美國合眾銀行 (USB) 2002 Q1 法說會逐字稿

Welcome to the US Bancorp first quarter 2002 earnings conference call. Following a review of the results by David Moffett, US Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question and answer session.

If you would like to ask a questions, please press the number one on your touch tone phone at that time. You can withdraw your question by press the pound key. This call will be recorded and available for replay beginning today at 6:00PM Eastern Time, through Tuesday April 23rd at 12:00 Midnight Eastern Time.

I will now turn the conference call over to

, Senior Vice-President of Investor Relations.

Good afternoon and thank you for joining us today. This

. Today David Moffett will be discussing our first quarter results.

If you have not yet received a copy of our earnings release, it is available under the financial and news release section of our web site at www.usbanc.com.

Before we begin, I would like to remind you that any forward looking statement s made during today's conference call are subject to risks and uncertainty.

Factors that could materially change our current forward-looking assumptions are detailed in our press release.

I will now turn the conference over to David.

Welcome, this David Moffett, Vice Chairman and Chief Financial Officer of US Banc.

Today we reported first quarter operating earnings of 841.6 million, or 44 cents per share on a diluted basis, up from 40 cents a share in the fourth quarter of 2001.

The 44 cents for the first quarter of 2002 includes a 2 cents benefit from the adoption of FAS 142 and meets first call consensus estimates.

We remain comfortable with first call consensus estimates for the full year 2002. Excluding the impact of acquisitions, divestitures, non-reoccurring items, and the impact of the adoption of FAS 142, first quarter

operating income grew 12 percent from the first quarter of 2001.

Revenue grew by approximately 5 percent, while expenses decrease by 3 percent. On a lead quarter basis, revenue is flat, which is comparable to what we have experienced in each of the last three quarter, three years, due seasonal trends in certain fee income categories, including credit card fees, merchant and ATM processing fees, mortgage banking revenue and deposit service charges.

The net interest margin remains strong, increasing from 457 from the fourth quarter of 2001 to 462 in the first quarter of 2002. The improvement in the net interest margin was driven by the continued decline in short term interest rates and improvement in the mix of interest bearing liabilities and growth in average non-interest bearing deposits.

We believe that our net interest margin will decline modestly as 2002 progresses.

Non interests income was flat compared to the fourth quarter of 2001 as growth in trust and asset management fees, and cash management fees help to offset continued weakness in US Banc Piper Jaffray and seasonal declines in credit card fees , merchant and ATM processing fees, mortgage banking revenue, and deposit service charges.

Customers in the retail side held higher balances in the first quarter in lieu of paying fees, also impacted deposit service charges. During the quarter we sold fixed rate Securities which we partially replaced with floating rate Securities in order to further position our balance sheet for possible increases in interest rates latter this year.

This resulted in a $44 million gain in the quarter. Retail loan growth remained strong as average balances for the first quarter increase an annualized 12 percent from the fourth quarter due to double-digit growth in all categories except credit card.

Average commercial loans declined 1.7 billion from the fourth quarter reflecting continued weakness in the economy, while commercial real estate was flat.

Excluding the impact of acquisitions, and divestitures, first quarter 2002 average non interest bearing deposits increased 16 percent from the first quarter of 2001, reflecting the current rate environment as well as successful business initiatives resulting from the integration of the two companies.

Savings, NOW, and money market accounts again, excluding the impact of acquisitions and divestitures, increased approximately 6 percent from the first quarter of 2001. In addition, higher rate certificates of deposits continued to be replaced with lower cost wholesale funding.

Net charge offs totaled 355 million or 1.19 percent of average loans in the quarter, due almost exclusively to an increase in commercial charge offs related to the manufacturing, transportation, technology, and telecommunication sectors. However, 90 day or more pass due loans declined 8 percent in the quarter, while 30 and 89 pass due loans declined 29 percent.

Net charge offs are expected to decline in the second quarter and to trend downward for the remainder of the year. Non-performing assets as of March 31, 2002 decreased 9 million from December 31, 2001, but remain high at 1.1 billion or .97 percent of loans in

.

We do not expect a significant change in the level of non-performing assets until the economy rebounds. Our average coverage ratios remain strong. The allowance for credit losses to non-performing loans was 250 percent at March 31 compared to 245 percent at December 31.

The allowance for credit losses to period end loans at March 31 remained at 2.15 percent. The company booked approximately 74 million of pre-tax merger restructuring expense in the first quarter of 2002, 64.4 million related to the

nova in

merger to the integration of

US Banc.

5.4 million related expense

in total merger

expense to integrate all of the current acquisitions including US Banc's Firstar.

42.

Net income in the first quarter of 2002 included an after tax impairment charge of 37.2 million related to the purchase of a transportation leasing company in 1998. This charge is recognized as accumulative effect of change in accounting principles and is not including in the operating earnings.

I am pleased to report that our first deposit conversion was flawlessly completed on March 8th, 2002 in the states of Arizona, Kansas, and Arkansas. In addition, the name changes have taken place in Arizona, Kansas, Arkansas, Missouri, Illinois, and Iowa.

As a reminder we are still on track to complete the integration by the end of the third quarter, with the next step being the deposit conversion in Missouri which will take place this coming weekend.

By the end of April, 42 percent of the Firstar branches will be re-branded US Banc. And 52 percent of our Firstar customers will be doing business as US Banc as reflected on their statements and ATM cards.

Finally, I want to update you on two revenue initiatives that you will be hearing about soon. First today, April 16, we are launching the biggest single day calling blitz in our history. Bankers across our 24-state footprint in both retail and commercial banking will be calling on their best customers and prospects to ask for new business.

To give you an idea how large this effort is, retail banking alone has a goal of contacting 38,000 new small businesses.

The second initiative which we will be launching in a couple of weeks is a corporate wide employee online sales referral program called: "Bank on US", complete with meaningful incentives so that employees anywhere in our company, on the front line or in the back offices can refer family, friends and other prospects to the right place for immediate follow up contact.

These types of programs combined with the high levels of customer service that already in place, will allow us to continue to build on the momentum that has already been established.

This concludes my prepared comments and I will now take questions from institutional investors and analysis.

At this time if you

question over the phone, please press the number one on your touch-tone phone now. To with draw a question, you can press the pound key. Once again, to register for question over the phone, please press the number one on your touch-tone phone now.

We will take questions momentarily.

We will take our first question from the site of

from Merrill Lynch.

Hi, David how are you?

Hi,

.

A couple of questions for you. The ¾ I guess I wanted to ask you first of all about what, how you judge the success in reviving US Banc West revenue momentum, particularly on the retail side? Whither you could talk to that issue or not?

And I am curious in particular the loan growth that you sighted on the consumer side for the first quarter, that 12 percent growth rate as coming from the western portion

?

Yeah,

, I think what we are experiencing in the retail sector really reflects a couple of things.

One is the whole retail system, other than the branch deposit conversions that I was talking about that are still yet to be completed, all of the initiatives, whither it would be in mortgage, whither it be in retail leasing, wither it be in credit cards, across the board have been rolled out.

And I think what we are experiencing now is the impact of rolling a lot of products, that quite frankly weren't in place or quite frankly weren't being marketed to the degree they are today.

The second thing that I think that has helped a great deal, and I can't underscore this, is the service.

And the service guarantee and the commitment to service is I know a very soft thing to understand, but quite frankly is making a big difference to the customers through out the West franchise with the old US Bank.

I think that is beginning to build and I think that as we converted more of the branches and roll more of the brand out and the guaranteed service, we will see more and more benefits in retail banking. And particularly in the lending and the deposit side. We've already begun to see improvements in deposits.

This is the first quarter in a long time that I can remember consumer deposits levels being up in the first quarter. And that is a direct reflection of the West and the efforts in the West. The retail lending, quite frankly, has been relatively straightforward to roll out.

Because there were a number of products across the platform that just weren't available in the West.

And so incrementally, it's been a fairly easy pick up to roll out, particularly the lending products, because those really weren't impacted to any degree by the conversion. So again, I think

and his team have worked very diligently to roll and really change the culture around retail banking. Around the commitment to service, and more importantly around the commitment to grow earnings in the branches, that we so need to do in order to make this successful.

So to answer your question, on both accounts, it's definitely coming from the West. East is clearly holding its own and growing, but incrementally, clearly the West has made a big difference.

Another question, just quickly. On the payment services business ¾ would it be possible to help us understand how much of the first to fourth quarter revenue drop you

and you think about 2002 from a planning point of view, what type of revenue growth do you think, assuming the economy, I guess is slowly revised, what kind of revenue growth would put on payment services and what kind of profit margin outlook would you assume there?

Well, in the credit card payments area, there sort of four areas,

.

One is in the merchant side, we really experienced about 5.6 million decrease in that area. And that's quite frankly, not as deep as the drop has been in prior years, either in Nova or US Bank.

Although it is, it's always lower. We are quite frankly glad it wasn't more than that. We are pleased because we believe, and we are seeing already increase in volumes and we saw the volumes increase in February.

We saw considerable volumes in March.

We have signed a number of large deals. As you probably know we have signed Union Planters. We have signed

in Louisiana. We have also recently signed

as both a co-branded card, and a merchant-processing client. We have also signed

which a dramatic volume opportunity.

Actually both in the US and we are working on a plan with our partner in Ireland under

to roll out that same possibility in Europe. We have also signed, recently signed the State of Virginia. Virginia itself is moving more toward plastic and they are moving more toward paying, getting people to pay by plastic.

We were also one of three banks selected by the State of California to begin to roll out merchant processing technology in the state.

In addition we also signed, recently signed Nike Town as also a merchant processor. Of course you probably also know that we have renewed our contract with

.

So the momentum and the number of contracts we have out there are beginning to flow through.

The ATM processing was also down. That was down about $2.5 million but that is also seasonal because you get a big increase in the fourth quarter in the ATM side, and lower in the first quarter.

And then the retail card fees were down, which is also significantly seasonal going from the fourth quarter holiday season to the first quarter. On the other hand, corporate card quite frankly increased, about 6 million.

And that was kind of unexpected. And that really represents both procurement and P&E.

If you had to divide those two, P& E is still weak and seasonally weak, but the corporate procurement side of it is actually showing improvement. Which is a significant trend from what we saw in the third quarter and the quarter of last year.

But in each of those categories we usually experience that decline, so quite frankly, that decline is not as severe, quite frankly, as we had expected. Which is somewhat reassuring for the quarters rolling out.

And given the fact that we are signing more and more deals, I think that the outlook with regard to revenue is what they have experienced in the past. Which should be basically double digit growth in revenue.

And that is exactly what they have experienced. Profit margins vary from product to product. And really, quite frankly, I can't give you really specific number on that. Largely due,

, we are combining the back offices of

and we are right in the middle of that.

We won't be completed until July. And then all the cost

that we've expected to take out of both US Bank and

by combining the back offices will increase our margin. So it's a little early to see what that's going to be, but clearly it's going to be an improvement over what we've experienced and clearly what they have experienced.

But we won't really know that until after the final integration.

OK. Thank you, Dave.

We will take our next question from the site of

at Goldman Sachs. Go ahead please.

I believe it is a follow-up to

question on all the contracts that you are signing on the merchant's side. Maybe if you could give us a sense of what all this should translate into in terms of versus what new contract sign ups maybe a year ago would have translated into revenues then?

And when a lot of these contracts will start to grow into revenue numbers? Whither it's

,

, whatever,

,

et cetera?

I think the best thing I can do for you is sort of give you a sense of the volume. Because when we sign the contracts we have a very good sense of volume. Now part the ¾ revenue will be very much impacted by the timing of the roll out.

And quite frankly, they are building a backlog and a lot these will actually not be rolled until later in the year.

So, but I give you a sense of the volume. Because these are fairly significant. In terms of transaction volume,

represents about 1.4 billion,

about 550 million. And by the way in the pipeline not mentioned of those two, there at least another billion of portfolios that are in the pipeline that represent a lot of small clients. That's about a billion dollars.

is about 500 million,

in the US are 600 million, State of Virginia about 200 million, California 100 million, Nike Town about 400 million is what we are projecting. Again those are beginning to build a backlog in terms of rolling it out.

So in terms of the revenue side, it's hard to exactly see when the timing is going to be. But I think my statement before about the double-digit revenue growth, I think you begin to see that. The impact of these begin to show in the second quarter, but I don't think you will see a full run rate until the third or fourth quarter.

And the current base of transaction volume?

It's about 100 billion at this point. That doesn't include, probably doesn't include the ones that were booked in the fourth quarter.

That would probably be through the third quarter.

OK. We will take our next question from the site of

at Lehman Brothers. Go ahead sir.

Thanks, afternoon, David.

Hi,

.

Couple of things. One if you give us a sense of what you are seeing in the economy? What the pipeline is like in the commercial business, loan business? And give us some expense guidance? Your expenses, even net of the amortization went down this quarter. What do you expect going forward?

OK. On the expenses, I would expect expenses to continue to climb and obviously not at the same rate,

.

And the reason for that is obvious. The conversions, the heavy part of the conversions, which really start with Missouri and then end with Ohio, we would expect to see the expenses come down. It 's hard to gauge because largely for a couple of reasons.

One is we are going to continue to have key people to insure that the follow-up with the conversions is complete. And we are continue to carry staffing even past the third quarter because to insure if there are any issues, they are address really quickly.

but expenses would be lower

.

What we are seeing in the economy is I think that ¾ I can characterize it in three ways. Number one is factoring sectors specifically, we think manufactures bottomed. There is beginning to be some build up in terms of ordering materials and begin be some pipeline with regard to manufacturing, but it is extremely weak, but it has bottomed.

We are seeing in the financial statements some improvement in cash flow. But the major issue still seems to be prices. Prices and profit margins are very weak. They haven't rebounded despite the fact there is a lot of capacity. In terms of volume, they are not seeing the volume either. So we are not particularly optimistic or bullish on manufacturing.

Until maybe third and fourth quarter, hence our statement with regarding the non-performers.

We believe once the manufacturing rebounds, which we are expecting as

sort of later in the year, that's when we will get some meaningful reductions with regard to that.

In the rest of the economy, we are beginning to see backlogs and new loan commitments and notices from borrowers that they expect to increase borrowing. Now where we are seeing that is in pretty much through out the what I call the middle market areas in the larger metropolitan market.

We are continuing to see very strong retail growth. And in the community banks, which has been really slow with regard to commercial, they are beginning to build a pipeline. And I think that pipeline, if you had, sort of added it all up would sort be low single digits at this stage.

But that's a dramatically different than what we saw in the fourth quarter which is consistently pay downs of lines. And basically what was going on before was people were not doing cap ex, they were not accumulating inventories. They were taking cash and paying down borrowings.

And now we are beginning to see some shifts towards more borrowing, but it is too early to say how much that is going to contribute to loan demand. My guess is that we will show better loan growth in commercial in the second quarter, but I don't think you will get the full steam until sometime in the third or fourth quarter.

But I guess the best way to characterize it , I think, overall things are getting better but manufacturing ¾ regardless of what some of the statistics are showing, it's still relatively weak out there.

OK. If I could just ask one other thing. You completed all of your forward buy back programs in this last quarter. What would you characterize as your buy back appetite going forward?

, basically what we are doing is we are buying back ¾ we are in the market essentially every day.

And we are going to consistently buy stock as we have. Your right, obviously we settled the stock on the other one, so it won't be near the same size, but our goal, quite frankly is to build back to our tangible common of right around 6 percent by the end of September.

So what we will do is pace our buy back based on meeting that target. That's the target we are comfortable maintaining. And we will just obviously related our buy backs to reaching that target. And of course that's dependent on our earnings and everything else.

But given our outlook and given what we think is going on, we think it calls for a fairly continuos and steady repurchase of our own stock.

Thanks a lot.

Once again if you would like to register for a question over the phone, please press the number one on your touch tone phone now.

We will take our next question from the site of

at

. Go ahead please.

Hi, good afternoon. You mentioned that you are looking for non-performers to remain, you know, no improvement until the economy improves, but your are looking for lower net charge offs going forward. What's the difference there, because typically you would expect that net charge offs would be a lagging indicator? Is it because of you are looking for improvement on the consumer side?

There are a couple of issues. Consumer, we think will be relatively steady. We are seeing delinquency trends as very stable and in some ways improving. So the consumer, we don't think will change a lot but we will get some improvement in the consumer.

But what we are seeing is, really what we are seeing is there are much fewer write-downs with regard to some of the loans that we've sold. Whither it's values of some credits have improved. But overall, I just think there ¾ in many credits we are beginning to see financial statements that don't warrant any write off or any write down.

Or in subsequent cases, we don't really see any loss content that we have seen in the past. Now there maybe ¾ again charge offs are going to lower and write-downs are going to be lower for sure on the commercial side, but we are really saying with to regard to non-performers.

We don't expect any improvement ¾ now that improvement that doesn't mean there are not performing. 40 percent of them are still paying. But we think it's going to take several quarters a couple of things happen. One is our risk ratings improve on those credits because they are performance is better, cash flow is better, operating trends are better.

And as a result that would cause those non-performers to come down.

But it is probably going to be a couple of quarters of operating performance before we see that happen.

Great, thank you.

OK. We will go to our next question from the site of

at Morgan Stanley. Go ahead please.

Hi, it's

how are you?

Hi

.

Two quick questions.

One is one the commercial portfolio. You talked a little bit about where you are seeing expectation for change going forward. But I would be interesting understanding how pricing is going there in that line item? And then the second thing is could you talk a little bit about the mortgage business and where you see that going?

OK.

On a going forward basis?

With regard to the expectations, we are seeing a couple of things. The level of charge offs on the manufacturing side, although I said it was weak, has really beginning to come down. Now that doesn't mean there are not non performing and that doesn't mean they don't have operating issues.

But the loss content is clearly going to come down. So we are going to see it there. We are also going to see it in the leverage lending area because we have existed a number of credits over the course of this quarter that would basically reduce future write offs or partial write offs of credits.

That is a little bit in the telecom area, in

.

We are also seeing some improvements in consumer products. We are also seeing some improvement really across the board. And then also in real estate. With regard to pricing, I will tell you that pricing has improved in the commercial side across the board.

Whither it be a new line of credit, we are seeing an improvement in spreads, in terms, and then also on renewals, particularly of credits that have been downgraded,

, where they may have been rated a four and the go down to a six. We do have opportunities as part of our language to increase pricing. And that's pretty much across the board.

And I think our margins, quite frankly, some of our margin improvement is related to that pricing. But I would also say, not only on the commercial side, but we are getting the improved pricing on the retail side as well, particular in retail leasing. In some of the installment areas. Home equity is still very competitive. And obviously credit cards fairly competitive. But really in the leasing side we are getting better rates.

And then finally in the mortgage area. Origination's are down. I think there is a table in the back of our press release that indicates that. That's going to continue. Although last year was a record year. We initially thought that the mortgage group would be down pretty much double digits but it looks like their revenue is going to be down less than that.

Part of that is they are having a lot of success with the roll out of mortgage product in the West. Part of that , quite frankly is the fact that the servicing revenue is growing. During the last refinance we keep most of the mortgage servicing rights and we continue to service more and more mortgages. In addition to that,

, we describe that we did acquire

in the second quarter, actually closed in the second quarter, which is a servicer of mortgages that are created from the issuance of tax exempt municipals finance loans by cities and counties, that basically issue bonds to raise money for first time home buyers.

And that will also, as a result improve mortgage banking. But overall, the business is strong. It is not as strong as it was last year. The mix of the revenue will shift a little bit from origination to servicing, but I think, overall, I think we should really have pretty good year considering.

OK. Thanks.

OK. We will take our next question from the site of

at JP Morgan. Go ahead please.

Hello?

Yes, my question was already answered.

OK. Thanks,

.

OK. Then we will go to our next question from the site of

at Prudential. Go ahead please.

Hey David.

Hi,

.

What inning are you in, in terms of bringing up the productivity level of the West to the level of the East? Maybe sales per employee? Where was it when you announced the deal? Where is it now? Where do you hope it goes to ?

Well, we were probably, quite frankly in the third inning, maybe the fourth inning. It depends a lot,

on the market. For instance in the large metropolitan markets, probably Seattle, Denver, LA, to some extent Salt Lake, they are much further along. Largely because the model that we've rolled out is a very familiar model

.

The accountability, the responsibility for P&L's, which is going to drive revenue which drives product sales and then the incentive programs which are rolled out really take a better grip in those markets. In the community markets, it's just slower. It takes more time to roll it out. There are a lot more of them.

And it's an area that is dispersed.

So I would say in the metropolitan markets we are probably in the fourth inning, fifth inning maybe, and in the community markets probably the third inning. But after a while, the community markets become much more consistent and much more, I would say, full service, because they operate both commercial and consumer banking out of one model.

Where as you know in the metro markets, consumer is really separate from commercial banking. And I think in the metropolitan markets, it's not necessarily more irradiate, but it is more dependent on calling blitzes, more dependent on sales programs, more dependent on contest

. Where the community markets really ¾ they take a little slower to roll out but they really take traction a lot in a lot less time, but none the less it's more permanent. If you know what I am saying.

So we're sort half way into the game, I think at this point.

And this calling blitz you also announce internally today, is that right?

Yeah.

And your timing of that is ...

It will run for the next five to six weeks.

OK. And this is the first time you have done that since the merger was closed?

It's the first time we've done it. We did it several years ago, actually going back to Star Bank and Firstar. We didn't do it, particularly with Mercantile, but it took a while to organize, as you can imagine, such an effort.

But they started today and the program should go, you know, five or six weeks, but the big blitz really rolls out, really rolls out today.

And it's really across the board chronic effort in ¾ it's really the first step at basically expanding the culture of calling, continuing to call on new prospects as well as take care of our current customers.

And that's really the objective, is to make sure the whole company operates on the same basis, and experience the same sort of calling efforts.

And obviously be assisted with people who have had a lot more experience in doing this. So it's a little bit ¾ we are going to show you how we do this and we are all going to it at the same time.

All right, thank you.

Once again if you would like to register for a question over the phone please press the number one on your touch tone phone now and you can withdraw a question by pressing the pound key.

We will take our next question from the site of

at

. Go ahead please.

Actually my question has been answered, thank you.

Thank you,

.

We will take our next question from the site of

at

. Go ahead, please.

I wonder if you could just comment on the strength of your aerospace credits, relative to strategies taken over the last six months? Could you just give us an update on that please?

I think what you are really talking about is our airline exposure.

There are a couple of things that have happened. One is ¾ at least all the carriers that we are involved with either through leasing aircraft or where we process tickets through our merchant processing area or the procurement area, have all improved considerably.

We don't see the stress that we thought we thought we would see back in the third and second quarter of last year.

Cash flow is improving, revenue is improving. We are obviously going to continue to take wait and see look at these credits and will come closer to evaluate them towards the third and fourth quarter as the volume begins to pick up.

But there is no doubt they are in much better position today than maybe six months ago or three months ago. And we are feeling very good about not only the activity in the airlines, but also the amount of business beginning to flow through.

We don't see though any net new acquisition of aircraft on the horizon. We would normally begin to see that at this stage. It is probably too early but that may occur in the 2003, but in terms of cap ex we don't see a lot of activity in any of the airlines.

We will take our next question from the site

at Salomon Smith Barney. Go ahead please.

Hi, David.

Hi,

.

Did you sell any non performers and where there any charge offs associated with that?

No we did not sell any non-performers.

I mean, non-performing in that they weren't ¾ they were maybe in the non performing category but they were paying. And we did sell a few, not a considerable amount, maybe less than 20 or 30 million, not a lot.

And were you surprised by the high charge offs?

No, at all. I would say that ¾ our view was that there were clearly some that we would anticipate taking in the future quarters. There was some deterioration in a lot of manufacturing credits that we felt like we should go ahead and recognize. They may have been maybe recognized in later quarters but none the less we felt like it was enough evidence of deterioration that we felt like we should probably go ahead and recognize those in this quarter.

However, we do at this point, believe that our charge offs ¾ will come down in the second quarter and we think they are going to continue to trend down based on really what we see that is sort in the stages of evaluation.

But we just don't see any charge offs going higher than we really have today. So we're pretty optimistic that credit cost are come down in this company through out the year.

OK. And then just a quick question on net interest income. Why was wasn't net interest income up if the margin was up and earning assets were flat?

Well, a couple of things. One, we booked part of fee income,

in the net interest income line, depending on what kind of fee income it is. And that was lower.

Number two, quite frankly, the value of the demand deposits, because rates have fallen, are less, and therefore gave us less impact. But more importantly the difference is the two less days in the quarter represents 22 million dollars. So just going from fourth to first quarter cost us 22 million of that.

I can tell you where we did get some improvement,

in earning assets. That's about 3.2 million improvement. The asset mix really had no change in net interest income. Liability mix contributed about 15 million, which is really going from the higher cost CD's to lower cost wholesale funding.

Overall just rate movements, probably cost us about 5 million, but the biggest difference is the day basis, which is 22 million.

Now in the second quarter, we will pick up half that loss because there is one day longer in the second quarter. And again, I made a reference to the margin, I think you might recall we expected our margin to be lower this quarter. It actually improved. We do expect the margin to decline in the coming quarters, largely because the asset repricing is going to catch up at some point.

And we don't think it's going to be a large change, but none the less we actually, we think it will be lower. But again, when we came into this year, this margin is much higher than we anticipated when we were in the third quarter of this year and the fourth quarter. So its been a very positive surprise. And quite frankly, we are getting improvement in asset pricing, in loan pricing which didn't expect.

And again the drop in rates has really helped the wholesale cost side quite dramatically.

But again it is hard to draw a picture that would get continually improvement from here we are expecting a decline, but it's not going to be a large decline. But we none the less feel like that's more likely than not.

OK. Thanks.

OK. We will take our next question from the site of

at

. Go ahead please.

Hi, David.

Hi,

.

Just a quick question on deposits.

Yes.

You've got pretty good growth in your own interest bearing but your money market deposit accounts are down? Is that like going to continue?

No. That's a good point

No part of my, part of the margin improvement, quite frankly, is that our money market rate balances, our rates have been lower. And one of the reasons we expect the margin to decline a little bit is because we are beginning to move back in and change our pricing in the money market account area.

But you also saw in savings, NOW, and really interest checking. We are seeing improvement in balances there. Part of it is the rate environment, part of it is new business development and part of it is quite frankly eliminate or turning the tide on attrition of accounts in the West margin related to much better service, in improved service.

But you are right. Part of our margin decline, probably going forward will be the fact that we are going have extra efforts in building money market accounts, and that is partly through pricing. And that's going beginning as part our efforts in the second quarter, to begin to build those balances back and attract new accounts.

But that's right we need to improve that and we are planning to.

And why the change in strategy now?

Well, one, there is a couple of things. One rates have sort of bottomed in our view. And rates are beginning to migrate slightly higher.

As a result of that ¾ two things, one consumers have had low rates for

obviously become more sensitive to that. Also you are seeing an improvement in the yield curve, hence customers more than likely taking more out of money market accounts into higher rate CDs. And we are also seeing people take money out of money market accounts to begin to go back into the market.

So we need to be more competitive both to the longer dated CD market, which is beginning to be much more attractive. And really reflects the yield curve. And in addition to that really the overall stock market. And we are loosing money from those money market accounts into those products. So by definition we just need to be more competitive than we have been.

OK. Just one last thing. On the payments business. I think that all the net new adds that you mentioned total to roughly 5 billion dollars, is that ¾ that's pretty decent, but I'm just wondering do you expect to generate kind of incremental new business when, on a quarterly basis of that magnitude? Or is this like more the new business wins that have accrued a longer time period?

you're right, this has been a big quarter. And as you know some of these that we mentioned are extraordinarily large. And we don't expect to sign the real big ones maybe like some of the alliances that we have with some of the large banks.

But what we are seeing is, I think I mentioned in one question, is this billion dollars that are in the pipeline ¾ that is a lot of small customers.

So I would expect the volume to improve. I would expect the volume to continue to increase. Again, there for instances, those two state accounts are relatively small. But there are new efforts by us to call on municipalities and states. So I guess what I'm saying is that I would expect the volume to continue at this pace, but I don't think we are going to get it in real large increments.

I think we are going to get it in the smaller accounts.

Which has really been the thrust of

and

marketing efforts. And the reason I say that,

is because, as you know, the US Bank has a very large small business effort. In bringing those two together and the marketing people meeting with the people who operate the small business through the branch system, is really going to add to that fairly quickly.

And that's really quite frankly, one of the synergies we've found with

is the ability to go after a small business clientele with their platform we just didn't have the capability. We are very successful in the large retailers. But this is where you are going to get the incremental benefit is out of small business.

So I would say again where volume is continuing to improve but it want be these big ones.

I don't expect to

anyway

.

All right. Thank you.

We will take our final question today from the site of

at

. Go ahead sir.

Thank you. Couple of question about the mortgage banking business. First of all, just kind of a number question. Do you know what the MSR valuation is, how many basis points you are carrying on the books at? And then could you talk a little bit rolling out the mortgage product into the Western branches? How is that going? And do you have any kind of rough cut guess of what portion of your mortgage origination's are coming out those branches?

Great.

It is pretty complete today. We are rolling out primarily

and fixed rate product and obviously we are selling almost all the product to the secondary market. But I guess I would characterize us as probably 50 percent there. We still go a long way to go to begin to tape into the local wholesale markets. The local real estate developers.

But in almost all the branches we do have mortgage originators in the branches today in the West. And what we have simply go to do is then those branch originators, then need to continue to develop new contacts and more contacts with Realtors and builders. And that's where I think it's going to make the difference.

Right now we are relying on the branches and the branch contacts and the branch customers. But quite frankly there is a lot more opportunity in markets where we can develop builder relations as well as Realtor relationships. And that piece of it has just kind of begun.

We still go a little ways to go, but I think we are making great strides. We have had a very successful roll out. We have an infrastructure that's complete. We have incentive plans that have already been laid out. And quite frankly it is just a matter of making more calls on providers of sources of mortgage product to us.

And so we don't really ¾ I don't see any obstacles to growing the business.

So do you think you would have a shot at coming close to last year's origination volume even with the drop off in re-fi business?

I don't think so.

I really don't think so. It is hard to replace that much re-fi. We know the re-fi volume is down. And their expectations are that they don't won't see the kind of volume from the re-fi¾ now housing prices are strong across almost every market. And there is more home buying, but I don't think then it is going to make that difference up. Last year was one of the best years we have ever seen and the manager of that business has ever seen. I just don't think we are going to approach that.

OK. Great thanks.

It appears that there are no further questions at this time. So at this time I would like to turn it back over to management.

That's great. I think we are done. We appreciate your attending today and we will be talking to you soon.

Thank you.

The conference has ended for today. We thank you for participating. You may now disconnect your lines.