美國合眾銀行 (USB) 2015 Q2 法說會逐字稿

Welcome to the U.S. Bancorp's second-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 approximately noon Eastern Daylight Time through Wednesday, July 22 at 12 o'clock 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, 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 U.S. Bancorp's second-quarter 2015 results and answer your questions.

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 forward-looking assumptions are described on page 2 of today's presentation, in our press release, and in our Form 10-K and subsequent reports on file with the SEC.

I will now turn the call over to Richard.

Thank you, Sean.

Good morning everyone and thank you for joining our call.

I will begin with a review U.S. Bank's results as a summary of the quarters highlights are available on page 3 of the presentation.

U.S. Bank reported net income of $1.5 billion for the second quarter of 2015 or a record $0.80 per diluted common share, a 2.6% increase year-over-year.

Total average loans grew 4% year-over-year and 0.7% linked quarter excluding student loans which were reclassified to held for sale at the end of the first quarter.

In addition, we continue to experience strong growth in total leverage deposits of 8.9% over the prior year and 2.6% linked quarter.

Net new DDA account growth was especially strong this quarter growing 4% annualized.

Credit quality remains strong.

Total net charge-offs decreased by 15.2% from the prior year and increased modestly from the previous quarter.

The increase in the previous quarter is a result of lower recoveries.

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 equity Tier 1 capital ratio under the Basel III standardized approach as if fully implemented was 9.2% at June 30.

I am also pleased that we were able to return 76% of our earnings to shareholders in the second quarter through a combination of our dividend and the repurchase of 14 million shares of common stock.

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 1.46%; our return on average common equity was 14.3%.

Moving over to the graph on the right, you can see that this quarter's net interest margin was 3.03%.

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

Our efficiency ratio for the second quarter was 53.2%, lower than the prior quarter.

We expect this ratio to remain in the low 50s going forward as we continue to manage expenses in relation to revenue trends driven by the economic environment while continuing to invest in and grow our business.

Turning to slide 5, the Company reported total net revenue in the second quarter of $5 billion, a 2.8% decline from the prior year.

Excluding the prior year notable item, total net revenue increased 1.4%.

The increase was due to the higher net interest income as well as strong growth in trust and investment management fees, merchant processing services and higher credit and debit card revenue partially offset by lower mortgage banking revenue.

I am especially pleased with the improving trends in our payments business especially our merchant and credit card businesses which Kathy will discuss in later detail.

Average loan and deposit growth is summarized on slide 6. Average total loans outstanding increased by over $9 billion or 4% year-over-year and 0.7% linked quarter excluding student loans which were reclassified to held for sale at the end of the first quarter.

Again this quarter the increase in average loans outstanding was led by strong growth in average total commercial loans which grew by 11% year-over-year and 2.1% over the prior quarter.

Total average revolving commercial and commercial real estate commitments continue to grow at a fast pace, increasing year-over-year by 10.5% and 2% on a linked quarter basis.

Line utilization was relatively flat in the second quarter.

Residential mortgages declined 1.4% year-over-year and 0.6% on a linked quarter basis.

Average credit card loans increased 1.3% year-over-year and were seasonally lower on a linked quarter basis.

Total other retail loans grew 5.7% year-over-year and 1.7% over the prior quarter excluding student loans.

The increase was mainly driven by steady growth in auto loans and continued positive momentum in the home equity loans which grew 4.1% year-over-year.

We expect average linked quarter loan growth to be back in the 1% to 1.5% range in the third quarter.

Total average deposits increased $23 billion or 8.9% over the same quarter of last year and 2.6% over the previous quarter.

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

Turning to slide seven and credit quality, total net charge-offs declined 15.2% on a year-over-year basis and increased 6.1% from the previous quarter.

The linked quarter increase resulted from lower recoveries.

The ratio of net charge-offs to average loans outstanding was 48 basis points in the second quarter.

Nonperforming assets decreased by 7% on a linked quarter basis and 18.8% from the second quarter of 2014.

During the second quarter, we released $15 million of reserves equal to the prior quarter and $10 million less than the second quarter of 2014.

Given the mix and quality of our portfolio, we currently expect the level of net charge-offs and total nonperforming assets to remain relatively stable in the third quarter of 2015.

Kathy 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 2015 results versus comparable time periods.

Our diluted EPS of $0.80 was 2.6% higher than the second quarter of 2014 and 5.3% higher than the prior quarter.

The second quarter of 2014 included two previously disclosed notable items impacting other noninterest income and other noninterest expense that together had no impact on diluted EPS.

The $12 million or 0.8% decrease in net income year-over-year was principally due to a reduction in net interest income related to the previously discussed wind down of our Checking Account Advance product that ended in the second quarter of 2014, lower mortgage banking revenue primarily due to an unfavorable change in the valuation of mortgage servicing rights net of hedging activity and an expected increase in noninterest expense excluding the prior year notable item.

Partially offsetting these variances was a decline in the provision for credit losses.

On a linked-quarter basis, net income was higher by $52 million or 3.6% mainly due to increases in fee-based revenue.

Turning to slide 9, net interest income increased year-over-year by $26 million or 0.9%.

The increase was the result of growth than average earning assets of 9.1% partially offset by lower net interest margin including lower loan fees.

Approximately $40 million of the reduction in loan fees was due to the Checking Account Advance product wind down.

The net interest margin of 3.03% was 24 basis points lower than the second quarter of 2014.

The decline was primarily due to growth in the investment portfolio at lower average rates as well as lower reinvestment rates on investment securities, lower loan fees due to the Checking Account Advance product wind down, lower rates on new loans and a change in loan portfolio mix partially offset by lower funding costs.

Net interest income was higher linked quarter principally due to an additional day in the current quarter relative to the prior quarter with higher average earning assets offset by lower net interest margin.

The net interest margin of 3.03% was 5 basis points lower than the first quarter.

The reduction in the net interest margin was principally due to continued change in loan portfolio mix, the impact of higher cash balances as a result of continued deposit growth along with growth in lower rate investment securities and lower investment portfolio reinvestment rates.

We expect that the net interest margin will be relatively stable in the third quarter.

Slide 10 highlights noninterest income which declined $172 million or 7.0% year-over-year.

Excluding the second quarter 2014 notable item, noninterest income increased year-over-year.

We saw strong growth in trust and investment management fees and merchant processing services as well as higher credit and debit card revenue.

As Richard mentioned, we are pleased with the improving growth trends in our merchant and retail card businesses.

Merchant processing revenue while up 2.9% was negatively impacted by foreign currency rate changes.

Excluding this impact, merchant processing fees grew approximately 7.6% on a year-over-year basis.

This growth compares to approximately 5% year-over-year in the first quarter.

Retail credit and debit card fees grew 2.7% on a year-over-year basis compared to 0.8% year-over-year in the first quarter.

Credit and debit card volumes grew 7% in the second quarter.

Retail credit and debit card fees continued to be negatively impacted on a year-over-year basis by the cost of rewards that were increasing in 2014.

As we previously mentioned, we would expect this negative impact to dissipate in the second half of the year.

Partially offsetting these favorable variances was a $47 million decrease in mortgage banking revenue primarily due to an unfavorable change in the valuation of mortgage servicing rights net of hedging activities which more than offset higher origination on sales revenue earned from the 34% increase in application volume.

On a linked-quarter basis, noninterest income was higher by $118 million or 5.5% principally due to the seasonally higher fee revenue and credit and debit card revenue, merchant processing services and deposit service charges in addition to higher trust and investment management fees.

Moving to slide 11, noninterest expense decreased year-over-year by $71 million or 2.6%.

Excluding the second quarter 2014 notable item, noninterest income increased 5.1% year-over-year.

The increase is mainly due to higher compensation expense reflecting the impact of merit increases, acquisitions and higher staffing for risk and compliance activities and increased employee benefit expense mainly due to higher pension costs.

On a linked-quarter basis, noninterest income increased by $17 million or 0.6%.

The increase is primary due to increases in professional services due to mortgage servicing and compliance related matters, marketing and business development due to the timing of various marketing programs and compensation expense principally reflecting the impact of merit increases.

Partially offsetting these increases was a decrease in employee benefits expense primarily resulting from the seasonally lower payroll taxes and a decrease in other expenses mostly due to insurance related recoveries.

Prudent expense management remains a priority for our Company.

For example, our decision to hold FTE flat except for compliance needs in place since the beginning of 2014 remains in place today.

We also continue to manage other discretionary expenses where appropriate but continue to make investments in businesses and products that will yield a high level of return.

This philosophy is and has been a strength in how we manage our Company and this focus will continue going forward.

Turning to slide 12, our capital position remains strong.

Our common equity Tier 1 capital ratio estimated using the Basel III standardized approach as if fully implemented at June 30, was 9.2%.

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

Our tangible book value per share rose to 16.79 at June 30 representing a 10% increase over the same quarter of last year and a 1.8% increase over the prior quarter.

Our return on tangible common equity was 20% for the second quarter.

Turning to slide 13, in June the Board of Directors declared a 4.1% increase in our common stock dividend.

As a result in the second quarter we returned 76% of our earnings to shareholders.

Dividends accounted for 32% of the return to shareholders and the 14 million shares of stock we repurchased in the second quarter accounted for the remaining 44%.

I will now turn the call back to Richard.

Thank you, Kathy.

I am very proud of our second-quarter results.

We delivered solid financial performance in a challenging operating environment for financial institutions.

We continue to achieve industry-leading performance measures and because of the overall strength and consistency of our results, we have returned 76% of our earnings to shareholders through dividends and share buybacks in the second quarter.

As we move through the second half of 2015, I am confident we will continue to deliver solid financial results.

We will continue to take the appropriate and effective actions including tighter expense management to ensure that we are meeting our value creation objectives for our customers and for 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.

Just a question on your last comment, Richard.

You used the term tighter on expense management.

Does that mean you are a little less optimistic on the revenue outlook or is this just basically a similar approach?

Has anything changed?

Yes, I am actually more optimistic on the revenue on the second half because things have turned the corner and I think you will see with NIM flattening out, with loan growth now as I am committing to well at the 1% or higher because I can already see that for quarter three and the knowledge that our mortgage businesses, the balance sheet is growing again.

I think we are feeling quite good about revenue.

What I'm still waiting for is the interest rate impact that would occur if the Fed increases rates.

So if they don't, we are going to continue to keep in place this FTE hold we have had now for as Kathy said for a year and a half.

That is worth by the way thousands of FTE that we haven't added and therefore we haven't talked about reducing either.

And then all the discretionary things that we continue to do to keep ourselves at the efficiency level you have come to expect.

So revenues has actually got a nice trajectory in the second half.

Expenses will come down as we watch our nickels and dimes.

But I will tell you the cost of compliance has erased a lot of the benefits I would otherwise hope to have gotten a year and a half ago when we started this as we continue to add to compliance personnel, audit personnel and not just in those areas but in the front line where we have that same compliance responsibility that has gone up substantially.

But expenses we will continue to watch, John, like I promised and I have always said that if we have to be more draconian we will but the FTE hold and watching our vacancies and things has served us pretty well so far.

Okay, good.

And then I guess one of the items you singled out in growth was the corporate business and that seems to have been driving the growth.

Talk to us a little bit about what is going on there?

Is this large corporate driving it or is it broader based?

Yes, it is way broader based.

So in fact much as I like the 2.1% linked quarter in C&I, that is one of our lowest quarters in the last six and I'm actually kind of satisfied with that because we are now getting competing growth from the retail consumer side which is what we have been long waiting for.

And that is one of our reasons we can say that the margin will start to flatten out because the mix will start to be balanced.

So commercial business, the bond markets are driving balance reductions because people are driving to the bond market and so to still get 2.1% linked quarter means we are doing real business for real customers that have other needs that aren't just M&A related.

We also see that more opportunity for us in the fee business given our involvement in that M&A market on the capital market side which we didn't have as you know a few years ago.

So that is a kind of twofer for us that if we can't get it in loan growth we will get it in fees.

The syndication loan market is really strong.

If you notice we were in the top four in the investment grade [lead] tables this quarter.

That is the first time that we have broken into the top four.

So we are seeing that for a business for us that is starting to pay dividends that we invested in a few years ago.

So C&I is strong.

Commercial real estate, that is not as strong.

That is more flat for us.

It was last quarter and it is going to be just slightly up in quarter three.

We are okay with that because I've told you before we see that as a market that can get overheated in the micro market so we are very careful in particular on where we do business.

The coasts are doing the best based on the growth that is present and I think where some of the job growth, the Atlanta, Denver is driving new interest in office space and things like that.

Construction is primarily apartments and office, not so much retail yet but we are seeing a lot of that construction on the smaller end being done by cash which is fine because we have been long saying that the first step towards a bank's balance sheet improvement is cash moving out of here to be used for growth.

Then lines of credit being used for growth, then new lines and loans being brought on to the balance sheet and we are still in that first phase from what I can see?

Finally, Jon, bringing a little more color on loans altogether, the consumer side is doing quite nicely.

Our auto loans are up 10% over the first quarter and that is backed off of a very strong auto market as you have seen now that the projections continue to be very strong.

And then our home equity as I mentioned in my comments are also strong.

That is up 4.1% and interestingly enough these accounts are now coming in at larger line sizes.

People are using their home equity for home improvement and home repairs, some debt consolidation but mostly improving the property.

And they are using the balances now more than they did even a year ago.

So we are starting to see some nice uptick and we don't have that home equity bubble at the bank here that a lot of companies do so we are not trying to offset that runoff.

And then maybe lastly because we brought it up last quarter, we did see some improvement in our balance sheet on the mortgage side.

As you will recall on the jumbo mortgages, we agreed to become a little more market competitive on price and in the last month of the second quarter, we saw the balance sheet starting to grow again and we hope that that will pursue itself into quarter three.

Has a lot to do with what rates do but our purchase to refinance right now is 70-30 in the mortgage business and if we can continue to get back to where that mortgage balance sheet is growing at least slightly, that helps our total loan growth get back into that 1% to 1.5% range.

Okay, good.

You are saying you already have some visibility for a bit better growth in Q3?

We do and a lot of that -- or I wouldn't be so strong in predicting that for you.

Scott Siefers, Sandler O'Neill.

Richard or Kathy, I was hoping you could add a little to your response on the expense side in Jon's question there a second ago.

Richard, are you suggesting that we are high watermark for expenses?

I believe you said expenses would come down.

I guess I'm just curious without doing something more draconian, where are they going to come down from?

And just as we look out in the third quarter I guess you have between -- I think there was a vendor reimbursement and then the insurance recovery about a cumulative $35 million or so of headwind.

So where does that come out of and what is sort of the near-term outlook on the cost side?

So I am going to call it more flattish.

It is going to be close to what you see now if anything.

It is not coming down, so let's put it that way.

But I don't see any material increases either.

What is happening here is the cost of compliance is at its high watermark.

As you know we are part of that mortgage foreclosure activity that we have extended and that is going to continue to cost us and we will continue to compliance and audits in virtually every part of the Company so that is in there.

Things that will come down to offset those headwinds are continued discretionary expense controls that we just never talk about here.

We don't have a name for it, we don't bring people in to tell us how to do it.

We've got a real heavy tight rein right now on discretionary expenses.

Marketing, travel, things that are less necessary.

And from FTE being flat for a year and a half and still doing quite well to taking things like vacancies, extending vacancies, moving those up and being very prudent about how we manage the quality of our people.

So I may have mentioned last time that we are also doing a pretty thorough review of our low performing employees in the Company.

Since FTE needs to be flat, you have your right to use your FTE but you better have the best that you can.

So we are encouraging people to improve the bottom performers and trade them out and get the best quality staff we can as this recovery is about to hit us.

So we can keep all that in general check.

With movement revenue moving up that is going to help our efficiency for sure but I don't want to leave you with the fact that we are going to take expenses down but I think they are at a place that you can watch for and a slightly potential increase over the next couple of quarters only because of the cost of compliance if I can't outrun it with vacancies.

Okay, that's perfect.

Thank you.

Maybe if I could switch gears just for a second, can you maybe expand upon the thought you had in your prepared remarks just in the payments businesses?

Just trying to distinguish how much of the better performance this quarter was the typical seasonal boost versus what I kind of interpreted as sort of a more constructive commentary about how those businesses are going.

You heard it right.

I'm going to give Kathy the detail but I want to say last quarter the payments businesses weren't that robust in part by the way it was FX which is hard to describe, it sounds like an excuse but relative to other companies, it is a real impact and it affects us in this one category.

But under a line, we saw everything get much stronger and we really like the second half for payments as we get into the second quarter's look back now and as it has improved from quarter one.

But, Kathy, bring some color to that.

I think as Richard said, we were very pleased with what we saw in our momentum in the payments businesses.

If you think about our merchant processing, I will start there, I think that is one of our better stories right now.

In the first quarter if you take out the impact of FX, we grew about 5%.

As we look into the second quarter, that number grew to about 7.5%.

Same store sales were in that in the North American market in about that 5.5% range and I think that we are seeing some additional growth there that we think will continue as we look forward.

Our credit and debit card fees were also we saw some (technical difficulty) in there.

We've been talking about the fact that rewards costs have been a headwind for us and that was absolutely true in the first quarter.

As you recall, we had a year-over-year growth of 0.9%.

This year you will see that growth increasing to that headwind is diminishing and as we get into later quarters I would expect to even see more improvement as that continues to diminish in the second half of the year.

So we are very pleased with the momentum there and would expect to see some good signs of this as we look out into the future quarters.

Okay, that is perfect.

Thank you guys for the color.

John Pancari, Evercore ISI.

Just on the margin, wanted to see if you could give us a little bit of color on how you are thinking about the margin in coming quarters.

Just given the competition on the loan front, could you still see similar mid single-digit compression over the next several quarters?

Is that the best way to think about it?

You know, John, I was going to say I think we are starting to see the margin stabilize and I think that is coming from a couple of different reasons.

As Richard mentioned earlier, we are starting to see a pickup in our loan growth on the retail side and that is going to help.

As you recall we have been calling out an impact of several basis points on a linked-quarter basis related to the mix of our growth so as retail starts to pick up that is going to help us.

Additionally what we are seeing is that as loans or securities run off and we are replacing them with new, that spread between what is running off and coming on is starting to get a little closer together or getting smaller so that is going to help us as well.

So I think as I look out into the third quarter I'm going to call that our net interest margin is going to be relatively stable.

Right and I guess the way I should have asked it is how do you define relatively stable?

Because I think you had alluded to some emerging stability in the past but we still saw mid single-digit compression -- so how (multiple speakers)?

Okay, John, we actually never did say we were stable.

We were super transparent and always said it would be 3 to 5 basis points or 3 to 6 and we dimensioned by 1 basis point.

So stable to us is give or take 1 basis point, maybe 2, either direction.

But right now we are forecasting this thing to be flat and we could be surprised but we will have a chance later in the quarter to update you guys.

We tell you exactly what we see as soon as we see it and we are extremely transparent and clear so stable means stable.

Okay, good, good.

Separately in terms of the deposit side if you could just give us a little more color with what you are seeing there.

I mean it was exceptionally strong and surpassed our estimates particularly around some of the interest-bearing stuff?

You know, John, you are absolutely right.

It was higher than we saw in quarter two and I will tell you it is just continued growth across all business lines.

I can't call out any particular business that had higher growth than the other.

We just continue to see strong growth in our wholesale, our consumer and our trust businesses.

It is a great problem and we are not sending deposits out.

We are also not rationalizing the number of branches we have, we are just rationalizing what we do in them.

So that is probably keeping a lot of deposits, the core stuff.

But we all know in a few quarters or years that is going to be the gas in the engine for making loans and so we are going to be pleased with loan growth, deposit growth even if we are not sure what we can do with it yet and we will continue to see that as a sign of more customers.

Our net DDA was as high as it has been in years.

We have a lot of new business coming in from our corporate trust which as you know is a very important part of 15% of our core deposit.

So it is a good news thing and as much as we are a little surprised ourselves, we are not going to do anything to send it back.

Then my last thing I just wanted to ask you about was about your updated (inaudible) on capital deployment particularly your view of M&A opportunities here as you are looking at opportunities to put your capital to work?

Sure.

We have indicated an interest in the GE Capital although it is a part of their portfolio and we are in the due diligence with that.

So we will keep finding an interest in asset purchases.

We are continuing to find payment portfolios that we look at.

We like the merchant acquiring space where you have either seen us get new partners in the domestic or more even often, you've seen us do in the international side where we can find a partner and extend into another new country and kind of plug and play like we do with our payments platform.

And then corporate trust, we just had our Board meeting a couple of weeks ago and we highlighted our European trust business which is also fund servicing and a corporate trust and they are both quite robust.

The market continues to be very receiving of a new player in us being there and we see a lot of growth opportunities and that can be both organic and M&A, John.

So that is where you are going to see us, not whole bank transactions, what you've seen in the last few years is what you will see in the next couple and I think that as the tail falls off of what I will call the statutes of limitations of inheriting somebody else's problems from the early years of the recession, as that falls off in a couple of years we will probably be back into the game of buying whole companies or looking at whole banks but for now that just doesn't suit our appetite.

All right.

Thanks for taking my questions.

Paul Miller, FBR.

Good morning, guys.

This is actually Thomas on behalf of Paul.

Richard, you talked a little bit about how you have been participating more in the jumbo market lately, I guess in particular on pricing.

What is giving you the confidence to take that leap and obviously that has helped your consumer growth.

Let's have Andy respond to that.

He's got the mortgage business under his leadership.

Good morning, Thomas.

You know it is about our customers so our customers are choosing to go longer in terms of their mortgage product given the low rate and the fixed-rate and the 30 year.

So they are financing out of either what they have today or variable floating into longer jumbo.

We want to serve our customers' needs so we are putting those on our books.

They are not coming out as a loss, they are just coming out a little thinner spread than what would be historic but given our low cost of capital as well as our low funding costs, they are still profitable for us.

Great.

Then I guess one more question sort of on the loan growth.

Loan growth seems like it is picking up for you guys.

Does that mean that more of the reinvestment of sort of the excess deposit growth which has been mentioned was very strong last quarter will go towards the loan side rather than securities or can we still expect some investment securities growth as well?

I think at this point what you will see as loans start to increase that will really help offset the deposit increase so I think you will see that.

There might be some modest investment security just based on the balance sheet positioning and so forth but it is really going to be used by deposits.

The deposit growth will be used by the loans.

Okay, great.

Thank you, guys.

Erika Najarian, Bank of America.

Good morning.

Richard, we asked your peers yesterday what they thought about deposit repricing as we hopefully enter a higher interest rate environment.

One said that the deposit betas will be much higher because regulation has given us now [quantifications] of good deposits and bad deposits while your other peers seem to be more optimistic on deposit beta given that we are coming from zero.

What is your view in terms of both the pace and magnitude of pass-through if we do see the Fed raise rates this year?

I will probably be right in the middle and that is not like me.

I like to take a position but I will say my answer is a little different.

We all want this deposit beta to go up because we want that money to be used in some form for growth in the American economy.

It really is at record high levels and it is not sustainable.

It has nothing to do with the banks keeping and we are losing but it has everything to do with consumers and businesses using it.

So my hope is that there is an early beta take when rates start to move up not because of rates being higher and the costs changing but because that informs the fact that people are now investing and consumers are consuming so I am all for that.

I do think that marginal beta on companies has a lot to do with what kind of level of relationship they have created with their customers whereby if people are double banking, triple banking, the core relationship stays with the bank that has established themselves as the core partner.

And I also think customers that have established themselves as that they were treating well during this period especially corporate customers and felt that the company protected their deposits here, let them stay on the balance sheet if necessary or work them into some money center alternative, I think we will give credit for the way we handled that over the course of the more challenging times and deposits were less attractive.

So I'm going to say the beta is going to be -- I hope it is a bit of an early -- an abrupt start because people are using it and then I think that the marginal beta starts to determine the quality of banking relationships you have.

And I have to remind you because of our corporate trust, we will have at least 15% of our core deposits are in a different category and as much as are contractual and they don't have the ability to move the vagaries of rates or even consumerism.

So I think we will have a slightly better beta no matter what and probably better than you guys have modeled given that that is a pretty substantial amount of money as we continue to grow corporate trust.

That is a great point.

Thanks for highlighting that.

Just Kathy, as a follow-up to Thomas's question, does that mean that your earning asset growth is going to now match your loan growth?

Over the past several quarters it has outpaced your loan growth.

And I guess the follow-up question to that is could you give us a sense on where you are towards the LCR standard for January 2016?

Let me start with the LCR first.

I will tell you that at the end of last year we had met that ratio so we were fully compliant with LCR at the end of 2014.

I will tell you one other aspect of our earning asset growth in addition to investment securities is held for sale and particularly around our mortgage environment.

So I think that as you think about total earning asset growth, I think that it will more closely approximate loans going forward but you will have to take into account the held for sale activity depending on what the mortgage market does.

Got it.

Thank you so much.

Bill Carache, Nomura.

Good morning.

I had a follow-up question on cards and I've heard a lot of your comments on payments in particular a lot of items affecting the fee income line.

But I was hoping to focus a little bit more on the spread and it looks like you've been seeing a pretty consistent reduction in year-over-year credit card loan growth over the last several quarters to most recently 1.3% this past quarter.

That is a little bit slower relative to the rest of the industry.

I was hoping you could just talk a little bit about -- give a little color around what is driving that and what you anticipate going forward?

Let's have Andy give you color on that.

Sure, Bill.

On a quarterly basis, it is down principally due to seasonality so that is not uncommon from quarter one to quarter two to be down on a year-over-year basis.

It is about 2%.

Part of the factor that is impacting that is although sales and spend is up closer to 5%, 5.5%, people are paying down more of their balances with perhaps some of the excess they are getting from the fuel side of the equation so we are seeing pay it down rates being higher, revolve rates being lower even though sales are up.

Okay, that is helpful.

So just looking at the average loans on slide 15 that shows the year-over-year growth, so really we can tell from second quarter 2014 until now that growth rate has been downward so as we look forward from here, would you expect that kind of similar trajectory or would that pick up a little bit?

I think on a linked quarter basis we would start to think that -- we do feel confident we will be back into that 1% to 1.5% range.

Okay.

And then my last question is more on kind of broadly at the upcoming interchange rate reductions in Europe in particular, the capping of debit and credit interchange at 20 and 30 basis points respectively.

Can you discuss whether Elavon offers pass-through or bundled pricing to merchant partners in Europe?

Just trying to understand the extent to which you might be able to benefit from the upcoming interchange rate reductions in Europe?

I think for the most part that interchange impact will not impact Elavon in Europe so our rate of revenue will not be impacted by that change.

Okay, thank you very much.

Ken Usdin, Jefferies.

Thanks, good morning.

First question just on credit, it looks like you had a little over recovery this quarter which I would think would be expected at this point, most of the underlying metrics continue to look excellent in terms of delinquencies, NPAs, etc.

How much room is there do you think for charge-offs to still decline from here.

And I know reserve release is pretty much done but it just looks like the underlying credit still looks quite good.

Yes, this is Bill.

I think the one area is still in the residential space so there is still continued improvement there.

It is already getting low so the dollars aren't going to be huge at this point.

But as you pointed out the rest of the movement comes through recoveries generally on the wholesale side.

Those are sporadic, sometimes they are very strong in one quarter; this quarter they were a little lighter.

Further away we get from the downturn, the fewer of those higher recovery levels we will have.

So I would say in general we are at a good spot, might see a little more improvement on residential mortgage.

Okay, great.

Got it, thanks, bill, and then secondly just a question on the mortgage business, obviously we had a pretty good second quarter and you had a big pump in originations.

Just maybe just your general thoughts on the state of the housing market, the mortgage business and the outlook for production there?

As you stated, we had a really good quarter from a year-over-year basis.

We grew our app volume about 35%.

As we look forward into quarter three, I do think that we will probably see a decline in our refi balances so I would expect as we look into quarter three on a linked quarter basis, our application volumes will be probably down a little bit.

I would say from a fee standpoint, our fee income might be modestly lower than what it is this quarter but it is very early in the quarter.

It is going to depend a lot of what we see in the with the rate market and the appetite for purchases so we will give you a little bit more heads up on that as we go further into the quarter.

Ken, this is Richard.

The applications up 34% in quarter 2 will show through in quarter 3 as bookings in some measure so quarter 3 has a lot to do with paying off quarter 2.

Quarter 3 I think will be a tale interesting to watch because we will see what happens as rates start to move or the threat of rates start to move and more on the psychology of the consumer behavior.

But I thought you would find this interesting, I was a couple of weeks ago in California with our home builder business.

They were there for a national conference and we had a large gathering and I asked them what interest rate level in terms of a mortgage rate would cause them to worry about the impact of future home-building?

And they all were comfortable that 200 basis points doesn't move anybody's needle on either the affordability or the belief that they could still get into a home that they want.

And that is a pretty nice range of safety for awhile because I don't think any of us think rates whenever they do move up are going to move 200 real quick so that provides me a little confidence that the purchase market by those who actually build and live off of it is feeling pretty strong and they are not typically worried at this stage of rates moving up if they don't move more than a couple hundred.

Refi is just typically what you see in the vagaries of whether people still haven't refinanced yet or whether they have a reason to take advantage of a rate they didn't heretofore.

So we will learn more.

I think this quarter 3 will tell a big story and probably a month from now we will have a really good sense of what the mortgage business looks like but it is just a little early now.

Understood.

Thanks a lot.

Chris Mutascio, KBW.

Richard, all of my questions I think have been answered but I do want to just make sure I do a double check on your thought process on expenses in third quarter when you talk about flat.

I know we've talked about a lot of this beating a dead horse earlier in the call.

But the reported expenses of roughly $2.68 billion, it seems to me there is a couple of things that you benefited from in the quarter whether it was insurance recovery or reimbursement from a business partnership.

When you say flat, is it flat thinking flattish with a reported number of $2.68 billion or should I gross that up for some of the benefits you had in the quarter.

And if it is flat, are you thinking it is flat with the reported number, where do you get the offsets from?

Is it lower marketing expenses, is it lower professional services fees that could get you back to that level?

Chris, I'm really glad for the question because I didn't know it wasn't clear.

So thank you.

It is not taking advantage of the one-time benefits.

It is the core.

And so the things that we manage we are going to stick pretty flat to that but you won't get the benefits each quarter unless something comes out of nowhere that we are happy with.

So on a reported basis, it will go up slightly.

As it does though, it will go less than it would have if we weren't continuing to put this kibosh on the cost of FTE and the cost of discretionary expenses like marketing and travel and entertainment.

So it is a good question.

It will go up in the second half but it is not material and as much as we are not counting on the other benefits to accrue and if they do we will take them and celebrate that.

The other thing I would mention, Richard, is the normal seasonality to our tax amortization -- our tax credit business which again is reflected in our tax rate all year but goes up through the year just normal seasonality and that is probably $30 million to $40 million (multiple speakers).

So Andy is talking about the CDC and so we have expenses up above the line but we get all the benefits from the taxes below.

And if you look at one line item, that is a great reminder that that will be -- you should isolate that and take a look at it in prior years, and it will be just the same as it has been in prior.

Right, so absent the tax issue which I fully understand, it is more of -- it should gross up at least to some degree second quarter expenses from a run rate perspective because of some of the benefits you had?

That is correct.

Exactly right.

Thank you so much, Richard.

Kevin Barker, Compass Point.

I just wanted to follow up on some of the mortgage comments.

Are you seeing an increasing amount of demand from consumers or at least incrementally regarding cash out refis or potentially a willingness to increase home-equity lines in order to take advantage of higher equity and higher home prices?

Definitely the latter.

As I said home-equity is up 4% and people are actually doing mostly home improvement.

When I was a young banker in California 30 years ago, we used to call it a PIP, a property improvement and we used to give credit back -- half the credit to the equity or the line itself because we thought they were improving the collateral as they went.

We don't do that anymore but that was the old days when people really used their house to live in it and to keep it for a longer-term and not improve it to flip it.

And I think we've got a psychology where people are going to live in their houses now and own them as an asset to live in with the hope that they will have some increasing value, use it when they can but not to do it in order to flip it.

Debt consolidation for the first time, Kevin, is starting to show up again in home equity which I guess it makes sense later in the cycle as people want to reset one more time but they are much more prudent than they were before.

And because of the quality of the loans we do, we don't do debt consolidation home equity for people who are desperate.

They are simply being more efficient in the way they handle their cash flow.

And somewhat consistent with what we are seeing in housing prices, the average line that we booked in the second quarter was up 7% versus a year ago and the average balance of our home-equity account is up over 10%.

So they are using it.

In terms of cash out purchase, not seeing any evidence of that that is materially different than prior quarters, whose with cash are putting it into the house, those without it are still taking the opportunity to refinance most of it and some of it with government programs.

Do you see that as a source of growth for you in particular or the industry in general or do you feel like it is going to be something that is going to be lackluster for the next couple of years still?

I don't about the industry.

I know this is an outlier for a lot of us.

Two reasons.

One is because we have been working first position second mortgages for a long, long time.

It has been a product we have had and for some reason it hasn't been matched by most folks.

And then I think I mentioned in my comments we also don't have that bubble that we are trying to outrun.

If you look at our balance sheet, we don't have a history of being a huge home equity lender at a disparate level so we don't have a lot to have to refinance or rebook.

So in this case, we are going to get the benefit of net growth from our activities and our product so I think we will be an outlier in a positive way.

Our origination volume on home equity which is primarily all out of our branches has grown substantially over the last few quarters.

We look back a few years ago we could barely do $1 billion, and in this past quarter we did $2 billion.

So it has been a nice steady growth for us and the performance has always been good.

Definitely been an outlier.

Thanks for taking my questions.

Mike Mayo, CLSA.

I got on the call a little late hopefully this wasn't asked.

I got the tail end of it.

So your 22% annualized fee growth for the quarter, what is a more normal rate as we look ahead?

Strong fee quarter obviously but 22% annualized, there is some items there, where would you guide us?

First of all --

First of all, the question was already asked -- sorry you missed it -- but we would be happy to repeat it for you, Mike.

Actually it wasn't asked so we are happy to answer it.

Here is what I would say, Mike.

You have to remember for us the second quarter is seasonally high because of our payment business and just some deposit service charges.

So I wouldn't think to annualize that quarter, I would look more at it on a year-over-year basis and I would say that we saw momentum in our payments businesses.

I think that is going to continue.

We have strong growth in our trust and investment management fees and I think that we would expect that to continue as well.

So I would look at it a little bit more on a year-over-year basis and assume that we will continue to add some momentum there.

And as far as acquisitions, where do you guys stand?

The sale from GE or maybe bank acquisitions, has your appetite changed?

It hasn't changed and I did answer that one earlier.

GE, we are in due diligence for one part of their portfolio -- who knows?

We don't have to have anything here to make it to tomorrow so we will just be prudent and take a look at it.

We like as I said earlier, we like acquisitions of payment companies, we like trust companies, we like overseas a lot because it seems to be an interesting market worth looking further out.

Not interested in full bank transactions at this stage and what you have seen in the last few years is what you will see for the next couple.

And then lastly, my question Richard Davis versus the 10-year, maybe Richard you are winning the recent round.

I am not sure.

But what is the check on you are feeling about the growth of the US economy?

Are we stepping out or is it kind of the same as it has been?

I think it is the same as it has been which is still slow but steady progress so it is not going backwards.

There is no inertia to jump it forward.

My long philosophy is the minute it is known that rates are moving up whether they have to move or not, it starts to create a catalyst for people to take the action that they have heretofore been holding off on.

My hope is frankly that the consumer blinks first and starts consuming as they should and that incentivizes businesses to start investing and growing and that kind of cycle starts up again.

So I'm still optimistic that we are making progress and everything is going in the right direction and I am hopeful that the Fed sees it the same way and if they do, then rates start to move up.

We benefit from the balance sheet being only half of our Company's balance sheet so we will benefit just as much from the fee businesses as it relates to a stronger economy so I am optimistic.

Great, thank you.

Vivek Juneja, JPMorgan.

A couple of questions.

You had very strong growth in auto loans.

Just wanted to understand if you could give me how much of that is prime versus nonprime?

It is all prime, Vivek.

We started an initiative about a year and a half ago to pursue the subprime but the volume and the opportunity there was not sufficient so we are a completely prime shop.

Okay.

So if that is the case, how is the yield on that retail loan staying flat quarter over quarter because prime is seeing a lot more competition from what we are hearing from everybody?

Leasing is strong, lending is more pressured and the net of the two is flattish.

And does the leasing all show up in retail leasing or does that show up in the auto lending line?

It shows up in the leasing line.

Okay, because that seems to have been down year-over-year and linked quarter.

Yes and I am just talking about on an absolute basis if we think about spreads and profitability when we book that next lease, that is still quite profitable.

The next loan prime auto loan is probably one of the most competitive loan categories on the balance sheet today.

Yes, because I can see the auto is up 5% linked quarter; that is a very strong number.

Secondly, Kathy mentioned about trust and wealth management being up sharply.

As I look at it, it is up $23 million year-over-year.

Over half that growth is in corporate trust fees.

How much of that has come from that cleanup call stuff that The Wall Street Journal highlighted a few weeks ago?

Cleanup costs is immaterial and it is actually in a different line so it is not even that number at all.

That is because our corporate trust business is doing well, we continue to be number one market share across all three categories, muni, corporate and structured doing well both domestically as well as our small footprint in Europe which is growing.

So that is just strong business growth and taking share.

Okay, got it.

Okay, glad to hear that is immaterial.

I just sort of wondered why bother to do it then?

It is part of the structured business and the way the documents are compiled so it is a normal process, many banks do it.

It is not unusual and we have been doing it because it is part of the document.

All right.

Lastly, you are obviously expanding on the investment banking side and noticed that you even did a preferred stock deal where you were a co-lead underwriter.

At what point are you going to start breaking out IBCs from commercial products?

It hasn't been material enough so we haven't but given your question, we will look into that.

If that is valuable to you all given that we are continuing to make progress and our momentum has been really good here, we will make that a to do for ourselves.

Thank you.

Jack Micenko, SIG.

Good morning.

Richard, in your prepared comments you mentioned higher mortgage servicing regulatory expenses.

It sounded incremental.

Is that the correct interpretation I guess?

And then second, would these expenses be one-time to sort of ratchet up to a new standard or given your 70/30 purchase focus, is this -- could be the new norm around servicing?

Good question.

It is not incremental, it is just longer than I wanted.

So in my mind I wanted this thing to be done and gone and the consent order continues.

So the rush to the end to the finish line so we are going to continue to spend probably between now and the end of the year at the levels you have seen.

There is no relief on that at all.

As it relates to the cost of servicing though, it is an important decision each bank as to make.

The cost of servicing is remarkably higher now than it ever was.

To take you back a couple of quarters, I think I reminded you all that one of the things it does is it inspires you to stay at a higher quality of customer.

So if I have a customer at a FICO level that there is a risk that we may have some form of a modification before their mortgage is through its life, I am probably not going to do it anymore because the cost of handling that customer in the modification period and phase is expensive and it is rife with compliance risk and mistakes.

So I'm just going to go a little higher than that and make sure that all the customers we bank at least going in are not likely to have any concern so the servicing costs for the bank are standard operating servicing as customers pay as agreed.

When you start getting into that lesser quality customer, the cost of servicing goes way up and we have been feeling that because we have been dealing with all these issues we've had to go back and remedy but we are not going to do it going forward.

So it is at least the rest of this year.

We are going to have those costs and then my hope is that they will start seeing some relief into the future years as mortgage servicing.

We are sticking with it.

We love the business.

We are going to stay in the top five as a mortgage originator and a mortgage servicer but for now those costs are just longer that I had hoped and they are at least the rest of this year.

Okay, great.

And then as a follow-up, the student loan, the move, the re-class, does that get you out of student loans or is there more potentially to come as sort of a headwind to the topline growth numbers as you deemphasize that business?

It is all out.

We haven't sold it, it is still out -- we are looking at the bids and things so it is still held for sale because we don't have an answer.

But with our intent is to get entirely out of both the government and the private student loan category and take that off of our things to worry about.

Okay, great.

Thank you very much.

There are no further audio questions.

Thank you for listening to our second-quarter results and please call me this afternoon if you have any follow-up questions.

Thank you, ladies and gentlemen.

That does conclude today's conference call.

You may now disconnect.