美國合眾銀行 (USB) 2003 Q2 法說會逐字稿

Please stand by for realtime transcript.

U.S.

Bancorp conference call will start momentarily.

U.S.

Bancorp second quarter 2003 conference call.

A review of the results by David Moffettt.

There will be a formal question and answer session.

If you would like to ask a question, press star 1 on the touchtone phone.

This call will be recorded and available for replay beginning today at 6:00 P.M. eastern through Tuesday July 22nd.

I will turn the conference call over to Matt McCullough, Senior Vice President of Investor Relations.

Good afternoon and thank you for joining the conference call.

Jerry Grundhofer and David Moffettt will be discussing our second quarter results.

Mike Doyle our Chief Credit Officer is here as well.

If you have not received a copy of our earnings release and supplemental schedules, they are available under the finance and news release section of our website at www.usbanc.com.

Our release has been designed to eliminate discussion of non-GAAP measures including operating earnings that exclude restructure items.

However, we'll continue to talk about operating earnings on this and future calls because profitability provide more transparent information about the company and highlight important trends in the company's core financial results.

Before we begin, I would like to remind you that any forward-looking statements made during today's conference call are such to risks and uncertainties are detailed in our press release.

I will now turn the conference over to Jerry.

Thanks.

Thank you for joining us today as we review our results for the second quarter of 2003.

We made good progress in the quarter.

We reporting operating earnings of 50 cents.

This represents an 11.1% increase from second quarter of 2002.

GAAP earnings per diluted share were 49, a 14% increase from the second quarter of 2002.

Revenue growth in the quarter was very solid compared to the first quarter of 2003 and excluding securities gain, revenues increased 2.9% or 11.7% annualized.

This increase was right in line with historic trends despite the weakness in the economy.

Retail credit remains very good but not yet satisfied, commercial quality is showing improvement.

We are clearly seeing the benefits of the actions taken over the past two and a half years to increase the overall risk profile of this organization.

Net charge-offs came in at 110 basis points still much higher than what we would like but should continue their downward trend.

Nonperforming assets declined in the quarter by an immaterial amount.

We expect nonperforming assets to trend lower as the economy improves.

During the quarter, we recognized $196 million of mortgage services rights impairment as mortgage rates continue to fall.

As has been our practice in the past, the impairment charge which we book as intangible among other things expense was offset with portfolio securities gain.

The use of our investment securities portfolio as an economic hedge against our servicing asset is much more transparent a than hard to value derivative strategies used by many.

We continue to generate increasing momentum in the business.

Net DDA accounts grew in access of 75,000 for the quarter.

A total retain loan at consumer banking have increased 15.1%.

We also saw record investment in insurance sales and mortgage low pressure production during the quarter.

We closed on the acquisition as you all know State Street's corporate trust abuse December 31, 2002 and completed the final integration.

For 2003, the performance of the required State Street business has exceeded expectations as well as assumptions that went into the decision.

While wholesale banking is soft despite growth were bright spots in the business.

Deposits up 46% year over year and annualized 10.9% on a quarter behaves increase.

Government deposits account for 48% of the growth year over year and 3% growth on a length quarter basis.

This month we will pay for certain government services with fees instead of balances can which will result in lower balances going forward.

Cash management fees which will benefit in this change and how we are compensated going forward are up 10.5% from the second quarter of 2002.

Length quarter fee growth and payment service is strong at 8.9%.

Credit and debit card fee growth was 11.8% and credit quality continues to improve.

Merchant processing services fees through our Nova subsidiary grew 11.4% quarter over quarter.

Corporate payment systems, our industry leading bank card issue and entertainment and purchasing products will grow revenues in the high teens for full year 2003.

As you may have seen, corporate payment systems was awarded the purchasing card business for the Department of Homeland Security, a major new business for us.

The Capital Markets business unit which is primarily U.S.

Bancorp Piper Jaffray saw improving trends with revenues up 4.1% year over year and approximately $35 million or 20.2% on a length quarter basis.

We remain on track to spin off U.S.

Bancorp Piper Jaffray to our shareholders by the end of the year.

Before I turn this over to David, two points.

First, we are continuing to emphasize the importance of service quality and seeing the benefits of net new account growth and retention.

Service is our brand and we continue to make progress to improve the quality of that service we provide to our customers as dedicated employees make customer service job one and bring to life our exclusive five star service guarantee.

Second, I want to thank our investors for continued support.

We are making progress against goals for 2003 even though we have not yet seen an substantial uptick in the economy.

For the quarter we have strong revenue growth close to 12% annualized on a quarter basis.

Industry leading financial ratios.

We continue to control costs and efficiently ratio and credit trends continue to show improvement.

We remain disciplined in our pursuit of industry leading customer service and goals set out.

Now let me turn it over to David to give you more details about the quarter.

Thanks, Jerry.

Second quarter operating earnings were 50 per share on a diluted basis. 1 better than the first consensus estimate.

We are comfortable with the target of a share for full year 2003 which is slightly high than the first call consensus estimate.

Second quarter earnings increased 10.5% from the same period of last year and driven by improvement of all business units.

For instance, wholesale banking recorded operating earnings of $311 million in the second quarter, an 8% increase over the second quarter of 2002.

Revenue increased 5.4% driven by strong deposit growth, 10.5% increase in cash management fees.

Non-interest expense it declined 12% and personal expense litigation and write-downs.

Partially off setting these trends was a percent increase in net charge-offs as a ratio to average loans increased from 88 basis points in the second quarter of 2002 to 1.1% in the second quarter of 2003.

In the air of consumer banking, second quarter banking increased 6.2% in the second quarter of 2002 to $400 million.

Total revenue excluding securities gains increased 6.2% as average retail loans increased 8%, mortgage banking revenue increased 16%.

Service charge is 6.5% and investment product fees and commissions up 23.6%.

Excluding the impact of intangible amortization expense which includes impairment, non-interest expense increased 3.7% due to higher commissions, loan production expense and marketing.

Net charge-offs improved 4.1% as a ratio of net charge-offs to loans declined from 82bp in 2002 to 72 basis points in the second quarter of 2003.

Moving on to private client trust reported operating earnings of $126.4 million in the second quarter, 6.8% increase in the second quarter of 2002.

Revenue growth in this group grew 8.% due entirely to the State Street corporate acquisition.

Revenue of growth of approximately 8.4 million was more than offset by market evaluation declines of $12.5 million.

Non-interest expense increased almost 10% tributable to the acquisition.

Excluding the impact of State Street, non-interest declined 3.6% excluding the impact of corporate trust business, private trust and asset management were essentially flat compared to the second quarter of 2002.

Despite the market reflecting significant new account growth and further penetration of existing customer base.

Second quarter operating earnings and payment services increased 14.3% from the second quarter of 2002 to $181 million.

Revenue increased 1.9% as credit and debit card fees increased 7.9%.

Corporate paunt revenue increased 10.2% and ATM fees increased 7.5%.

Partially off setting these strong increases were revenue reductions due to the sale of two co-branded portfolios in the third and fourth quarters of 2002 and weakness in service fees associated with our subsidiary.

Acquired volumes as imagined in dollars has increased 6.8% in 2002, Nova's revenue has declined 1.8% reflecting rate pressures at increased cost which are netted against a revenue.

Non-interest expense declined 3.6% as savings continued being realized from the integration of Nova and processing business.

Net charge-offs declined 14% due to portfolio sales, line management, enhanced collection auferts.

Average loans declined 4.8% in the second quarter of 2002 to 4.25% in the second quarter of 2003.

Finally in the Capital Markets Group which is primarily U.S. bank Piper Jaffray improved relative to the same period as revenue increased 4.1% driven by the fixed income.

As Jerry mentioned, we are still on track to prevent the spinoff by the end of the year.

Other items to note during the second quarter include second quarter revenue excluding acquisitions and securities gains increased 3.7% from the same quarter of last year as double digit growth and mortgage revenue, corporate payment and insurance products offset weakness, banking, trust and investment product fees.

Excluding these market sensitive categories, total revenue increased 5.3% in the same quarter of 2002.

Second quarter non-interest expense excluding the acquisitions of mortgage servicing can impairment increased $19.8 million or less than 1.4% from the same period last year due to high incentives and other intangible amortization.

The net interest margin decreased 6 basis points from 2003 to 4.5% primarily reflecting the growth of lower yielding investment securities as a% of those earning assets.

The company expects margins to decline in the third quarter as cash flows are redeployed to produce lower investment securities in the absence of loan demand.

Adjusted for the sales of two co-branded credit card portfolios in late 2002, second quarter average retail loans grew at an annualized rate of 6.1% compared to the second quarter of 2002.

Excluding the impact of acquisitions and reflecting in part the benefit of being one of the -- one technology platform across all 24 states, second quarter average non-interest bearing deposits increased 16.8% in the same quarter of 2002.

Now money market accounts excluding the impact of acquisitions displayed good growth growing 17.2% for the second quarter of 2002.

Nonperforming assets declined $3 million during the quarter to $1.36 billion June 30, 2003 or 1.14% of loans.

As Jerry mentioned, we expect nonperforming assets to trend lower as the economy improves.

Net charge-offs to $323 million, a total amount of retail net charge-offs declined for the fourth consecutive quarter despite higher retail loan balances.

Total commercial net charge-offs including CNI fell but remain high.

The CNI portfolios continue to be impacted by communications and manufacturing sectors as well as impact on highly leveraged value financing.

The trends for retail and commercial continue to improve assuming new further deterioration of the economy, we expect net charge-offs to trend lower.

Our asset ratios are strong.

Credit losses was 194% June 30 and allows for credit losses was 1.98%.

Our capital ratios remain strong as well.

Comfortably above the minimum targets to achieve cap status with a ratio of 8.3% and total Capital ratio of 12.8%.

Tangible capital ratio of the third quarter ended at 5.8%.

We expect our targeted ratio of 6.25% by the end of the third quarter.

In addition, our profitability measures remain at the top of our peer group with an operating ROA of 2.06% and ROE of 20.2.

The company approximately $11 million in pretax merger expense most to the integrations of Nova and State Street corporate trust acquisition.

In closing, let me say we are pleased with second quarter results, matching historical trends despite the weak economy, credit quality is trending and cost control is strong.

As 2003 progresses, we remain focuses on certain objectives.

First we will focus on growth and the creation of operating leverage.

Second we enhance our already high levels of consumer service, customer service, finally we will be dismined in the desire to reduce volatility and reloose the profile of the organization.

This concludes our prepared comments.

We will take questions from investors and analysts.

At this time we will begin the question and answer session.

If you'd like to ask a question you may do so by pressing star 1.

You may withdraw at any time by pressing the pound key.

Just one moment while we cue up our first question.

Our first question comes from Mike Bolton from TRO Price.

You expect to trend lower as the economy improves.

Taking your gauge of what kind of economic growth is needed, if the economy is growing at the level it is growing at today, do you expect MPs to grow or need an improvement in economic growth from here.

Mike, this is Jerry Grundhofer.

Let me ask Mike Doyle to answer that.

Let me answer that in two ways.

If the economy does not improve, I expect MPA to remain stable.

If the economy were to stay in this state, I think we might see a trending downward over a longer period of time.

Without the economy's help to make significant progress would be difficult.

Okay.

I want to be clear because the economy is growing now, albeit slowly.

If you get continued growth, MPAs would reasonable care remain flattish?

Let's say I don't have the view you have on the economy based on what I am seeing.

I see it as stagnant now.

If that should change and we get a slow economic growth scenario, I think we'll see MPAs come down.

If we stay stagnant, I expect to see stable.

And the second question would be as we look at your credit quality performance over the last couple quarters and the guidance you're giving and compare that to some of the larger banking peers we've seen results from this quarter whether Banc of America and see Wachovia soon, the degree of improvement has significantly lagged those companies.

What do you attribute that to?

The economy or something else we are missing?

My view on that is as follows and we've paucked did that historically and David talked about that in the opening comments about mortgage lending and something we had to deal with in the last 18-24 months.

We believe that sector for us is beginning to show improvement with reduced levels of charge-offs and mpas and a function of us working hard to reduce the level of those assets and we made significant progress in that area.

Even without a check improvement, I use that not only in that sector but several sectors in our portfolio.

We'll see reduced levels of charge-offs without improvement in the economy.

Now at the same time on the MPA side, say well then why charge-offs without improvement in the economy.

Now at the same time on the MPA side, say well then why would you see the MPAs reduced and the issue there is we've seen weabs in the middle market sector and that started 90-180 days ago.

We've seen the leverage side improve and the large corporate side improve, the middle market begin to shift and become weaker, and that's in effect backfilling the MPA issue.

On the MPA side on middle market credits, if you lend correctly, the loss potential on those credits is much less on a percentage basis and the average credit is much smaller.

The impact results are much smaller.

Mike, this is David.

I also would add that as you look at our commercial portfolio and the distribution of the MPAs, you will still see that we still have a significant exposure in manufacturing particularly in the midwest as a lot of other midwest banks do it.

This to some degree inhibits the progress we've made and we are making progress, but yet it's going to be slower because manufacturing is still not recovered and it is still although we are hopeful it will, still has not done as well as we had liked.

Mike, this is Jerry.

Some of the other banks we reported have had similar if not a little more stressed charge-offs.

We'll take the next question.

Our next question from John McDonald from UBS Warburg.

Good afternoon.

I was wondering if you could give up more color on sensitivity where you stand at quarter end and what you are preparing for the rest of the year?

Yeah, our margins came in where the average was for the quarter was 450.

Our outlook margin will decline.

It's really going to be a factor of two things.

One, as you know, the shape of the u-curve will have some degree, some impact on that.

That doesn't really unfold until three or four quarters later.

I think it would have some marginal improvement.

The real issue for us is redeployment of cash flow.

We have a short bond portfolio and we've elected to essentially take that cash flow and reinvestment in relatively short security.

That alone would have a negative impact on the overall margin which, I think is fair to say would likely occur during the third and fourth quarters.

The other issue quite frankly is the fact that the cash flow coming in is much greater than the loan demand in order to absorb that cash flow.

If loan demand does improve and we get some more improvement in overall loan demand, that will absorb that cash flow and have an off setting impact on margin decline.

At this juncture, we would expect a margin decline in the third quarter and if interest rates change, then obviously it would help.

At this juncture, we're assuming in our own numbers and own estimates we will get more margin depression as we think others will as well.

But still expect interest income to grow?

We do.

And, David, could you also let us know did the loan conduit, did that effect the loan metric as soon as.

Very, very slightly.

You will see in the third quarter the whole conduit coming back on balance.

That's proxing $2 billion.

That should be on balance sheet as of today.

Okay.

So you will see a change because of that in the third quarter.

Great.

And final thing, could you or Jerry elaborate on the State Street you've had and the metrics there?

The one thing that stands out in my mind is we met really all the revenue growth and the expense, in fact, on the expense side, we've done better.

The most important thing, though, is the customer retention.

We have only had impact, we only last five customers and that had an impact of $500,000 during the whole conversion.

The reason for that, I think, is one, the efforts the team made in retaining the employees and also they called on well over 400 customers, corporate trust customers during that time.

Those two things helped retain it.

It is done really well.

We're pleased with the retention and the fact we are able to find more cost savings and still retain the revenue is really a very positive experience with that.

John, this is Jerry.

We also, as you know, we had a $75 million holdback on the purchase price which we'll have to fund the rest of it because we haven't lost our customers.

We're very pleased with that progress.

Thanks.

Next question from Mike Mayo from Prudential Securities.

Hi.

You mentioned short duration on your security portfolio.

What was that at the end of the quarter and how is that compare to the start of the quarter?

It is around 2.5 years at the beginning of the quarter, around 2.8, 2.7.

Okay.

And separately, I guess you added around $7 billion in securities since the start of the year, you leveraged up the balance sheet, opportunisticly, it was good.

At what point do you say we take on extra security, we should take off our bid a bit.

A couple of things, if you notice during the course of the year, our asset ratio has been constant at around 10.

As we've been building equity during this time in order to reach our tangible target of 6.25, we essentially used that additional equity to invest short in the bond portfolio.

Also that is fact one.

Fact two is as we've had MSR impairment, we sold securities to offset that.

We have been primarily selling all the fixed rate portfolio in anticipation that at some point will come off the bottom and begin to rise.

So as a result of that, we've kept the portfolio short.

And we've done that over the course of three or four quarters in anticipation that one the second half of the year will improve interest rates will begin to rise as a result, we will have improved loan dhaned which will offset some of that cash flow.

So our view is that it's better to be short than long and lag out of that strategy by selling the fixed rate.

Recognizing you get margin compression in the short run but in the long run, better served.

You expect to maintain the same level securities you have now with your outlook?

My expectation is when we finish the third quarter, our bond portfolio would be in the $37 billion category and at that point, it will pretty much stay at that level.

As time goes on, loan demand improves, we'll start financing a lot of that loan growth with cash flow from the portfolio.

Okay.

And you keep saying, your margin didn't go down as much as it could have given the circumstances, there must be positive assets.

How much of a decline are you expecting the third quarter, second half of the year?

It's early to figure out how much exactly because there's going to be a lot of factors that play into it.

One of the things that we've done and done consistently is we've been very, very disciplined in ensuring that our customers particularly on the commercial side who elect to prepay their loans, that we have very strong prepayment language and compensation for those prepayments and we've done a great job in collecting those.

That disciplines or margin.

Last year our margin was flat where a lot of banks fell.

This year we had less decline.

Some of it is obviously customers wanting to refinance but keeping that discipline in order to ensure that the bank is compensated for that is pretty important.

That obviously diminishes over time.

But nonetheless, it's been an important factor in that whole process.

Thank you.

Next question from Jason Goldberg from Lehman Brothers.

Thank you.

Good afternoon.

One of the comments in the release was you expected total assets to decline next quarter.

That along with the margin and the decline you mentioned that NI would be up.

If you could pile that up together?

A couple of things.

One is if you look at the ending balance sheet for the quarter, you'll notice when you compare the average ending balance sheet is significantly higher, that's one result of a tremendous surge of deposits in the last day of the quarter and that was obviously carried up in the money market account.

What we're really saying is, it's not going to remain that high.

Average assets are going to come down.

But the difference is we will bring the $2 billion of loans from the stellar conduit back on balance sheet which going forward we would expect the overall total assets instead of an average of 187 more like 189.

What that really means is people ask the question what does that mean for your ability to hit your tangible capital ratios?

If you would calculate common ratio at average, we would be at 610.

We really think we will make our target by the end of the third quarter even though we will have some loan growth as a result of those loans coming back on balance sheet.

Just so you know, the elimination of Stellar was an elective decision.

It was not a decision we were required to do because Stellar was QSDE but felt like given the discussion in the future, discussion of faz faz b, we -- FASB, that's what we were referring to.

That's helpful.

Thanks.

Next question from Leo Harman.

Hi, good afternoon, guys.

Hi.

I was wondering if you could talk about the discrepancy of growth and mortgages of home equity and whether or not that's an issue of penetration or an issue of balance sheet conservatism or something in a first mortgage product that's causing that growth versus home equity.

Essentially let me describe it this way, Leo.

We have growth in the first mortgage prirnle bank product.

We also, as you know, have a first mortgage product in the consumer finance company.

So we are originating first mortgage products in both entities and all the adjustable rate product.

In addition to that, we are originating to a lesser extent but you see they're really categorizing the first mortgage what we call home equity products, they are really a first.

A hybrid between a straight forward-second mortgage product and single family first mortgage product.

We classify them as a first mortgage because they are a first lien but they are marketed really as a home equity product.

It's not, it doesn't have anything to do with where whether we are selectively reducing our om equity but a nice sales growth in that area, because it is a first lien, it ends up in the first mortgage category.

In fact, Leo, this is Jerry, if you look, take that into consideration, with today's markets, sometimes the first time with home equity cheaper than a mortgage.

That's what's occurring.

We have annualized growth in all home equity including our first trustees in excess of 22%.

And second could you segment the growth in the commercial business between large, middle and small, if you could.

As far as loan demands?

Loan growth, yes.

Basically there isn't any loan growth, very, very weak.

We see that throughout.

We hear customers, men and women in the middle market and larger corporate side talking about investment but we have not seen it.

That's a fact.

Thank you.

Our next question will come from Nancy Bush from NAB Research.

Please go ahead

Guys, you popped up on Rueters as one of the creditors for Mirrant and showed USA and exposure and that's bond exposure?

Thanks for bringing that up.

We noticed the same thing right when we noticed the press release.

We are corporate trustee on a convertible debt issueance.

We don't have credit exposure to that company.

Great.

And the other company, David, you mentioned something about revenues at Nova from acquired accounts being down?

Could you clarify that, please?

Essentially last year we have, as you know, we have engaged in a sizable outsource arrangements with several banks, and during that period of time, we obviously have revenue sharing arrangement with those and those revenue sharing arrangements are relatively, are amortized on an accelerated basis as opposed to straight line basis.

If you look at the different arrangements, we are getting strong value and strong growth but the accounting for this basically accelerates the cost of that instead of straight line.

Therefore it has a weakening impact on the reported revenue.

Overtime because we use an accelerated method, that will have less impact given the same volume and relationships.

The reason we do that, Nancy, because when we enter into an alliance, we believe the most conservative thing is to assume not a worst case that we will have more attrition or more runoff because we are switching major relationships, and therefore we think of it as sort of the worst case, we'll have more accelerated runoff and therefore we don't want to be in the position of writing off the assets.

So we basically take a much more conservative approach than our peers which does have a dampening impact.

What are the life assumed on these agreements?

These agreements range from say 7-10 years. 8 years with accelerated deappreciation.

The first two years it's closed 40% where as if you look at the other major competitors, they all use straight lines useful life.

We use a much more penalizing accounting.

Thanks, very much.

Our next question will come from Steve Wharton from Limited Sales.

Good afternoon.

I had two questions.

Going back to the balance shield in the rates and analysis.

I know the period is different, but the $2 billion rise in your taxable securities and the yield went up three basis points?

Can you sman how that happened and also the yield seems high relative to other banks I've seen with similar average duration.

Did you buy these at discount?

We bought them at discounts and also early on before rates fell.

Really early like the first or second day.

That's primarily the difference, Dave.

And then the second thing was on the government deposits, you mentioned a switch from the deposit, I think?

Basically, Steve Wharton, the federal government through the treasury department basically is switching the method of compensation and not just us but all banks, basically, that participate in depository services to the federal government.

Essentially what happens is they'll create basically fees in Lew of balances.

The way this is going to be contemplated is we calculate what fees they really owe us and they are going to basically pay us in the form of a fee.

The way the accounting works is we'll actually record -- it's not a seeable but acts like a receivable on the balance sheet and that balance sheet will be reduced when we receive the fees.

Just a switch in compensation.

No impact on the volume, no impact on the service.

Treasury department decides to change the way of compensating banks.

And any way to size the impact on deposit as soon as.

We can't and the reason why is we don't know the extent of the activity in the coming quarter.

Again, we don't quite know because also the business we have with the treasury department is seasonal in nature.

We don't quite know yet but we are really going to have and wait and see how this works and how quick will it gets implemented.

Many times these take longer than you think.

This is Jerry, sometimes these balance between $1-2.5 billion.

On average, I hazard to guess $1-1.5 billion or pretty close, Steve Wharton.

And one last question.

The economics are the same to us.

Right.

Since Jerry is there, maybe you could give us an update on your thinking in terms of dividends.

I didn't think you'd ask, Steve Wharton.

As you know, we made a commitment to rating agencies to get our tangible comment to 6.25%.

We're going to do that.

We committed to it.

We said we would do it and get it there.

We believe we'll get there the end of the quarter as we told a number of you.

Obviously with some of the actions taking place, we'll watch and see what the reactions are there.

We certainly do generate a lot of capital, and obviously it's a board decision but we'll wait and see.

We were, as you know at the higher end for a while as we acquired companies.

We set a target somewhere between 35-40%.

Again, as this becomes a board decision, our tendency is to look at this and do it slowly over time to see what the reaction is by the investment community and knowing that we can have options not only buying back stock or additional dividend increases based upon what's in the best interest of our shareholders.

We have those opportunities or options available to us.

Believe me, we'll do what's right and what really is the best interest overall.

Thank you.

The bias would be toward higher dividends.

We'll wait and see.

Our next question will come from Nancy Sexton from Adage Capital.

Hi, I have in my notes from a month or so ago, you say instead of leveraging the balance sheet at no spread, you would pay off short torm fund, shrink the balance sheet and do a share buyback, but yet you added 5 billion in securities.

I think the statement before that is once we hit our tangible common target, then that would be the more likely outcome and what I was trying to address before is during this period of time when we had been raising equity to reach that common ratio, then using the excess capital in the short run and raising the investment portfolio, our equity to asset ratio is 110.

And I think the question was if the redeployment of that, once we reach that capital target and no longer able to redeploy the assets in a profitable manner, then we take the cash flow and pay down the borrowings and provide the opportunity to downsize the company and take that additional property and buy back our stocks.

But that's, the question is, I think the question is what is the yield curve so flat that the margin would have no benefit but we wouldn't reach that until the end of the third quarter.

If you don't g have securities this quarter, what would your tangible be at today?

I don't think it would be that material difference. 6.1.

We still wouldn't have made it to 6.2 yet.

So we've got another quarter to go, Nancy.

Just looks like given your stock price the stock buyback would have served you better.

At this juncture we don't think so but it's getting close.

Again, outoverriding concern is get our capital ratio in line with our ratings peers.

Once we do that, we'll have a lot more flexibility on the buyback.

Thank you.

Next question will come from Michael Granger from KBW Asset Management.

Hi, David.

Hi, Mike.

What the yield on securities that you are purchasing with your cash flow in general?

Basically about 130 over, somewhere in that range.

All floating rates so they are very short, short duration.

Okay.

Somewhere in that range.

Thank you.

Next question from Hawkins.

Okay.

Somewhere in that range.

Thank you.

Next question from Hawkins.

Please go ahead.

Good afternoon, guys.

Two quick questions regarding credit.

One, in terms of current MPAs, what percentage is the leverage or said another way, what percentage of your leverage book is currently MPA.

Second, in terms of middle market credit, are you moving in and out of certain industry groups based on what you're seeing in different areas?

The first part of your question would be about 20% of the current MPAs in the leverage book.

The second question as relates if I understand it correctly in middle market are we seeing movement in sectors there?

The answer to that is generally, no.

We have a granular diversified portfolio in many industry sectors, we are not seeing anything from one specific sector.

It's very broad.

As Jerry counted earlier, a lot of it tends to be in the midwest part of the country which has been manufacturing and so forth and without an economic uptick, that's difficult to see improvement.

We do have as an example out in the northwest, middle market companies as well, service sectors experiencing stress as well.

Great.

Thank you.

Okay.

Next question with Fred Cummings from McDonald Investments.

Good afternoon.

A follow-up on that.

Can you talk about the levels of nonaccrual you've been seeing.

In past quarters, you've had some success in some nonperforms assets.

Did you do any of that here in the second?

Yes, we did.

Hold on a second.

Let me get the specific numbers for you so I can quote this accurately.

Give you a little kind of comparison.

During the second quarter, we sold roughly $90 million in MPAs.

We sold another $66 million in performing assets.

That compares, you look at the first quarter we sold 120 MPAs and sold about $47 million of performing assets.

And, Fred, some of those performing assets are part of our continued reduction and overall risk profile in our company to get down to the levels that we believe we should be at for what we want to be going forward which we're getting close to being.

Yes.

And, Mike, as it-relateds to the level, it sounds like the flows are predominantly now in the middle market area, can you give us some sense in terms of dollar magnitude say over the last couple quarter as soon as.

Speaking, always speak to the second quarter as well.

You can see with that level of mpas sold, and then you look at the types of credits we are able to move out during the quarter, typically what we've been running on the inflows that has been somewhere in the neighborhood of, I want to say, 175ish.

Okay.

200 range.

And then, lastly, you all were talking about your credit outlook, are you taking into account the possible impact of the shared national credit review, if you care to comment on that.

We have the transactions, our review of the deals went very well.

On the nonagent transactions, as you know this year the OCC took a little different approach in examining the credits.

They did more of a sampling approach.

So as a result of that, and they looked at the credits but past credits they were much more selective.

We've been getting inflows and information relative to that but we don't have the total picture yet.

Our expectations to this point are not significant issues or changes in that regard.

Thank you.

Next question will come from Rodrigo from Merrill Lynch.

Please go ahead.

Good afternoon.

I was curious if you are getting closer to sharing customer satisfaction scores, attrition rates and so forge.

Show how the five-star guaranteed program is working out?

No, this is David.

I don't think so.

One is we thought about this in the past and it's a little bit like cross sell.

It gebbeds on how you count them and exactly what you think is satisfactory.

We believe, quite frankly that at the end of the day, the most important number that we can point to quite frankly is growth in net demand deposit account.

At the end of the day, people dissatisfied are going to close their account and people attracted to the convenience, the service and the price and quality are basically going to open new accounts.

This quarter as an example, we net open $75 thousand new checking accounts.

Last quarter it was $25,000.

The growth rate is accelerated.

Curely over last year significantly better.

We think that's basically the best indicator.

Again, we're not interested in really disclosing these kind of measures because, one, you can't compare them across companies.

Two, quite frankly, although they are important for internal management, we think at the end of the day, it's how much have you opened and how much revenue have you grown from your business.

We don't look at it as an ends, more as a means than anything else.

Thank you.

Next question will come from Mark Alpert from Essex Capital.

Please go ahead.

I'm hoping I'm not asking you to repeat something but can you tell us what the size of the portfolio is?

Yes, if you will go back to the supplemental schedules, Mark, there's a schedule, I believe, it's at the back end if I can find it, on page 40, that basically serves, the fair value of the servicing portfolio, fair value is $437 million and unpaid principal balance about $48.2 billion.

So a little under 1.

.91.

Thank you.

Next question from Alan from Bought.

My question was just answered.

Okay, no further questions at this time.

At this time I will turn it back over to Mr. McCullough.

Thank you for joining us today.

Give me a call if you have questions and I'll be here to sther the questions for the rest of the day.

Thanks.