our long-term trusts.

And I do expect people to start using their lines of credit again feeling the strength of an economy and a higher wage that will come with it.

So I am super optimistic about how things are moving; they are slow but steady, but they continue to move forward.

But I do think until rates move up, it continues to impinge the ability for banks to be particularly as financially successful as they will be when things get better.

As it relates to loan growth, we were at 0.8% this year, if you adjust for a little bit of noise.

And that's outside of our normal range of 1% to 1.5% on a linked-quarter basis, which is about a 5% to 6% annualized number.

We are looking to get back into that 1% a 1.5% in quarter two as we look into this -- 15 days into the second quarter.

I am also hopeful that as the year ages we will see those increases a little higher to the ranges we are used to at the 1.5% to 2%.

So I am still going to stick with our hope that we can get in the 6% range for loan growth on a year-over-year basis by year's end.

But for now, the 0.8% for me is a little disappointing because I really wanted to say in that 1% to 1.5% range.

But for you as an investor, make it certain that we are not going to stretch on any kind of credit quality in order to accomplish those numbers until which time it is more natural and the customers that we serve have a need for their loans.

So I am quite optimistic and yet a little bit hesitant until rates start to move.

Okay, good.

That's helpful.

And then just maybe a quick one for Bill.

I know it's a small number, but the incremental provision in energy, can you maybe just give us an update of what you did and what your expectations are and maybe size the exposure for us?

Sure, so our energy loans are about [1.3%] of our total loans and the part of that portfolio that's most directly impacted by the lower oil prices is the E&P portfolio; it's roughly two-thirds of that.

We have now run through that entire book with the new pricing deck reflecting the much lower forecast, obviously, on oil, and we have adjusted the ratings accordingly on that book.

And we did take an incremental reserve at the end of the year.

We've adjusted that now that we've accomplished this on a loan-by-loan basis.

It all adds up to something that is really not that material in terms of our $4 billion plus loan reserve, but it's all baked in now and we've done all the analysis and we update that pricing deck at least two times a year.

So if we need to do it again, we will, but --.

Good.

That's helpful.

Thank you.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

How are you doing?

A couple of questions.

One is just on investing in your people in an environment where rates are low and the loan growth is solid, but not accelerating too much.

I am just asking the question with regard to how you are considering allocating resources to drive top-line growth.

And is there opportunity to pull back maybe on some of the non-client facing related areas to be able to put more feet on the Street?

Right on.

First of all, I wish.

But no, we're not going to be able to slow down our incremental adds for first, second and third line of defense, as we call it for compliance and audit.

That is just a new world and even if I thought we had everything right, I would still keep everyone there to double/triple check that we are still doing things well.

So that has been the only place we have increased our FTE since I told you I think many times last year that in the middle of February of 2014, so that's now 14 months ago, we asked the employees, but for those in the compliance areas, to stay at their FTE level for all intents and purposes and to manage at a higher expected performance per person.

So that's not a hiring freeze because there is a lot of turnover, and when people -- if you have 964 FTE in your group, you can still have 964.

But it does encourage you to manage the bottom performers out more swiftly and to increase the quality of the 964 people that work for you, and that's where we are, Betsy.

I not going to do a reduction in force; we've hung on here for eight years and done quite well.

Our engagement, I believe, to be at the highest level it's ever been.

And I believe that the employees are deeply engaged; they will perform remarkably well for customers and shareholders will get the benefit.

So I don't want to mess with that formula, but I am asking everyone here to work harder.

I am working harder.

And we are asking everyone to appreciate the fact that protecting all of our current positions by performance is really the way to manage through these difficult times.

So that as a backdrop, you'll see that our operating leverage was, as you know, negative for quarter one, both on a linked quarter and year-over-year basis.

And as we put the plan together, we, as I said, always seek positive operating leverage and our planned for 2015 is for the year to be slightly positive.

I will say, however, that hinged on the original expectation that interest rates would start moving up at midyear, and based on our stress test and the prevailing view of economists a couple of months ago, if that doesn't happen in June then it's going to put some stress on our ability to be positively operating leveraged.

I will tell you this, though, in almost any circumstance, quarter one at 54.3% operating leverage will be our highest quarter, or in this case our least attractive quarter of the four.

And I think you'll see that as the quarters age we will get smarter and better at managing our expenses as revenue starts to move up.

But if anything else, I'd just close by saying I am on a lag basis so I've got to see revenue move up sustainably and consistently for long enough before we start to increase any expenses.

In the meantime, we will deliver with the same people working as hard as they do to deliver a little bit more each time.

And we'll manage the quality of our FTE to the highest level at this point where I think we are still an attractive employer and we can get some really good people from different places to accompany those who are here.

So if there is a push out in the rate hike, you counter that with more productive employee?

Yes, I do.

And again, being very clear, that could put a pressure on our full-year positive operating leverage; it could make it slightly negative instead of slightly positive because we were counting on that.

But it's not enough of a difference and it doesn't change, I don't think, you're all's trust in the way we manage the Company, to cause me to want to start laying people off or doing something more draconian.

Because it is not an if, it's a when for interest rates.

And when that happens, I'll be very glad we have the quality people we have ready to jump on whatever opportunities come along.

Sure, okay.

And then just separately, you did have a change in the management of the Payments business recently.

We did.

I just want to understand if there is any change in direction of the organization that we can expect?

So let me turn that over to our Chief Operating Officer.

Andy is going to give you an update there.

Hi, Betsy.

Good morning, Betsy.

No, there is no change in our strategy.

We have a good place in terms of market share and capabilities and our platform in merchant expansion outside of the US.

All those things are going well and we continue in that focus.

Our card issuing is doing also very well.

We are growing in regard to the activity, our branch activity is also increasing.

And finally, our corporate card is doing well.

So I don't see any change in direction.

Corporate card was impacted this quarter by a lower fuel price which impacts our fleet business and that was one of the big anchors this quarter in terms of our year-over-year growth.

And the other phenomenon that we did see this quarter was corporate spend on payables is down, which again probably reflects to what Richard spoke to which is just a general careful attitude in terms of large companies and payables for corporate spend was perhaps 1% up, where in a normal period it would be up 5% to 6%.

I will just add too.

Pam Joseph as staying all the way through June 30, so she and Shailesh Kotwal will have, gosh, almost four months of overlap, which we are going to take every day of because Pam has done a remarkable job.

Shailesh was attracted to us in a number of ways, not the least of which is his international experience.

And we will continue to follow, as Pam started this march across the pond, to increase the exposure we have in the European markets and eventually look into other places of the world for our merchant acquiring.

But he is going to be a perfect transition and the two of them have already established, I think, a great rapport to carry on for the second quarter.

And we'll make sure you all get a chance to meet him in future meetings because I think you will want to hear him directly and get a chance to understand his thoughts.

I appreciate that.

Thanks.

John Pancari, Encore (sic) ISI.

Morning.

Just want to ask a little bit more around loan growth, just want to see if you can give us a little bit more color on trends in the first quarter, particularly around Commercial Real Estate, as I know it was particularly weak in the quarter, and what may have impacted that.

And then secondarily, how do you get back to that 1% to 1.5% range that you indicated for next quarter?

Is it just the snapback in something that was abnormally weak this quarter?

Thanks.

Thanks, John.

I'll start; I'll let Andy add some color.

First of all, one of the ways out of the 0.8% into the 1% to 1.5% is getting out of quarter one.

So look how we've done already; we are in April.

It's part of it.

We are a seasonally affected company, particularly with such a heavy Midwest influence which includes some of the weather, so that helps a lot.

That's part of it.

Commercial Real Estate was actually pretty strong for us.

I'm not sure what numbers you were looking at, but I will give you the trend in commercial real estate is very consistent.

We call it the smile, but it's the East and the West Coast and Texas, and that's where most of the activity for growth is coming for, at least our customers.

Development activity, per se, is in the bigger cities, West Coast, Seattle, San Francisco, LA, Orange County, and then you've got Miami, Boston and New York.

So in the places you would expect.

And a couple of years ago on this call, John, I indicated that we had done a study of total housing availability once and when people moved out of their parents' basements and when the housing stock of foreclosures came back into the normal course.

And there were a couple of markets that we actually stayed away from for a while thinking that they might be overbuilt.

We are not seeing that right now; it seems that things are settling.

The economy has been slower to recover.

People have been more thoughtful about building in the right places.

So I am not concerned about that as I was a couple of years ago.

And then finally, construction lending is highest for apartments, office space and some lodging properties which continue to find their way to pop up all across the country as people start traveling again.

So for me I think Commercial Real Estate continues to be a strong point for us.

Our quality is remarkably high because we only deal with the very large national customers, for the most part, and we're going to stick to that approach as it has served us well.

And then I will just close by saying loan growth continues to be really strong in commercial and wholesale, which we've seen before, the 15.1% year-over-year growth.

Our commitments are even higher so that bodes well for once.

And when people start using those commitments, that will start to have a nice increase.

And any time that happens that is going to be a twofer because we will start talking future quarters about loan growth being remarkably higher than anything in the last few years.

And part of it would just be line usage.

So those of us who are collecting customers with lines that they are not using are still doing a good job of developing a future core of outstandings once and when people draw on them.

So, Andy, why don't you bring some color around (inaudible)?

So, to your point, commercial, wholesales real estate, all very strong.

Commercial corporate up 15%, real estate up 6% year-over-year.

The area that is not growing as rapidly as our real estate -- residential real estate, which is relatively flat.

And what's going to drive that growth is going to be our home equity increases.

We do see increases in pipeline and line of credit, home equity line of credit and in residential real estate.

And I think as you go throughout the year, we will see an increase in that category, which will help the overall loan growth numbers.

Okay, I guess I was looking at the Commercial Real Estate GAAP line item on the consolidated balance sheet going from [42.8] to [42.4].

That was primarily what I was calling out in terms of it appeared to pull back a little bit.

That might be -- John, that might be.

Are you looking at the end of period versus the average growth?

Yes.

Yes, and I think that at any given day, you might have a little bit of fluctuations in -- with pay downs and new loans coming on.

So we really focus on average loan growth.

Okay, all right.

Let's give it up for John, though.

John got the longest pause we've ever had (laughter).

We are never stuck, I don't think.

So, John, congratulations.

You should win something for that.

I figured I would let it sit just to see (laughter).

It felt like forever; transcripts will read -- 2 minute pause.

Right, adds a little suspense to the call, you know.

There you go.

Okay, and then lastly, just back to energy.

I know it's a small piece of your book, but just want to clarify something.

Did you quantify the size of the reserve or size of the provision that you took?

And then what is the size of your energy reserve as of today as a percentage of loans?

Yes, we haven't disclosed that.

I mean, as I said, the total loan book is about $3.3 billion and about 60% of that is the E&P portfolio, which is the area most directly impacted.

Exploration and production.

Yes, exploration and production.

So it's all re-rated; it's -- the impact is in the numbers.

But no, we haven't disclosed the actual dollar amounts.

It is not material, John, but it's certainly sufficient for the regulators.

Got it.

Okay, thank you.

Scott Siefers, Sandler O'Neill.

Just had a question on the margin and just sort of future directions there.

I think all the big pressure seems pretty much behind you with cessation of the deposit advance product and then you are pretty much all set with liquidity build for LCR.

So at this point I imagine it's just normal spread compression, maybe to the tune of 3 or 4 basis points a quarter.

Is that a fair way to think about margin erosion as we stay in this kind of sustained low rate environment?

Yes, Scott; I'll take that.

Here is what I would say.

As we look out into quarter two, I think you're absolutely right that we will continue to see margin erosion related to the mix of our growth.

So we are more heavily weighted right now on wholesales versus retail, so I would expect that to come down 2 to 3 basis points.

We also -- as we think about our investment portfolio -- while we are done with the build, we still have run off in that portfolio of about $2 billion a month, which is now coming on at lower rates, so the reinvestment aspect of that is also worth a couple basis points.

And then, as we talked about earlier, our deposits are really strong.

And while that is positive from a net interest income standpoint, I do think that that potentially has the possibility of having a negative impact on our margin as we look out into the next quarter of a basis point or so.

Okay, so maybe somewhere in sort of mid-single-digits per quarter kind of a compression range?

Yes, that's about right.

Yes.

And you know, this -- we are seeing something a little new because we didn't expect --.

With rates keep staying flat as long as they have, you actually do have this reinvestment risk.

Stuff we put on anywhere in the last seven years, some of that much less than seven year tenor is coming due and it's coming in lower than it was before.

So when rates move up, just so many things start to get better and things that were about to be tough stop being tough.

And never mind when rates move up; we have this wonderful benefit from some of the trust businesses that we have where we've been paying out to, what is the word, Andy?

The waivers?

Waivers.

Correct.

Trying to protect against that.

So it's just so many things will start to improve.

But I would say there is another basis point or 2 of added risk with rates staying low longer on this reinvestment that we haven't talked about in addition to the mix.

So, Scott, it's -- but it's exactly what we've telegraphed before.

Yes, okay.

All right.

That sounds good.

Thank you very much.

Erika Najarian, Bank of America Merrill Lynch.

Good morning.

My question is probably top of mind for most investors in that it seems like some of the assumptions even from three months ago on rates for most banks on normalizing interest rates have been pushed out.

And we are sort of at the level of provision and charge-offs where even if you stay pristine you can have volatility in any one quarter.

I guess the question here, Richard, is: what is your view in terms of the timing of when normalized rates could converge relative to normalized credit, knowing that it's the normalized credit that is likely under your control or that you have a better viewpoint on?

Yes, I get it, and I agree with everything you said.

Investors do want to know, we all do.

I will tell you, we use the prevailing view of the general economic forecast, which I think we all agreed, particularly a few months ago, where, starting in June, one of four interest rate increases -- June, July, September, December -- and I think we are now getting a telegraph that this could start later, more like September and less frequent, maybe two times instead of four.

What's most important is it starts at all.

I've got to tell you, that is way more important than the number of times that it occurs.

And I think that starting point, as I referenced a few minutes ago, will begin a bit of a tsunami effect of people extending and taking uses of credit and taking credit lines and locking down interest rates.

So for me there will be a little bit of blip -- if you remember, Cash for Clunkers may be the same sort of thing in the wholesales side.

I will say, though, I have also telegraphed that the way it works for bankers is people will use their deposits first to invest in their life, then they will use the line of credit they have established, whether they have anything outstanding on it, call it a house or call it a wholesale line of credit, then they will extend more credit.

So it does have to go through those steps, like Maslow's hierarchy.

So banks have to have deposits -- should see deposits flow out and deposits go down.

And a lot of you have been asking us about our stress testing and volatility of deposits running out.

Second, then lines of credit will go up and the new lines and loans will be formed.

So even when it starts, Erika, it will take a little bit of time but once it starts we can see a better predictability around it because we haven't been able to show you guys what we used to do seven, eight years ago when rates moved.

We had a pretty high correlation on what behaviors would occur and what kind of margin impacts it would be.

So for me I think we are going to say that as the economy gets stronger we are kind of in that interlude where it's stronger for everybody else but banks don't particularly have an important need in the minds of consumers and businesses.

As it starts to -- gets really strong and rates move up, because it's strong, we will start getting a lot of benefits on the income statement and the balance sheet will start to move from deposits over to loans.

And then we will start to get a much more predictability, which I think is probably a year away.

But I am of the mind, believe it or not, after all this torture I still think rates will move sometime in 2015.

And that effect itself will have a pretty stunning impact.

And then we will all study very quickly what happens on the backside.

But it will be positive under any circumstances and it will just move from one side of the balance sheet to the other, all giving us net interest income, which is what you all want.

And what about on the credit side?

Given the underwriting standards have remained quite tight and the economy on both corporate and consumer remains healthy, are we -- is it a longer path to normalized charge-offs even though the provisions could be volatile from here?

Yes, it's a very long path -- like multiyear path.

If you think about it, were at 46 basis points and we've declared all of you from a bottoms up basis that over the cycle we thought we would be at about 95 basis points.

So we are now actually under half of that.

And over this cycle, as you know, you never actually hit it, you just pass through it on your way to either the next recession or the next recovery.

But I will tell you it is many, many years until we get to that number, because it takes that long to get the loans on the books, takes that long to have them stressed, unless there is a monumental event.

And then it takes a long time for our reserves to be used in order to accommodate that.

So you'll see interest rates move up probably three to five years before you'll see the kind of credit quality that would be impacted by what would be some either poor underwriting decisions or aggressive underwriting decisions.

Either one we are not going to make, but I think you will see the credit quality will be better than average for many years and will be the least thing we will be talking about in the next couple.

Got it.

And just one last question.

You continue to do well in the CCAR process.

Are you confident that at least for the banks that are not considered SIFIs by the Fed that the CCAR process from here will be steady state?

I'm sure there is going to be the transition to advance, but less stringent or less change for non-SIFIs in the US?

So do you mean do I think that the non-SIFIs will get relief from where they are or that they won't be brought under the structure?

Not necessarily relief, but more so less incremental negative change in the tests looking forward.

I mean we do believe that there will be a distinction.

I don't know where the line is going to be on SIFI, non-SIFI.

It doesn't matter to us because we are SIFI; we think we are.

We will defiantly not be a G-SIFI, but we will be a SIFI.

And so, according to that, I think there will be plenty of regional banks and smaller banks that will not be brought into that same kind of a routine, which is what we plan for all the way and not something we are going to see as a disadvantage.

On the other hand, I do think we can play our advantages to not being a G-SIFI as it relates to not only the oversight, the additional capital requirements and some of the expectations that have been placed on them.

So we're going to call it a sweet spot and, based on our own preparation, we have been working on the SIFI and the CCAR process; it's well ensconced here.

There is no reason to not want to keep it up.

And frankly, I sleep better at night knowing that we've passed all the SIFI tests.

And if I were ever to acquire another bank, I would be more attracted to them if they had gone through the same rigor because it improves half of my due diligence.

So I am actually a supporter of it and, knowing that we are in it anyway, we're going to make the best of it.

Got it.

Thank you.

Ken Usdin, Jefferies.

Hey, everybody.

Good morning.

One big picture question, just following up on that normalization effect.

Given that -- and the structural changes to the balance sheet given LCR and some of these intersecting points between that path to growth and rates, do you still see a path that long-term [1.6-1.9 ROA] is achievable?

And is there anything that has happened over the last couple of years that would prevent the Company from getting back to that point as you look further ahead?

Yes, I am quite bullish that that is not a problem.

We will get there because the income will be so much higher.

The ROE will forever be lower for all banks based on the requirements that have been placed in this new world for higher capital and that is the E part of the equation.

But the ROA is really a function of just how much money we can make and the quality of which we do it.

And that is -- no one has really taken that from us, as long as consumers and businesses need banks and use us, and I have every reason to think that [1.6 to 1.9] range is quite still reasonable.

And I think for our ROE the 16% and 19%, while we are not there yet, will also find its way through our normal standards.

And I also think we'll be at the high end of the peer group.

So we are sticking with those numbers.

They are not evidential today, but I think in a year or two you will see them again very quickly.

Okay, got you.

And then on a short-term question, just on mortgage banking, can you talk a little bit about the drivers of the really strong gain on sale margins and whether they are sustainable?

And then also, if you have it, just the mix purchase refi in both the volume and the apps?

Yes, this is Kathy.

Why don't I go ahead and start with just the mix of the volume?

So as you know, in quarter four, we were kind of in that purchasers versus refi of kind of 70% purchase, 30% refi.

We did -- as rates started coming down, we did see a shift of that into the first quarter, probably in that more -- closer to the 55%/44%.

So we did see a little bit of a pickup on the refi.

As we look out, we still see volumes increasing.

We would expect to see seasonal impacts related to second quarter.

People should go -- or probably will be out buying and I would think that we would start to see a little bit of a shift back to purchase versus refi markets.

And I think if we think about the rates, as you know, kind of our margins have been up on a linked quarter basis about 10 basis points, year-over-year about 28 basis points.

And I would think that as we look into quarter two, we would expect to see that trend be for slightly increasing margins.

Okay, great.

Thanks very much.

John McDonald, Sanford Bernstein.

Hi, good morning, Richard.

Question on the CCAR.

You've been a leader in payout and cap returns for the last couple years.

That said, the magnitude of your requested increase in dividends and buybacks this year was a little less than the Street was expecting and relative to peer increases.

Did you look at the results and kind of feel like, wow, I left some money on the table or we were conservative here, particularly on the dividend payout?

Maybe just some thoughts on what you were thinking as you went through the request and kind of how you felt when you looked afterwards?

Yes, that's a really fair question.

I had no regrets after I read everybody's, but I did study it hard, as you would expect we would.

Let me put it this way.

It's just -- it might just be philosophy, but until interest rates start to move again, and we have a higher sense of control over the final outcomes that we provide you guys.

It didn't seem reasonable to me, and it had nothing to do with the Fed, that we should increase our dividend above that 30%, 31% level until which time we had more control.

So you'll never hear on this call that we are going to wave our ability to create outcomes because something else is changing our future, like interest rates.

We have to manage to it.

But it does take away our ability to be certain that we have control over the bottom line.

And this whole discussion today about when interest rates move is torture for us.

But at the same token, I haven't stretched so hard that I have to worry that if something doesn't go like we hope it will that the Company is now overextended or that I have missed my opportunity to work with the Fed to exceed that 30%.

Another way to say it is I am prepared to ask the Fed for more than 30% on dividends when I feel that we have got a control over the profit plan we put together in October.

And like in the old days, it's highly deliverable in the next year solely based on our execution, not on somebody else's decision on when the rates move.

So if that is what you are seeing is a company that is conservative to control its own destiny and not wanting to send signals until we can confirm it; I would not have asked for more than the 30%, 31%.

And in terms of buybacks, that will probably be the other place you will see us extending ourselves a little further because we do have control over that.

We can shut them off if we need to.

And so at the end of the day you probably will see our buybacks go up a little more than our dividend request, but they will both move up.

And I think as soon as we get that confidence that we have the control of the entire Company like we want, you're going to see us be a little more aggressive.

But for now, I am satisfied with where we are and actually quite pleased with how this has moved out nice and slow and predictable, repeatable, and I think our shareholders at least can count on a steady state return and that's what I promised them.

Okay, thanks.

That's very clear and fair.

On that point about the controllable/non-controllable, you mentioned that you've got the plan for a modest positive operating leverage, but it could get tough if you don't get the midyear rate hike.

What is the debate that you have there?

It sounds like you don't want to cut too much and cut into muscle.

Do you have some kind of break the glass program to use?

This is going to be longer than we thought?

Is there room on deposit funding costs or other expenses even though you are already pretty lean where you can pull and try to get this balance right?

Yes, that is the dilemma, right?

Broken glass.

And so, we've never invited a third party to come and tell us how to watch our expenses.

We have never created a special campaign and named it to tell people they are going to lose their job and still be good with that.

We are not going to do that, and I am not.

Maybe it's the effect of being in this for eight years, but what I'd like to do is have gone through this whole recession and not have had to do that, because I just can't describe to you the impact of execution when the employees trust the company and trust that they are going to be safe.

It's just -- it's remarkable.

So I'd rather have 67,000 people here who feel really good about their job and the company that has their back through the tough times than to have 69,500 where at any time 2,500 wonder if they are going to lose their job and the other 67,000 wonder if they are the next.

So I can't explain that very well as a CEO.

It is almost worthy of someone trying to write a book on it.

But that's really important to me and this team and to this Board.

If you told me interest rates are going to be flat for the next three years, or if I believe that to be the case, we do have the broken glass scenario.

It would be a reduction in force.

It would be a very aggressive but thoughtful, precise reduction in people and in expenses and things that honestly you would know what impaired the near-term and the long-term but you'd have to do it to get to the other side.

I am highly convinced after this eight years of recession that we are going to get interest rates to move again.

I do believe it is worth hanging on.

So I'll give you my Richard Davis dorky way of thinking about it.

If you remember in high school the bar hang -- the bar hang was the test we all had to take for the President's Fitness Award.

The bar hang was 90 seconds on the bar.

And if you remember it at all, the last 10 seconds were torture, but they were equal to the exact same value as the first 10 seconds which were nothing.

And I feel like we are here at the last 10 seconds and this Company is going to hang on longer than anybody.

And it is torture, but I want to do it for the right reasons because in two years and four years and six years, you guys are all going to be asking us how we're doing in a positive environment with a great economy.

And I want to harken back to times like this and say, we gave up a penny or two on near-term profits in order to be able to say to you here in the future that we are an amazing Company doing as well in great times as we did in the tough times.

So that is the discussion around the table and I am holding on for dear life not to do a reduction in force to that we can have a great future while watching every penny, which you know we've done for years, that we do have expected spend at this point in time.

It's tough.

All right, well, keep hanging.

And thank you.

Yes, thank you.

Good one.

I should've had violins in the back, too, for my dork (multiple speakers) story, but (laughter) (inaudible), so thanks.

Better than pull-ups.

(Laughter), I could go into that next.

All right.

Carry-on.

Mike Mayo, CLSA.

Hi.

How much did the low tax rate help this quarter?

Mike, that helped us this quarter by about a penny.

Okay, so I guess versus consensus you would have been a penny short or maybe there are some offsets to that.

But if you were a penny short, then what are some of the risks that you are not taking that might have held back your earnings?

Richard, you just mentioned the bar hang and 67,000 people who will be more productive over the next 5 to 10 years because they don't have to worry about a strategy of the day.

But in addition to that, what else are you doing that might hold back earnings now for the benefit of the future?

That's it.

That's it; it's all people.

Because I've got all the other expenses quite well aligned.

Our compliance costs are still at the high point but they are not going to go higher because we have managed that.

And we are moving through the more mature stages of some of these -- creation of the compliance groups, the audit functions, and even the first line of defense in the lines of business.

There is no expenses that we are not watching and haven't and there is really no other activity but FTE, paying people fairly and compensating them well.

So, Mike, that's -- and following John's question -- they are perfect back to back, it would be simply sit around the table and say, do we cut people, and we simply don't want to do that.

So that is all we are doing is asking them to work harder.

Your decision is whether or not we've got enough of a good culture here is that our people will work harder, they will sustain it and they will do better than others and that that's good enough.

And otherwise you can challenge the fact that I either should be taking a reduction in force or that I should be adding a bunch of people and taking the hits from you guys for having really negative operating leverage and I am not doing that either.

It is kind of right down the middle.

So we are not withholding on anything else that would cause us to be unable to deliver on everything we said we would in tough and especially in good times.

I guess I am stuck on that last 10 seconds of the 90-second bar hang.

And sometimes, especially as you get older, I am finding this out, it makes sense just to let go, so --.

Yes, this is funny because last night I told my wife what I was going to say if this came up.

I said I'm probably going to do this stupid bar hang.

What do you think?

She smiled and she turned around and she said -- and just for the record tell them you actually hung on for 2 minutes.

So the fact is this Company can hang on past the 90 seconds, we can.

We are not old; we are actually ready to roll.

But it's tough.

That was all I was trying to say -- not that we are about to fall off, just that it gets really tough.

And as long as you know that, it's the guts that carries you through this stuff.

And the best companies in our business are going to be the ones who have the will and the ability and the trust to get through it.

I am just convinced of it.

Again, the book I'll never write, but it's that nth degree spirit of a company acting like a person that believes anything is possible and delivering it with a certain level of pride.

But I've got nothing more to show you for it.

Last follow-up on this.

Richard Davis versus the 10-year bond again.

Yes, I thought that.

I still haven't met it.

It's down 25 basis points since we last talked.

It's fallen below 2. But go ahead, ask your question.

Well no, just the quarterly update.

Seems like you're feeling better about the economy, but we are still waiting for it.

Is -- what -- how -- do you feel better than last quarter about the economy, or are we just all still waiting here?

John's question at the very beginning is exactly how I feel.

I feel better about the economy than I did 90 days ago.

I can see that it's not better for banking in the near-term, it's that simple.

And when rates move up, I'm going to love the economy and I am going to love the Fed, I'm going to love our future.

But right now, I think the economy is really that strong -- record stock market performance; Europe is coming back.

We've got customers husbanding cash all over the place.

They've got money in their pocket because fuel prices are down, and yet they don't need a bank as much as they are going to need us.

So we just want to keep them all as happy customers and we will be there when they're ready.

But right now, we are probably on the low end of their need to get through the day -- priorities.

And for that, it's not correlated.

A great strong economy -- an improving economy is not necessarily good for banks until rates start to kick in.

All right, thank you.

Paul Miller, FBR.

Hey, can you talk a little bit about -- because you've got some of the best, I think, mobile apps out there and how -- and everybody is seeing mobile banking really pick up especially with the new accounts.

How do you see the mobile banking, online banking in your branch system work together?

I am going to go first and have Andy jump in.

You know why we're really good at mobile banking is because we are great at mobile payments.

And I can't tell you how much that matters.

And I actually wouldn't know it if I had a bank that didn't have this large payments business; I would just -- I wouldn't know what I don't know.

We have a thing called The Grove, G-R-O-V-E, down in Atlanta where we have our payments group; it's hundreds of people who sit there and do nothing but work on merchant and consumer paradigms and modules on how to change the way they move money around.

And it's a ton of customer intercepts; it's a lot of money we spent.

And by the way, I haven't taken that out at all out of our forecast.

But because we have merchants who work with us to create better mobile apps, then that transfers backwards to mobile banking.

Because mobile banking is just kind of a mini app to people moving money intra bank and between them and merchants.

And the merchants are really the smart ones on how to get stuff installed and stuff moved about.

So that is one of the reasons we are so good at it and because we have people in house that are focused on something even greater than that.

And I am kind of excited to showcase that particularly high at our next investor meeting a little over a year from now.

So that's one of the reasons we do well.

As it relates to the branch, they, therefore, are the benefactors of that and, Andy, you might care (inaudible) --.

In addition to what Richard said, I would mention that the other key aspect of this is making sure the branch is working together with the mobile payments and mobile banking side of the equation so they are working as one.

So the seamless delivery of transactions and products and the ability to buy or sell, looking at it from the perspective of a customer and if they start something on mobile, want to finish at the branch or vice versa, that we are all in sync in terms of the process from a customer's perspective.

And, Paul, I appreciate you bringing it up because most of you guys live on the East Coast and bank on the East Coast and you actually don't get to experience us so there is not a branch down the street that I can send you to or you don't just walk by and see whatever our current collateral is.

But if you all want to come online and take a look at it, it's really, really good stuff and it would be our pleasure to have you experience us through a more mobile approach than just perhaps the old brick-and-mortar.

Well, I know we've seen when somebody comes up with a really cool mobile app, it's copied very quickly.

But one of the things that you have that I have not seen anybody else have is the automatic bill pay app.

Is that just because you work with the merchants so close you are able to develop it?

Do you think other people will be able to develop that same product?

I think it gets back to what Richard talked about which is our R&D and looking at different aspects of what we can do on a mobile app and what we can do in a branch and what the people can do at home and do at an ATM in trying to make everything as convenient as possible and as a cross channel as possible as we can.

Okay, guys.

Thank you very much.

Bill Carcache, Nomura.

Good morning.

Thank you.

Richard, I had a follow-up on your comments about rate increases and positive operating leverage.

To the extent that the frequency and magnitude of rate increases came in lower than what the market currently expects, do you have a sense for how much of an increase you would need to see to achieve operating leverage?

Maybe if you could just give us a sense of whether you have kind of run through the math and what that breakpoint is?

Yes, I mean I am pretty transparent.

We expected four increases starting in June -- June, July, September December, [25] each.

If that doesn't happen, you can back into our math and do a pretty quick calc.

And if that slows down and moves pay to September and only one in December, which is now the prevailing view, that will put pressure on our positive operating leverage.

And while I have no idea what the next nine months of this year are going to be, that will be very, very tough.

We will be very close to flat or even slightly negative.

And that will be where I would get back around the table, like John and Mike talked, and sit down with a group and say is that enough of a reason for us to [curry] favor with the investment community to try to be positive for one year, which you may or may not remember, in order to do something draconian?

Or do I take my lumps and have you guys a little disappointed but understand why we had a slight negative operating leverage to live to fight next year when things will be highly positive?

I'll probably go to the latter, but I promise you we will always have that conversation.

And every time there is an adjustment we will see the impacts and decide whether or not it is worthy of taking a near-term or a longer-term view.

Understood.

That's very clear.

Thank you.

If we look at your loan growth -- on a separate topic -- on a year-over-year basis to take out seasonality, the growth in residential mortgage in particular has been decelerating for about nine quarters and turned negative this quarter.

And I think we are kind of -- by looking at it year-over-year, we would strip out seasonality.

So I'm not sure like some of the comments about weather and stuff would really play a role.

I was hoping maybe you could talk a little more specifically about your outlook there and address how you are thinking about that deceleration and what gives you confidence going forward in the resumption of growth in that area in particular.

Bill, this is Andy.

The principal reason for that decline is our smart refinance product that is a branch originated, high-quality, refinance product that has been shrinking because refinance volumes were coming down throughout the year as rates were not moving down as rapidly.

The pipeline for that right now is a little stronger because of what we saw in the first quarter.

So I think you will start to see a little bit of an uptick certainly than a downtick in that category in the future quarters.

And then the other wildcard in the overall category is home equity loans, as I mentioned in the retail category, which we are seeing strong growth and strong pipelines.

Excellent.

Thanks very much.

Appreciate it.

Nancy Bush, NAB Research.

Good morning.

Sorry I came into the call late.

Another of your competitors' call ran way over, but --.

Well, no matter what you say, I'm going to say we already answered it (laughter).

No, you're not going to get away with that, sorry.

All right.

I knew I would try.

Yes, one of your competitors just did a material purchase of CRE loans from GE Capital and it looks like GE Capital is going to be the gift that keeps on giving.

So I am wondering if you have any appetite for that or if you are looking in other places for portfolios of loans?

Yes, yes and yes, and more than I have in the past because if I can't deploy it in normal course and I've got deposits, I honestly love and cut it but don't know what to do with, the answer is yes to both.

GE is way too early to know until they get out some RFPs and take a look at what pieces -- particularly leasing would be of interest to us as we look at our big equipment financing business that we have here in the Company.

And there are other portfolios that we would be interested in defending.

That could be credit card portfolios, could be high-quality auto portfolios.

But it's got to be something that we do already; it's got to be underwritten qualities that we would do ourselves.

And if we do something of any size we are going to spend more time in due diligence it will be a nightmare for whoever it is because we want to do diligence like we underwrote it ourselves.

And if we can't get that level of comfort I'll pass all day long because I really don't need to introduce anybody else's problems into our otherwise high credit quality.

But my appetite is definitely higher based on the lack of alternatives on how to deploy both the deposit growth we have and the capital that we are starting now to build.

And given the portfolios that you may be seeing right now, is the pricing attractive?

We're still scratching our heads over that.

That's a good question.

In fact, as we put our student loan portfolio out for sale, they are attractive to us because there is a market out there that people want to pay a premium, it seems, for something that we have less value for.

So I do think that it's going to be an expensive proposition if you don't get it the right way and if you don't do diligence and underwrite it properly for potential risk as we all think the world we have today isn't a good proxy for how loans will perform.

So I think it's going to be rough -- tough to find something you like at the right value and that's why we won't overpay for it either.

And that's one of the reasons we are attracted at this moment to put our portfolio of student loans out for sale, because there seems to be a fairly robust level of interest and premium out there that we'll take.

So it may just come down to the fact that we will look but we won't like the pricing and we will step away anyway.

Yes, and just a final note on that.

It looks like the deal that Wells Fargo did was something of a joint venture with Blackstone.

Are you seeing other private equity pools or whatever out there that you might want to do some kind of similar transaction with?

Yes, you know, I don't know their deal, but no.

We don't like partners; we're not very good partners.

We want to own it, we want to control it and, with third-party particularly, a third party in every way now in banking has become an intensely added risk.

It is like more than a twofer.

So anything we do with a third-party we have to operate as though we have full control.

We have to have information that allows us to have full control.

And then if you don't have full control, even if you have all the information, it's a whole lot less rewarding when something happens that you are not absolutely able to predict, so for us probably not.

Okay, thank you.

Thanks, Nancy.

And, by the way, we had not answered that question, so you (technical difficulty).

There are no further questions.

Perfect.

Thanks, operator.

Thanks for joining our call this morning and if you have any follow-up questions, please contact me this afternoon.

Thank you.

Thanks, everybody.

Thank you.

Thank you, ladies and gentlemen.

That does conclude today's conference call.

You may now disconnect.