U.S. Bancorp (USB) Q2 2012 Earnings Report, Transcript and Summary

Judith T. Murphy - Senior Vice President, Director of Investor Relations and Analyst Richard K. Davis - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Risk Management Committee Andrew Cecere - Vice Chairman and Chief Financial Officer P. W. Parker - Chief Credit Officer and Executive Vice President

Leanne Erika Penala - BofA Merrill Lynch, Research Division Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Gregory W. Ketron - UBS Investment Bank, Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division Nancy A. Bush - NAB Research, LLC, Research Division Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division David A. George - Robert W. Baird & Co. Incorporated, Research Division Paul J. Miller - FBR Capital Markets & Co., Research Division

Welcome to U.S. Bancorp's Second Quarter 2012 Earnings Conference Call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer, and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately noon Eastern Time through Wednesday July 25, at midnight. I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp. Please go ahead.

Thank you, Holly, and good morning to everyone who has joined our call. Richard Davis, Andy Cecere and Bill Parker are here with me today to review U.S. Bancorp's second quarter 2012 results and to answer your questions. Richard and Andy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analysts' 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 filings on file with the SEC. I will now turn the call over to Richard.

Thanks, Judy, and good morning, everyone. We're very pleased to share our record quarterly results with you this morning, and I'll begin with the highlights on Page 3 of our presentation. U.S. Bancorp reported record net income of $1.4 billion for the second quarter of 2012 or $0.71 per diluted common share. Total net revenue was higher by 8.1% over the same quarter of 2011, driven by 6.6% growth in net interest income and 9.7% growth in fee revenue. As importantly, we achieved positive operating leverage on both a year-over-year and linked quarter basis. The total average loans grew year-over-year and linked quarter by 7.7% and 1.9% respectively, and we experienced strong loan growth in total average deposits -- strong growth in total average deposits of 10.5% over the prior year and 1.3% linked quarter. Credit quality continued to improve as net charge-offs declined by 8.9% from the prior quarter and non-performing assets decreased in total by 6.9% or 12.3% including covered assets. We generated significant capital this quarter through earnings and ended the quarter with a Basel I Tier 1 common equity ratio of 8.8% and a Tier 1 capital ratio of 10.7%. We repurchased 13 million shares of common stock during the second quarter, bringing our year-to-date share buyback total to 29 million shares. Since the beginning of the year, we have returned 62% of our earnings to shareholders through dividends and share repurchases. Trends in our industry-leading performance metrics are shown on Slide 4. Return on average assets in the second quarter was 1.67%, and return on average common equity was 16.5%. Our company's long-term goal is to achieve a normalized ROA in the range of 1.6% to 1.9% and an ROE between 16% and 19%. Both performance ratios are within their respective ranges. Our net interest…

Thanks, Richard. Slide 9 gives you a view of our second quarter 2012 results compared to various comparable time periods. Record diluted EPS of $0.71 was 18.3% higher than the second quarter of 2011 and 6% higher than the prior quarter. Slide 10 lists the key drivers of the company's second quarter earnings. The $212 million or 17.6% increase in net income year-over-year was the result of an 8.1% increase in net revenue and a decrease in the provision for credit losses, partially offset by a 7.3% increase in noninterest expense. Net interest income increased year-over-year by $169 million or 6.6%. The increase was largely driven by a $26.2 billion or 9.4% increase in average earning assets, in addition to strong growth in low-cost deposits. The growth in average earning assets included planned increases in the securities portfolio and growth in average total loans, as well as loans held for sale, partially offset by a lower cash position at the Fed. A net interest margin of 3.58% was 9 basis points lower than the same quarter of last year, primarily due to the expected increase in lower-yielding investment securities and a decrease in loan yields, partially offset by lower cash balances at the Fed and lower deposit costs. Noninterest income increased by 9.7% year-over-year. Mortgage banking revenues was very strong again this quarter as production increased by 150% year-over-year and gain on sale margins improved. These positive variances in mortgage banking and several other major categories were partially offset by a 17.8% decrease in credit and debit card fees due to legislative changes to debit card interchange. Offsetting the impact of this unfavorable change in debit card fees was legislative-related mitigation activity, including the final elimination of the unused rewards and higher overall transaction volumes. Noninterest expense was higher year-over-year…

Thanks, Andy. So to conclude our formal remarks, let me turn your attention to Slide 13. The momentum continues this quarter and hopefully beyond. We grew our balance sheet and customer base and we gained market share. We grew net revenue, we achieved record earnings and industry-leading performance metrics for the quarter, as well as positive operating leverage. We continue to invest in our businesses, and we saw our credit quality continue to improve. Our capital and liquidity positions remain strong and they're growing. And we've returned 62% of our earnings year-to-date to our shareholders through dividends and buybacks. Our company continues to invest for the long term in our diverse and stable mix of businesses, products and services and in our employees and in the communities that we serve. Consistent, predictable and repeatable. Our straightforward approach to doing business has allowed to deliver industry-leading performance and returns to our shareholders, and we look forward to doing more of the same during the rest of 2012 and the years to come. That concludes our formal remarks, Andy, Bill Parker and I will be happy to answer questions from the audience.

[Operator Instructions] And your first question comes from the line of Erika Penala, Bank of America.

My first question is for Andy. Could you walk us through, in terms of the components, margin stability for the back half of the year? And I guess, my more detailed question underneath that is, could you give us a sense of how much debt is maturing in the second half and at what rate and what replacement rate you're assuming, as well as, I notice on an end-of-period basis, the cash balances were actually up, what size bond portfolio you're assuming for the rest of the year?

Okay, Erika. So the key moving parts are the negative is the investment securities reinvestment risk, and the offset to that is the debt repricing, which will be at a lower cost, replaced by either additional debt issuance and/or deposits. The differential of those 2 things is essentially causing us to be -- to have an expectation of neutrality in net interest margin for the rest of the year. In terms of the cash balance, Erika, any day there's fluctuations in that cash balances. And I'd like to look at it more at the average for the quarter, which was down from about $4 billion in the first quarter to about $1.5 billion in the second quarter. And again, the level of loan growth and deposit growth is fairly stable, as you saw in the second quarter. So I would expect a little movement around that but not substantial.

You don't happen to have the dollar number of the debt maturing and the rate at which it's maturing for the second half of the year, do you?

I do have that. In the second quarter -- in the third quarter, we have about $6 billion maturing, and I would say the debt that's coming off versus what's coming on is favorable right around 100 basis points.

Got it. And my last question before I step away from the queue relates to CCAR. I guess perhaps it's too early to tell, but now that the NPR proposal is out, do you anticipate that the CCAR is going to take into account Basel III ratios rather than Basel I when thinking about approving capital return for the banks next year?

Well as you know, Erika, the last CCAR actually took into consideration both Basel I and Basel III. It was Basel III under the stressed environment and -- Basel I under the stressed environment and Basel III under sort of the glide path. And I would expect a similar sort of set-up constraints in the new one next year.

Your next question comes from the line of Jon Arfstrom, RBC Capital Markets.

A question for maybe Richard or Bill on Slide 7, the credit trends. Richard, you've talked about this concept of the industry over-earning in the past.

Yes.

And just curious if you'd be willing to take a stab at going below 1%. How long does this phenomenon last and how low can the charge-offs potentially go for the company? Just kind of big picture would be helpful.

Yes. I'll start and Bill can clean up. The 0.98% is about where I thought we'd be right about now because in the last few years, we and the others have not been taking much risk on lending, which is probably, at end of the day, what we are supposed to do but have to be very careful. I think that we stay below 100 basis points for a few quarters just because the math of it says that we don't have any loans that would be coming to some point of stress, I don’t believe, in the next couple of quarters based on our prudent underwriting of the last year or so. I will say, you'll remember that we have a credit card, fairly important credit card book, that does affect our overall ratios, and that's probably the one that's coming now to its most nearest bottom, where it'll start to move up probably sooner than the rest of the portfolios. But for the rest of it, I think we're going to stay under 1 for a while. My hope is that based on appropriate accounting trends that we can continue to have a certain level of unallocated reserves remaining so that we don't find ourselves releasing reserves to a point of unsustainable performance only to have to build them back as things start to move up. I'll also close by saying I don't think the 0.98% falls to anything like 0.5 or 0.6. I think it floats around the high 8s and high, midpoint 9s, but it probably eventually gets above 1. And I'll actually be looking forward to that because that means we've been optimal in doing the right risk/reward balance and making sure that we're taking the right risks and rewards for our customers. But I would say it's another few quarters and not very aggressive in its movement from here. Bill, do you want to add?

Yes, I'll just say, John, that how long it stays below 1 and how low it goes is in a large part a function of how strong the economy is. If it stays at this very moderate growth level, that's positive. But we wouldn't necessarily see that loss rate go way down, given the continued high unemployment rate. But if we do enter into a very robust economic growth and see unemployment go way down, see loan growth go way up, then clearly, we could get a much lower rate. But a large part of it remains a function of the economy.

Just to follow up on that, obviously, the pipelines are strong. But are you sensing any incremental borrower caution or any potential changes in activity between now and the end of the year?

Yes, a little bit. This is Richard. I like to characterize things in quarters. So I think quarter 4 was a pretty strong ending as it related to our customers' sense of things. Quarter 1 remains strong for a quarter at the beginning of the year. And then quarter 2, I'd say the last month that quarter 2 started to taper off a bit in terms of appetite for risk. No surprise, but as you think about it, we're getting close to a number of moments. We're coming close to the election. We're coming closer to the fiscal cliff decision. We're certainly not getting better news from Europe as it relates to the confidence of our customers. And then the economy isn't strengthening. It's not falling apart, either. It's just not getting better. So I would say that we saw slight tempering in the end of quarter 2, and I think we'll continue to see that between now and the solution that is in the opting [ph] for any of those outcomes, particularly the election, the fiscal cliff, which at least have deadlines on them as we all know. For us, as it relates to our loan growth, we're 1.5% linked quarter in quarter 1, 1.9% for quarter 2. Our current forecast shows us pretty steady to that level where we've been right now. So I don’t think we're going to see a ramp up, but we're certainly not seeing things go backwards. But our customers' behavior, both on their continued decision to take on commitments that they are not using and their caution in not extending themselves in places that they're not comfortable continues to remain. And that story is kind of just more of the same, with a slightly negative bias to their confidence.

Your next question comes from the line of Scott Siefers, Sandler O'Neill. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: I guess a couple of questions. First just generally on mortgage. Another pretty strong quarter, and you guys obviously have beefed up in that business pretty considerably over last couple of years or few years. So just curious, anecdotally your thoughts on how long it can stay strong given the rate environment and any additional opportunities you might see there.

Yes. This is Rich. I'll go first. We know that this is an unsustainable moment in time because refis are so robust. They're about 2/3 of our originations right now. And with interest rates this low, they're not going to stay there forever. So we're going to continue to enjoy the benefits that accrue to a high-quality producer like we are with a good brand, and we're not going to withhold any opportunities that come along. But we're not building this church for Easter. There are number of things we're doing to make sure that we have the right people and the right processes in place. But we're also building with a certain level of temporariness as things will eventually start to flatten out. I think our market share will continue to grow as it has as much for our own efforts as it has been the changing in the marketplace. And I think in the future, say, 3 years forward, when there is a more normalized environment, we should have very significant market share of a more traditional new home market business for which we will build an infrastructure that can withstand that and grow with it but not put ourselves over our skis at moments like this, where it's probably not sustainable. I'll have Andy talk a little more about the margins we're getting right now. And you're right, the pipeline is strong in quarter 3. It looks a lot like quarter 2.

Right. So you know, as Richard mentioned, about 70% of our activity in the first quarter was refinancing, and that dropped to low 60s in the second quarter. Gain-on-sale margins fell a bit from about 2.30% to about 2.18% from quarter 1 and quarter 2. So our expectation for quarter 3 is a similar volume, perhaps a little bit of further pressure on gain-on-sale margins. And then again, fourth quarter is going to depend a little bit about where rates are at that time. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: Okay. It's helpful. I appreciate that. And I just wanted to ask another question. You guys are in the journal, I guess it was yesterday or today on that Los Angeles lawsuit. And you've talked about sort of the market confusion regarding being a trustee versus actually owning some places when these lawsuits come up. I was just curious if you had any thoughts on that most recent one?

Yes. I do. Besides the fact that I hate it, is the -- we don't own any of those properties. And it's a classic case of misinformation and the confusions created by the role of the trustee. The trust owns these RMBS. But in turn, they're owned by the investors, and we have a limited duty as a trustee. And in fact, we don't have any rights to go in and touch the properties. And while that doesn't pass the test in the public jury, it is accurate and it's the way the trustees were built. We have in this particular case since they had their bully pulpit yesterday for wholly incorrect information. I guess I have mine now to say that none of the information that they have provided was accurate. We've been working with them for 18 months to try to understand what they really wanted, and we're even willing, above the duties of our responsibility, to connect with the servicers and help try to figure out where these properties are falling into disrepair and to no avail. For the record, we have 46 of those properties in LA County, for which they were actually -- we can get our hands on, and U.S. Bank owns only 18 properties outright in the LA County that are foreclosed, and every single one of them, with pictures to evidence, are in good shape and in great repair. So we will continue to manage this through the courts and do our good duty of making sure that people understand the role of the trustee. But I think at this point, it's disappointing but it's not altogether surprising because, if it's not here, it's sometimes in bankruptcies or other places where the bank gets tagged as the owner or the creator of the problem, and we just have to go back through the right courses to explain our position. And usually we don’t have to do that after a press conference, but we will have to do that this time.

Your next question comes from the line of Ken Usdin, Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Richard, I was wondering if you give us a little more color on other parts of the loan book. I noticed that commercial mortgage grew a little faster this quarter. If you can walk us through that. And also your appetite for continuing to build the residential mortgage portfolio. I know it's a relatively still small percentage but just from an asset liability perspective, if you can give us some color on that.

Yes, a little color on all of it. So our loan growth in the C&I market business was actually strong, and I'm happy to report across the board 6% linked quarter, and it was all the way from small business, including SBA, up to middle-market and all the way up to large corporate. In terms of markets, we said last time and we'll say it again, we're not seeing a real distinction across geographies except in commercial real estate, where the coasts are stronger for reasons that make sense, I think, than some of the markets in the Midwest. Our investment in all these businesses can continue to be attractive to me because it's an opportunity for us to slightly and quietly move market share get opportunities with business with other customers we haven't had before it. Namely, on the more corporate side, I would say our growth is first and foremost, our own new marketing efforts and being more -- invited to more opportunities, including syndicated deals and now the chance with Capital Markets to lead many of those deals. Second in order would be our own customers giving us more of their business, and third, and probably the diminishing level from prior quarters, would be the benefit of the European banks starting to retreat. In the other parts of the market it's just old-fashioned market share and customers giving us more business. And in Commercial Real Estate, it happens to be a business we're very good at. We have, as you know, from stress test results to prior quarters review, we have a very good book and an amazingly strong team. So that probably is a place where without a European benefit so much, we've been getting invited to a lot more opportunities because I think we said no to a lot of people in the last cycle, and as much as they might have hated it then, they're back saying, "Look, you said no when it was easier to say yes and the fact is I suspect you're going to take care of me all the time because your best interest must be mine, so let's sit down and talk." And I'm going to continue to see growth in Commercial Real Estate, which is what I think you're seeing a bit latent. CRE is always late, last in and last out, and I think we're getting the benefit that we saw with C&I a couple of quarters later. So Bill, I'll stop there and turn it to you in terms of more color around the loan book.

Yes. In terms of the mortgage, obviously, there's not a lot of construction activity other than multifamily. We do have a fairly robust multifamily construction pipeline. But on the mortgage side, we have a lot of large institutional customers, a lot of REITs. There's been a lot of repositioning of Class A properties, and we're more than willing and able to provide financing to those institutional clients for that mortgage category. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. Got it. My second question, just to put it to the deposit side for a second. Continued good growth, and I'm just wondering, is it from new customer adds? Are you seeing any flight-to-quality benefit? And also just a little color on this broker/dealer list that you saw on the large time deposit category?

Yes. It's across all those categories. We're seeing good growth in our retail customer base across the branches and savings account principally. The DDA growth is principally driven by wholesale as well as our Corporate Trust business, which is a great source of DDA deposits. And we have a very robust broker/dealer group that will have fluctuations up and down. But from a core basis, in terms of long-standing deposits, those are growing across the board. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: And last little nitpicky one, just the professional services was up on some mortgage-related stuff that's been elevated in the past. Can you just explain that and then talk about like is this going to be just a continued kind of elevated type of expense that we're going to have to deal with just until all of the stuff is settled out?

Yes, Ken. So that is principally due to the mortgage consent order review that many banks are facing. It's a third-party review that's going on. It cost us just over $50 million in the second quarter. We would expect a similar level in the third quarter and then start to fall off in quarter 4 and going into 2013.

Your next question comes from the line of Greg Ketron, UBS.

Richard, maybe a question for you on the Visa MasterCard litigation and maybe your view on that. It looked like you have accrued some charges for the quarter. But maybe how the settlement plays out for U.S. Bancorp, especially given the fact there could have been a larger negative overhang as the year progressed. And now it looks like, for the most part, it has been resolved.

Yes. So I'll talk about a settlement that seemingly nobody likes. After 7 years, you would have thought we got that right. As you know, we are not a party to that directly, but we are influenced by the outcome. And in fact even if we were a party, we would have been allowing Visa and MasterCard to do our bidding. In this case, I think the settlement itself was acceptable because first and foremost, we have, like other banks, have a great deal of money reserved for this particular lawsuit for many years especially once they both became public companies. And that money for the most part was used for this and that's what we wanted it to be used for. The overhang of 10 basis points for 8 months, as you can see, we accrued for that, so that's now behind us. I do worry that it might pierce the veil in terms of what merchants will want to do on month 9. So I think we need to keep our eyes open and make sure that, that satisfies the Court's requirement. And we will also have 8 months to see whether that money actually does get passed along to consumers or to retailers or where it goes. And then probably the trump card, Greg, biggest issue is the surcharging and the permission now that's granted. As you know, AMEX doesn't have that opportunities. So it will be interesting to watch between those issuers, between MasterCard and Visa versus AMEX, how that plays out. And I do think it's very interesting and provocative to see what kind of actions the retailers will take because typically surcharging is a negative feeling and impact to consumers, and I would suspect that most of them probably won't jump on it. Lastly, and you know what I've read, but there -- it's not final. They still have an opt-out opportunity, so it'll be interesting if all the large merchants and some of the chains of, say, the fast food chains or the convenience store chains, all accept this or not because it may in part be just a starting point to the continuing saga that's now 7 years old. So I don’t expect it to be conclusive. I think we have a lot to watch. I actually appreciate the extra time we'll have even over the holidays to see how this all plays out. And it's not going to be hugely material to U.S. Bank. We're also an acquirer so at the end of the day, there is some counter hedging benefits to whatever the solution is. But I think it's a very instructive to watch. And it's very different than Durbin. It had nothing to do with congressional oversight. It had nothing to do with customers weighing in on it. This is a retailer versus card business, and I think it's got probably halfway through the game. We'll see how it goes in the next couple of months.

Great. I appreciate your insight. And Andy, on margin, when you look at the average cost of interest-bearing deposits, it was down about 43 basis points for the second quarter. Do you think there's appreciably more room to down price as we work our way through the rest of this year and into 2013?

Yes, Greg, there's some room. You think about that average, that includes some deposits that are very low. Some are between 3 and 5 basis points, and then some are well above the 40 basis points. And the opportunity would be for those set of deposits that are above 40, and we still have some room there.

Your next question comes from the line of Marty Mosby, Guggenheim.

I had a question -- 2 questions about this overall economic activity. If you're looking at -- just curious on Page 6. If you look at the deposit growth and you kind of work from third quarter to second quarter, we're seeing deposit growth go from 18% down to 10.5%. On the other side, you got loan growth growing up from 5% to almost 8%. So the gap between those, while we're not seeing a big shift in dollars, the growth rate gap is closing. That's gone from about 13% down to about 3%. And I just know given the kind of position you all have in the marketplace and the growth that you're seeing on the revenue side, do you think that this is related to kind of some underlying tones to the economic activities?

As we talked about, Marty, your observation is correct. The differential between loan growth and deposit growth is condensing so that they're almost at the same level now. So we are at the 1.09% and the 1.3% on a linked quarter, and in fact, flipping to loan growth being a little higher. So there was a period last year where there was very limited loan activity and tremendous deposit activity as particular corporations were building liquidity on their balance sheet, and effectively on our balance sheet. That seems to have slowed and sort of leveled out. So there's more of a balance right now, and that is sort of what we're anticipating going into the third quarter.

And so it's not really the quick shift that we've seen in the past but maybe there's a slow boil that's kind of going on underneath?

Yes. It isn't a massive change all in one quarter, but it is over many quarters shifting a little bit. That's correct.

Would you also say given your transaction processing business, what are you seeing in the activity levels there? Is it encouraging at all? Or is -- we had a nice uptick this quarter from seasonality, but how was that relative to your expectation?

I'd say that in terms of same-store sales, Marty, we have both a good view of the whole domestic market and even a little peek into Europe given our position over there. But year-over-year sales for our Elavon business was up 2.2% and primarily led by government, financials and apparel. Without the airlines, which is a huge portfolio for us, it's up almost 3%. On the negative side, furnishings, consumer purchases and entertainment were on the downside, are negative. So what you're seeing is I think the reduction of a long, torturously long recession with a slow recovery, where people are spending on what they have to spend on but they're probably still lagging on spending on the more discretionary benefit. And for us, the 2.2% year-over-year growth is pretty much what we thought it would be and expecting it to probably be settling into the summer months, somewhere in that same range, not getting much better, not getting much weaker. And consumers are less affected by those issues I mentioned earlier like the election and the fiscal cliff. But as we get closer to those points in time, for better or for worse, they'll start to become more engaged in that dialogue and their actions and behaviors may be affected by it. But for now, we think it's pretty steady state.

And just last question detail, you mentioned Visa accrual in a couple of places. In the press release, you say that noninterest expense was up $41 million primarily due to Visa. Can you -- what was the actual number for the Visa accrual this quarter?

$65 million.

Your next question comes from the line of Todd Hagerman, Sterne Agee. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Richard, I have a couple of questions just in terms of the loan growth. One, in terms of the Commercial Real Estate, and you specifically referenced the multifamily opportunity pipeline. But I'm curious obviously you have more room to grow that portfolio relative to the overall size. And I'm just curious as you think about your risk balance, if you will, how do I think about just kind of that risk balance and the ongoing growth in Commercial Real Estate, multifamily in particular, how much -- where are you in terms of pricing and kind of thoughts in terms of where you want that portfolio to go, all else being equal?

First of all, let me remind you that historically, gosh, you can go back probably a decade, we've always had a fairly large Commercial Real Estate book. So in any point in time, I'm not worried about the size of that as it compares to the size of our total assets. So we're comfortable with that because we're good at it. I have the same management team for 19 years running that business, and so I would take more opportunity, like you said. But let me jump on one thing -- multifamily. We're not always a bellwether, but we had a strong opinion 2 quarters ago, first part of the year. We felt new construction, strong as it is, is risky in overheated markets. And we've been actually walking away from deals in certain markets where we think that the total housing stock is going to be too high once you put the foreclosed properties back into the marketplace and you have what has yet to be built multifamily. So you might be disappointed or impressed, I don’t know which, but we're not engaging in some of those opportunities in overheated markets particularly like Boston and Chicago, but we just think it's just too risky. So we're passing on opportunities not because the credit quality doesn't look good today. We just think that the future as we see it isn't going to be strong enough to account for it. You've got other categories, though. New housing sales, we're at historic lows and we'll continue to be light, and we're going to continue to participate with the only high-quality national builders. Office buildings, new constructions continue to be limited. Vacancy rates in the big cities are about 15%, ranging from 7% to 20%. And major suburban markets were even worse, more…

No, I mean, This is Bill, no we -- short answer: no, we haven't changed our underwriting standards.

By the way -- by the way, anywhere. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: And then I'd just segue into the card portfolio. Again, stabilizing credit metrics over the last couple of quarters. If you could just kind of give us an update in terms of where you think that portfolio is headed at this point, if you're doing anything different from a marketing or point-of-sale customer contact position?

One of the efforts we have, which has been very successful, is telling through the branches. So we've -- obviously we've always had direct mail as a source, but we've made a point of improving our originations out of our retail branches. That gets a very high-quality customer, one that we can provide other products and services to. So that's one change we've really focused on, especially this year. And in terms of just the outlook, I mean, the credit conditions are obviously very favorable for cards right now. It's a competitive market, but the credit outlook is very strong.

And so -- this is Richard, but we're not going to go downstream on that line. We're not going to sub-prime or near prime. We're just not going to do that. And that's probably a lot of opportunity, and I'm not even saying those doing it are making a mistake, if they get paid for. We're simply going to stay in the very prime and, as much as we can, customer-generated business, where we know our customer and that we believe that they would think that relationship is strong enough to make it first among few to be paid back. So I see it as a growth business. Our group is very good at it. We'll continue to extract more opportunity from the customers we have, but I'm not going to go into an underwriting game here to try to improve the volume. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Yes. The point that I was just trying to make was you're kind of within your normalized band now today. I'm just kind of more curious in terms of do you see more the growth opportunities staying within that band?

Yes. And so I think the answer is, within that band, yes, but not to extend the band to get more.

Your next question comes from the line of Nancy Bush, NAB Research.

Sort of a big question for you. I don't know if you listened to the Bernanke testimony yesterday. But one of the senators went through this long litany of evil deeds associated with the banking industry, including LIBOR and blowing up hedges and everything else, many of which are not directly applicable to you but unfortunately your company gets caught in that same web. But I think more ominously, we're hearing from a lot of investors who are just looking at the returns from the banking industry over not just the past several years but a very long term and just saying, you know what, the returns haven't been there. How do you remedy this? And how do you get your company out of this? "It's a bank, therefore, I don’t want to invest in it" kind of psychology that seems to be developing pretty quickly here?

Yes. That's a big question. And I saw parts of the testimony. If there was a long rambling senator, I probably checked out. But I will tell you the way for us to tell the story for U.S. Bank and it does derive to the entire industry eventually, but the thing you got to love about a bank, and you hate about a bank, but you love that it's an annuity, technically and literally an annuity. And unless you have big surprises, which what we're dealing with in the last couple of years, you really can pretty much bank on it, pun intended. But you know this. I mean, you've got -- you can't kill it and you can't change its course very quickly because the loan book and the deposit book move fairly slowly. But first of all you've got to ring-fence the risk and describe to your investors what those risks might be and convince them in a way you didn't used to that you have your handle on the risk and that you're not willing to take additional risks for rewards that are unsustainable. The second thing for the U.S. Bank story, and I'm preaching to the choir here, is that the derivative of our income, 50% or thereabouts, is coming from fee businesses like trusts and like payment businesses, also serves as kind of a buffer against the vagaries of interest rates and market perception. We hear only have half as much about what Bernanke is thinking about interest rates as somebody else because while they're all affected by the economy, you and I both know we have these other cylinders that provide us with this fee business, which is less consistent but also has a whole lot less variability. So ours is to tell the…

Yes. This story that's in L.A. is sort of demonstrative that it's nebulous, it's not true, but these municipalities feel that they can throw that out there and get some bucks in turn from some settlement somewhere. And as we look at the Wells Fargo settlement, we see that actually does work. I mean, how long do you think it's going to take this stuff, specifically around your company, to go away? Is it just a residual of the housing crisis and when the housing crisis turns, that kind of stuff finally goes away?

I think the housing crisis is the original issue, but let's agree that it's basically an economy. So the weak economy causes the City of LA to have a city attorney looking for places to raise up revenue. And what they're asking us to do there is change the legal bounds upon which a trustee's responsibility because they can get to the original servicers. So the housing is the reason for the topic, and frankly, people forget that there are 3 places where people own houses. There are the GSEs, by far the majority. There are the banks that own them outright, which people spent all their time on. And then there's this private group of trusts that own the RMBSs, and no one can get to them. And there's no construct to get that group together. It's like a bad co-op getting together for their annual meeting in Apartment 16B. I mean, you can't get them together to identify where they can agree to reduce the value of their trusts in order to get the houses onto the market. So they're going to go through another door. I should only hope that it doesn't impede the original goal of the trustee because if the changes the rules of what that means, then I don't know that anybody would want to be a trustee if all the responsibility falls to them eventually through some eyes of the law, and so far that hasn't happened. But I think answering your question I think as long as the economy is weak, everybody, everywhere will seek a place where there might be a deeper pocket to try to find an opportunity, even if it's not legal, to raise the specter of question and try to find some opportunity. I'm not a settler, I don't like to settle much at all because I think right is right and I'm a fairness doctrine guy. At the end of the day, I'll settle if it's better for my shareholders, but not at all in the first, second or third pass because it's just wrong if it's not right. And so we'll hold on a little longer to make sure we get treated fairly at the end of the day. We'll do what's right at the end. I'll tell you, Nancy, this a multiyear issue, and we'll probably face this and many others we haven't heard from yet as an industry for the next couple until the economy is assuredly on its feet and doing well again.

Your next question comes from the line of Mike Mayo, CLSA. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: I think you've talked some about the interest rate environment but you could elaborate more? How much more negative impact could there be if rates stay at these unexpectedly low levels.

Well, Mike, this is Andy. We're expecting them to stay at this level for the rest of the year certainly, and that is the environment for which we're projecting relatively stable net interest margin because again, the headwind of the reinvestment risk on the securities portfolio is essentially offset by the opportunity on the reestablishment of our debt at a lower cost. And those 2 things right now as far as we can see the rest of this year stabilize our margin to today's levels. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: But more generally, if over the next 3 years we have the rate curve the way it is today, are you half done with the pain or you expect a lot more pain for you or for the industry? Because one bank yesterday said, well, it's all done. It's all in the numbers and these low rates shouldn't hurt anymore. Whereas I thought you gave one presentation saying, oh no, it could actually hurt some.

Yes. So Mike, for the rest of the year, again, it's stable. If this exact rate environment went into next year I think for us and for industry, it will be a little bit of a negative bias because the yield curve is relatively flat. Low rates are at the low, and the short end rates are as low as they're going to go. And we are, as you know, positively biased to an increase in rates. We're asset-sensitive, so we would benefit from an increase in rates or a steeper yield curve. I don’t think it's material next year if it stays at the current level, but there's a negative bias. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: And longer term, you go 2 or 3 years out?

I would have the same answer. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: So not material, though?

Continued negative bias but not hugely material. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: And then separately, as far as acquisitions, what's your appetite? One thing you can do on an environment with some revenue headwinds is cut more costs or buy other banks. Where do you stand on that?

Well, we always look at opportunities that are presented. I will tell you that right now it's a fairly quiet environment in terms of M&A. There isn't a lot of activity going on from the traditional bank standpoint. What you've seen us in the past look at are small corporate trust transactions, payments transactions, that's both on a merchant acquiring side as well as the card issuing side, and those types of things are always in the works. None of them are huge and material, but those are the types of things we're focused on.

And Mike, we have all the powder we need, both time, energy and capital, if we want to go after something. So it's not an issue of not wanting to. We just don't have anything that's out there we like. And we look at a lot of things and turn them down because the price points aren't very attractive. I think you'll see between now and the end of the year a number of payments and/or corporate trust deals that won't register at headline level but they'll continue to be the calling together of opportunity that we think present itself for scale and/or efficiency in markets and we're going to continue to deliver those to you all. But in terms, as Andy said, of traditional bank deals, they're simply not out there at the level we like and we're not reaching for them because we don't need them.

Your next question comes from the line of David George, Baird. David A. George - Robert W. Baird & Co. Incorporated, Research Division: Question on capital. You bought back looks like 13 million shares. You returned over 50% again of your earnings to shareholders on the quarter. I notice you released kind of your estimate of the new Basel guidelines at 7.9%, using that math. Does that make you think any differently about buybacks? Are you -- does that change your view on returning capital near term?

Sure. This is Andy. We, as you know, the new rules came out in June 7. On June 7, as we worked through the new rules, we paused our buybacks for the remainder of the second quarter. The new rules resulted in about a 7% increase in our risk-weighted assets. We are bound by the standardized approach because our capital ratios would actually be better or higher under the advanced approaches. So we're bound by the standardized. We -- as you also -- as we also talked about, moved about $12 billion from available-for-sale to held-to-maturity in our securities portfolio because we intend to hold those securities and because it reduces the volatility. So given all that, our target capital ratio under the new calculation is approximately 8%. And as you mentioned, we're at 7.9%, so we expect to be there in the third quarter and expect to continue to go back to the buyback program in the third quarter.

So let me -- this is Richard. Let me just make it easier. I'll do the math for you. Last quarter, we're at 8.4% Tier 1 under Basel III, and we've stated our goal of 8.15%. That 8.15% was 7 plus 0.5 for a buffer for domestic SIFI, which we have no guidance for, and 0.65 for just other buffers. Based on the actions that Andy just talked about, we think that the OCI volatility is lower. So we're bringing that 8.15% down to 8%, which is 0.5 and 0.5. And we're now at 7.9% under the new rules. So we went from 8.4% compared to 8.15%. Now we're at 7.9% compared to 8%. And based on your question and his answer, we'll accrete back to 8% very quickly in this quarter, and then we'll continue our way.

And your final question comes from the line of Paul Miller, FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: I want to go back to the again your average balance sheet on your NIM. And I think one of the first questions you talked about -- somebody asked a question about how much borrowings you got repricing. Are they short-term borrowings or long-term borrowings that are repricing?

Yes, It's a combination of both, Paul, and it's about $6.5 billion that is going to mature. So it's not repricing. It's maturing third quarter that will be replaced by either other issued debt or deposits. Paul J. Miller - FBR Capital Markets & Co., Research Division: And then on your time deposits, you have $14 billion that same relatively consistent. My guess is most of that is a 1-year paper. Is that repricing also and what type of level are they repricing at?

Yes. So I would say our deposit balances in total, including those time deposits that you're referring to, are repricing, but the differential on what's coming on versus what's coming off is not as dramatic as the debt side of the equation. Paul J. Miller - FBR Capital Markets & Co., Research Division: So you have CDs that you're repricing above 1%?

We have either the differential between what's coming off and on is not nearly the same again as what the debt differential is. And that's why we focused on that because that debt differential is the big tailwind [indiscernible] on the securities. That's right. Paul J. Miller - FBR Capital Markets & Co., Research Division: Okay. And then on the security portfolio, did you guys disclose, if you did, because I've been jumping all around today, what type of CPR rates you were seeing on those portfolios?

We did not, and it hasn't changed dramatically. We have a little bit higher prepayments because of the rate environment, but it wasn't a dramatic change from where it has been the last few quarters. Paul J. Miller - FBR Capital Markets & Co., Research Division: And your duration. I think you said it's short-term. But have you disclosed what it is? I think it's -- is it around 3 years?

It's under that number. What we're putting on, what the duration of -- what the average life of the book is stated in our Q. The duration is in that 2-year neighborhood.

And at this time there are no further questions. I'd like to turn the conference back over to you for closing remarks.

Good, thank you, Holly, and thank you all for listening to our results. If you have any follow-up questions, as usual, feel free to call. And we will talk to you next quarter. Thank you.

Thank you for your participation on today's conference call. You may now disconnect.