U.S. Bancorp (USB) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the U.S. Bancorp's First Quarter 2015 Earnings Conference Call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer, and Kathy Rogers, U.S. Bancorp's Vice Chairman and Chief Operating Officer, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately noon Eastern Standard Time through Wednesday, April 22 at 12:00 midnight Eastern Standard Time. I will now turn the conference call over to Sean O'Connor, Director of Investor Relations for U.S. Bancorp.

Thank you, Kalia, and good morning to everyone who has joined our call. Richard Davis, Kathy Rogers, Andy Cecere, and Bill Parker are here with me today. Richard and Kathy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Richard.

Thank you, Sean, and good morning everyone. It's great to be here and to talk about U.S. Bancorp. I want to begin our review with the results of the summary of the quarterly highlights on Page 3 of the presentation. U.S. Bank reported net income of $1.4 billion for the first quarter of 2015 or $0.76 per diluted common share, a 4.1% year-over-year. Total average loans grew 5.1% year-over-year and 0.8% linked-quarter excluding the impact of the reclassification of certain municipal loans to securities at the end of the fourth quarter. In addition, we continue to experience strong loan growth and total average deposits. Strong growth in total average deposits of 8.1% over the prior year, and 1.1% linked-quarter. The strongest first quarter deposit growth we've seen in several years. Credit quality remains strong. Total net charge-offs decreased by 18.2% from the prior year and declined 9.4% from the prior quarter. Total nonperforming assets declined compared to both the prior year by quarter and on a linked-quarter basis. We continue to generate significant capital this quarter. Our common tier one capital ratio estimated for the Basel III standardized approach as fully implemented was 9.2% at March 31. We repurchased 12 million shares of common stocks during the first quarter which along with our dividend resulted in a 70% return of earnings to our shareholders in the first quarter. Slide 4 provides you with a five-quarter history of our performance metrics, and they continue to be among the best in the industry. Return on average assets in the first quarter was 1.44% and return on average common equity was 14.1%. Moving over to the graph on the right, you can see that this quarter's net interest margin was 3.08%. Kathy will discuss the margin in more detail in just a few minutes. Our efficiency ratio for the first quarter was 54.3% equal to the prior quarter. We expect this ratio to decline and remain in the low 50s going forward as we continue to manage expenses in relation to revenue trends while continuing to invest in and grow our businesses. Turning to Slide 5, the Company reported total net revenue in the first quarter of $4.9 billion, a 1.9% increase from the prior year. The increase was due to the higher net interest income as well as higher revenue in most fee businesses partially offset by lower loan fees due to the previously discussed wind-down of Checking Account Advance. Average loan and deposit growth is summarized on Slide 6. Average total loans outstanding increased by $12 billion or 5.1% year-over-year and 0.8% linked-quarter excluding the impact of reclassification of certain municipal loans to securities at the end of the fourth quarter. Average total loans grew by 0.6% linked-quarter on a reported basis. Again this quarter, the increase in average loans outstanding was led by strong growth in average total commercial loans, which grew by 15.1% year-over-year and 2.4% over the prior quarter. Residential real estate loans were relatively flat year-over-year and declined modestly on a linked-quarter basis. Average credit card loans increased 2.4% year-over-year and were seasonally lower on a linked-quarter basis. Total other retail loans grew 3.5% year-over-year and 0.4% over the prior quarter, mainly driven by steady growth in auto loans. We continue to originate and renew loans and lines for our customers. New originations excluding mortgage production plus new and renewed commitments totaled approximately $38 billion in the first quarter. Total average revolving commercial and commercial real estate commitments continue to grow at a fast pace, increasing year-over-year by 11.7% and 1.9% on a linked-quarter basis. Line utilization was relatively flat in the first quarter. Total average deposits increased almost $21 billion or 8.1% over the same quarter of last year and 1.1% over the previous quarter. Excluding the Charter One acquisition, the growth rate remained strong at 6.4% on a year-over-year basis. Growth in low-cost interest checking, money market and savings deposits was particularly strong on a year-over-year basis. Turning to Slide 7 and credit quality. Total net charge-offs declined 9.4% on a linked-quarter basis and 18.2% on a year-over-year basis. The ratio of net charge-offs to average loans outstanding was 0.46% in the first quarter. Nonperforming assets decreased by 6.2% on a linked-quarter basis and 15.2% from the first quarter of last year. During the first quarter, we released $15 million of reserves, $5 million less than the fourth quarter of 2014 and $20 million less than the first quarter of 2014. Given the mix and quality of our portfolio, we currently expect the total nonperforming assets to remain relatively stable in the second quarter of 2015. While we expect the level of net charge-offs to increase modestly in the second quarter mainly due to lower expected recoveries. Kathy will now give you a few more details of our first quarter results.

Thanks Richard. I’ll turn you to Slide 8. This gives you a view of our first quarter 2015 results versus comparable time periods. Our diluted EPS of $0.76 was 4.1% higher than the first quarter of 2014 and 3.8% lower than the prior quarter. The key drivers of the Company's first quarter earnings are summarized on Slide 9. The $34 million or 2.4% increase in income year-over-year was principally due to an increase in total net revenue, driven by increases in net interest income, and fee-based revenue and a decline in the provision for credit losses partially offset by an increase in noninterest expense. Net interest income was up 1.7% year-over-year, as an increase in average earning assets was partially offset by a lower net interest margin including lower loan fees. Approximately $50 million of the reduction in loan fees was due to the previously discussed wind-down of our Checking Account Advance, our short-term small-dollar deposit advanced product. The $34.6 million increase in average earning assets year-over-year included growth in average total loans as well as planned increases in the securities portfolio. Also at the end of the first quarter approximately $3 billion of student loans were transferred from the loan portfolio to loans held for sale. The net interest margin of 3.08% was 27 basis points lower than the first quarter of 2014. This is primarily due to the growth in the investment portfolio at lower average rates as well as lower reinvestment rates on investment security. Lower loan fees and lower rates on new loans and the change in loan portfolio mix which is partially offset by lower funding cost. Noninterest income increased $46 million or 2.2% year-over-year due to higher revenue in most fee businesses. We saw growth in retail payments, trust and investment management fees, deposit service charges, treasury management fees, investment product fees, mortgage banking and other income which was driven by higher equity investment gains. Merchant processing revenue were relatively flat on a year-over-year basis was negatively impacted by foreign currency rate changes. Excluding this impact, merchant processing fees grew approximately 5.5% on a year-over-year basis. Noninterest expense income increased year-over-year by $121 million or 4.8%. The increase is primarily the result of higher compensation and benefits expense and higher other expense. The increase in compensation expense is primarily the result of the impact of merit increases, acquisitions, higher staffing for risk and compliance activities and the variable costs related to higher mortgage production volumes increased benefits expenses due to higher pension costs of about $25 million for the quarter. Other expense is higher primarily due to mortgage servicing related activities. On a linked-quarter basis, net income was lower by $57 million or 3.8% mainly due to lower net interest income and seasonally lower fee based revenue partially offset by a decrease in noninterest expense. Net interest income was lower due to the impact of two fewer days in the quarter and a lower net interest margin. The net interest margin of 3.08% was 6 basis points lower than the fourth quarter. The 6 basis points decline includes approximately 2 basis points related to the unusually high interest recoveries in the fourth quarter which as you recall we discussed at the earnings call in January. Higher interest recoveries continued in the first quarter benefiting net interest income by approximately 1 basis point. The remaining decline in net interest income was principally due to growth in lower rate investment securities and lower reinvestment rates, lower rates on new loans and a change in the loan portfolio mix, along with the impact of higher cash balances at the Federal Reserve as a result of continued deposit growth, which as Richard mentioned was exceptionally strong in the first quarter. On a linked quarter basis, noninterest income was lower by $216 million or 9.1%. This variance is principally due to seasonally lower fee revenue in the fourth quarter 2014 gain. On a linked quarter basis, noninterest expense decreased by $139 million or 5.0%. The decrease is due to seasonally lower costs related to investments in tax advantage projects, the impact of the notable fourth quarter 2014 charitable contribution and legal accruals and lower marketing and business development expenses. Professional services also declined due to seasonally lower expend in many of our businesses. Partially offsetting these reductions were higher compensation and benefits expense due to increased pension costs, seasonally higher payroll taxes and increases in variable compensation related to higher mortgage volumes. Turning now to slide 10, our capital position is strong. Our common equity Tier 1 capital ratio estimated using the Basel III standardized approach as is fully implemented at March 31 was 9.2%. At 9.2%, we are well above the 7% Basel III minimum requirement. Our tangible book value per share rose to $16.50 at March 31, representing a 10.1% increase over the same quarter of last year and a 3.4% increase over the prior quarter. Our return on tangible common equity was 19% for the first quarter. In March we received the results of the 2015 comprehensive capital assessment and review or the CCAR including the Federal Reserve's non-objection to our capital plan. Subsequently we announced our new five quarter buyback authorization totaling approximately $3 billion effective April 1, and our intension to recommend to our board of directors the 4.1% increase in our common stock dividend beginning with the second quarter dividend payable in July. I will now turn the call back to Richard.

Thanks Kathy. Turning to slide 12, you'll see the cover of our 2014 Annual report and you've seen the power of potential. At U.S. Bank we stand at the intersection of people and potential each and every day and we're privileged to serve as the caveats for all of our customers whether consumer, small business, wholesale or institutional to assist them by providing the financial tools and resources they need to achieve their full potential. This positions us well for growth as our customers seek a strong banking partner to help them as they pursue their goals. Next week we will be holding our Annual Shareholder Meeting in Louisville, Kentucky. I look forward to telling our shareholders of how proud I am of what we've accomplished and of the 67,000 remarkable and engaged employees that have contributed to our success. We remain focused on producing consistent, predictable and repeatable financial results for the benefit of our shareholders. That concludes our formal remarks. Andy, Kathy, Bill and I would now be happy to answer your questions.

[Operator Instructions] Your first question comes from the line of Jon Arfstrom of RBC Capital Markets.

Thanks, good morning guys, good morning Kathy. Richard, maybe start with this -- just your view on the state of the economy. You talked a little bit about your position for growth when the economy gains momentum. Curious, are you still as optimistic as you've been in previous quarters? Do you feel like the economy is gaining momentum? And then maybe update us on your loan growth outlook?

Yes, I will, thanks Jon. I remain very optimistic for the economy and for the great citizens of America, a little less optimistic for the bankers until the interest rates start to move up. So if you think about it, consumer confidence continues to move up and particularly small business. Even corporate confidence continues to move up, but part of that confidence is found in their ability to operate more effectively during their day with more money in the bank, more of a reserve and their lines that they've got a back stop of equity in their homes and the belief that right now they don’t need to be indebted. So for bankers that might not be as positive as for consumers and for businesses, but it does reveal itself as people husband in cash and feel but better about their situation they did a few years ago. As rates start to move up, I'm still convinced of two things. One will be that when there is a real sense that's about to happen there will be a tsunami effect, particularly on the corporate and wholesale side that people want to lock down low rates before they finally get stuck having missed that opportunity. And I think consumers will move from those who have here to who have been saving looking for some money, now they'll start making some real money in their savings accounts and their endowments and their long term trust and I do expect people to start using their lines of credit again feeling the strength of an economy and a higher wage that will come with it. So I'm super optimistic about how things are moving. They are slow but steady, but they'll continue to move forward. But I do think until rates move up it continues to impinge the ability for banks to be particularly as financially successful as they will be when things get better. As it relates to loan growth we were at 0.8% this year if you adjust for a little bit of noise and that's outside of our normal range of 1 to 1.5% on a linked quarter basis which is about 5% to 6% annualized number. We're looking to get back into that 1 to 1.5% in quarter two as we look into this 15 days into the second quarter. I'm also hopeful that as the year ages we'll see those increases a little higher to the ranges we were used to at the 1.5% to 2%. So I'm starting to stick with our hope that we can get in the 6% range for loan growth on a year-over-year basis by year's end. But for now the 0.8% for me is a little disappointing because I really want to stay in that 1 to 1.5% range, but for you as an investor make it certain that we're not going to stretch on any kind of credit quality in order to accomplish those numbers until which time it is more natural and the customers that we serve have the need for their loans. So, I'm quite optimistic and yet a little bit hesitant until rates start to move.

Okay, good. That's helpful. And then just maybe a quick one for Bill. I know it's a small number, but the incremental provision in energy, can you maybe just give us an update of what you did and what your expectations are and maybe size the exposure for us?

Sure, so the energy loans are about 1.2 times of our total loans and the part of that portfolio that is most directly impacted by the lower oil prices is the E&P portfolio. It is roughly two thirds of that. We have now run through that entire book with the new pricings back reflecting the much lower forecast obviously on oil. And we have adjusted the ratings accordingly on that book and we did take an incremental reserve at the end of the year we've adjusted that now that we accomplished this on a loan by loan basis. It all adds up to something that's really not that material in terms of our $4 plus billion loan reserve, but it's all baked in now and we've done all the analysis and we update that pricing back at least two times a year. So if we need to do it again we will.

Good that's helpful. Thank you.

Your next question comes from the line of Betsy Graseck of Morgan Stanley Q - Betsy Graseck Hi, good morning. How are you doing? A couple of questions. One is just on investing in your people in an environment where rates are low and the loan growth is solid, but not accelerating too much. I am just asking the question with regard to how you are considering allocating resources to drive top-line growth. And is there opportunity to pull back maybe on some of the non-client facing related areas to be able to put more feet on the Street?

On personnel I wish, but no. We're not going to be able to slow down our incremental adds for first, second and third line of defense as we call it, but some plans in audit, that's just a new world and even if thought we had everything right I'd still keep that one there double triple check that we are still doing things well. So, that has been the only place we've increased our FTE since I told you I think many times last year that in the middle of February of 2014. So that's now 14 months ago, we asked the employees but for those in the compliance areas to stay at their FTE level for all intents and purposes and to manage at a higher expected performance per person. So that's not hiring freeze because there is a lot of turnover and when people do have 964 FTE in your group you can still have 964, but it does encourage you to manage the bottom performers out more swiftly and to increase the quality of the 964 people that work for you and that's where we are Betsy. I'm not going to do a reduction in force. We've hung on here for eight years and done quite well. Our engagement I believe to be at the highest level it has ever been and I believe that the employees are deeply engaged. They'll perform remarkably well for customers and shareholders will get their benefits. So I don’t want to mess with that formula, but I am asking everyone here to work harder, I'm working harder and we are asking everyone to appreciate the fact that protecting all of our current positions by performance is really the way to manage through these difficult times. So that as the backdrop you'll see that our operating leverage was as you know negative for quarter one, both on a linked quarter and year-over-year basis. And as we put the plan together, we as I said always seek positive operating leverage. And our plan for 2015 is for the year to be slightly positive. I will say however, that hinged the original expectation that interest rates will start moving up at midyear and based on our stress test and the prevailing views of economists a couple of months ago, if that doesn't happen in June then it is going to put some stress on our ability to be positively operating leverage. I will tell you this though, in almost any circumstance quarter one at 54.3% operating leverage will be our highest quarter or in this case our least attractive quarter of the four and I think you'll see that as the quarters age, we'll get smarter and better at managing our expenses as revenue starts to move up. But it's anything else I'll just close by saying I'm on a lag basis, I've got to see revenue move up sustainably and consistently for long enough before we start to increase any expenses. In the meantime we will delivery with the same people working as hard as they do to deliver a little bit more each time and will manage the quality of our FTEs at the highest level at this point where I think we're selling attractive employer and we can get some really good people from different places to accompany those who are here.

And so if there is a push out in the rate hike you counter that with employee?

Yes I do and again being very clear that could put a pressure on our full year positive operating leverage, it could make it slightly negative and slightly positive because we were counting on that. But it is not enough of a difference and it doesn’t change. I don’t think you always trust in the way we manage the company to cause me to want to start laying people off for doing something more draconian because it is not an if, it is a win for different interest rates and when that happens I will be very glad we have the quality of people we have ready to jump on whatever opportunities come along.

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

We did.

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

So let me turn that over to the Chief Operating Officer. Andy is going to give you an update there.

Good morning Betsy. No, there is no change in our strategy. We have a good place in terms of market share and capabilities and our platform and merchants, expansion outside of the U.S., all those things are going well and we continue in that focus. Our card issuing is doing also very well, we're growing in regard to the activity our branch activity is also increasing. And finally our corporate card is doing well. So I don’t see any change in direction. Corporate card was impacted this quarter by a lower fuel price, which impacts our fleet business and that was one of the big anchors this quarter in terms of our year-over-year growth. The other phenomenon that we did see this quarter was corporate spend and payables is down, which again probably reflects to what Richard spoke to, which is just a general careful attitude in terms of large companies and payables for corporate spend was perhaps 1% up where in a normal period it would be up 5% to 6%.

I will just add too. Pam Joseph is staying all the way through June 30, so she and Shailesh Kotwal will have, almost four months of overlap, which we are going to take every day of because Pam’s done a remarkable job. Shailesh was attracted to us in a number of ways, and not least to which is his international experience. And we’ll continue to follow as Pam started this march across the pond to increase the exposure we have in the European markets and eventually looking at other places in the world for our merchant acquiring. But he is going to be a perfect transition and the two of them have already established I think a great report to carry on with second quarter. And we’ll make sure you all get a chance to meet him in future meetings because I think you’ll want to hear him directly and get a chance to understand his thoughts.

Appreciate that. Thanks.

Your next question comes from the line of John Pancari of Evercore ISI.

Just want to ask a little bit more around loan growth, just want to see if you can give us a little bit more color on trends in the first quarter, particularly around Commercial Real Estate, as I know it was particularly weak in the quarter, and what may have impacted that. And then secondarily, how do you get back to that 1% to 1.5% range that you indicated for next quarter? Is it just the snapback in something that was abnormally weak this quarter? Thanks.

Thanks John. I'll start and then Andy add some color. First of all, one of the way is out of the point into 1% to 1.5% is getting out of quarter one. So that’s how we’ve done already in April it’s part of that we’re seasonally affected company particularly such a heavy Midwest influence, which include some of the weather. So that helps a lot, that's part of it. Commercial real estate was actually pretty strong for us so I’m not sure what numbers you are looking at, but I’ll give you the trend in commercial real estate is very consistent we call this mild but it’s East and the West Coast and Texas. And that’s where most of the activity for growth is coming for at least our customers. The development activity per se is in the bigger cities West Coast, Seattle, San Francisco, LA Orange County and you got Miami, Boston, New York. So in the places you would expect and a couple of years ago on this call John, I indicated that we had done a study of total on housing availability once and when people moved out of their parents basements and when the housing stock of foreclosures came back into the normal course. And there were couple of markets that we actually stayed away from for a while, I think that they might be over built. We're not seeing that right now it seems that things are settling the cognizant floor to recover people have been more thoughtful about building in the right places. So I’m not that concerned about that I was a couple of years ago. And then finally construction lending is highest for apartment, office space, and some lodging properties, which continue to find their way into popup all across the country as people start traveling again. So for me I think commercial real estate continue to be a strong point for us. Our quality is remarkably high, because we only deal with the very large national customers for the most part and we’re going to stick to that approach as it served us well. And then I’ll just close by saying our loan growth continues to be really strong in commercial and wholesale, which you’ve seen before the 15.1% year-over-year growth. Our commitments are even higher so that bodes well for one and when people start using those commitment. That will start to have a nice increase and anytime that happens that’s going to be too far, because we’ll start talking future quarters about loan growth being remarkably higher than anything in the last few years and part of all just be line usage. So those of us who are collecting customers which lines that they’re not using are still doing a good job of developing a future core outstanding once and when people draw and then. So Andy why don’t you bring some color around [indiscernible].

So to your point commercial wholesale real estate was very strong, commercial corporate up 15%, real estate up 6% year-over-year. The area that is not growing is rapidly is our real estate residential real estate, which is relatively flat. And what’s going to drive that growth is going to be our home equity increases. We do see increases in pipeline line of credit, home equity line of credit and in residential real estate. And I think as you go throughout the year, we’ll see an increase in that category, which will help the overall loan growth numbers.

Okay, I guess I was looking at the Commercial Real Estate GAAP line item on the consolidated balance sheet going from 42.8 to 42.4. That was primarily what I was calling out in terms of it appeared to pull back a little bit.

That might be - John that might be as are you looking at the end of period versus the average growth?

Yes.

Yes. And I think that at any given day you might have a little bit of fluctuations in what pay downs and new loans coming on. So we really focus on average loan growth.

Okay.

So let's get up for John, John got the longest pause we've ever have. We are never stopped our bank, so John congratulations and it’s been something for that.

I figured I would let it sit just to see.

It’s like forever transcript so read you may reply.

Right, adds a little suspense to the call, you know. Okay, and then lastly, just back to energy. I know it's a small piece of your book, but just want to clarify something. Did you quantify the size of the reserve or size of the provision that you took? And then what is the size of your energy reserve as of today as a percentage of loans?

Yes. We haven’t disclosed that. I mean as I said, I mean the total loan book is about $3.3 billion and about 60% of that is the E&P portfolio, which is the area most directly impacted.

Exploration and production.

Yes, exploration and production. So all re-rated, it’s - the impact is in the numbers, but no we have not disclosed the actual dollar amount.

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

Got it, okay. Thank you.

Your next question comes from the line of Scott Siefers of Sandler O'Neill.

Just had a question on the margin and just sort of future directions there. I think all the big pressure seems pretty much behind you with concession of the deposit advance product and then you are pretty much all set with liquidity build for LCR. So at this point I imagine it's just normal spread compression, maybe to the tune of 3 or 4 basis points a quarter. Is that a fair way to think about margin erosion as we stay in this kind of sustained low rate environment?

Yes, Scott, I’ll take that. Here is what I would say, as we look out into quarter two I think you are absolutely right that we’ll continue to see margin erosion related to the mix of our growth. So we're more heavily weighted right now on wholesale versus retail so I’d expect that to come down 2 to 3 basis points. We also, as we think about our investment portfolio, while we’re done with the build, we still have run off in that portfolio of about $2 billion a month, which is now coming on at lower rate. So the reinvestment aspect of that is also worth a couple basis points and then as we talked about earlier our deposits are really strong. And while that is positive from a net interest income standpoint, I do think that that potentially has the possibility of having a negative impact on our margin as we look out into the next quarter of a basis point or so.

Okay. So maybe somewhere in mid sort of mid-single digits per quarter kind of compression range?

That's about right. We’re seeing something a little new, because we didn’t expect as rates keep staying flat as long as they have we actually do out this reinvestment risk I mean stuff we put out anyone in the last seven years some of that much left in seven year tenures coming due and it’s coming in lower than it was before. So when rates move about just so many things start to get better and things that we're about to be tough stop being tough and never mind when rates move up we have this wonderful benefit from some of the trust businesses that we have always been paying out to what’s to our negative waivers. So it’s just so many things we’ll start to improve, but I would say there’s another basis point or two of added risk with rate staying a little longer on this reinvestment that we haven’t talked about in addition to the mix. So Scott, it’s but it’s exactly we telegraph before.

Yes, okay. All right. That sounds good. Thank you very much.

The next question comes from the line of Erika Najarian of Bank of America/Merrill Lynch.

Good morning. My question is probably top of mind for most investors in that it seems like some of the assumptions even from three months ago on rates for most banks on normalizing interest rates have been pushed out. And we are sort of at the level of provision and charge-offs where even if you stay pristine you can have volatility in any one quarter. I guess the question here, Richard, is: what is your view in terms of the timing of when normalized rates could converge relative to normalized credit, knowing that it's the normalized credit that is likely under your control or that you have a better viewpoint on?

Yeah, again and I agree that will being you said. Investors do want to know, we all do and I’ll say, we use to prevailing view of the general economic forecast, which I think we all agreed particularly a few months ago we're starting in June one of four interest rate increases June, July, September, December and I think we’re now getting a telegraph to this could start later its more like September and less frequent may be two times instead of four. What's most important is that starts off, I can tell that’s really more important than the, the number of times that it occurs and I think that starting point as I referenced few minutes ago will be little bit of a tsunami effect of people spending and taking uses of credit and taking credit lines and walking down interest rates, for so for me there will be a little bit of blip, they feel number of cash per clients is may be the same store I think in the wholesale side. I will say they’ve also telegraphed, the way it works for bankers that people were use their deposits first to invest in their life, then they use the line of credit, they have established whether they have anything else turning around it call it a house or call it a wholesale line of credit then they’ll extend more credit, so it does have to go through those steps like like Maslow's hierarchy. So banks have to have deposits -- should see deposits flow and deposits go down and lot of you have been asking as about our stress testing and volatility of deposits out running out. Second then lines of credit will go up and the new lines from loans will be formed. So even when it starts Erika, it will take a little bit of time but once it starts we can see a better predictability around it because we haven’t be able to show you guys what we used to do, seven, eight years ago when rates moved, we haven’t pretty high correlation of behaviors would occur and what kind of margins impacts it would be. So for me, I think we’re going to say that as the economy gets stronger, what kind of that interlude work stronger for everybody else but banks don’t have particularly have this an important need in the minds of consumers and businesses as it starts to get very strong in rates move up because its stronger, we’ll start getting a lot of benefits on the income statement and the balance sheet will start to move from deposits over the loan and that will start to get a much more predictability, which I think it’s a probably a year away. But I’m of the mind, we’ve even out all stores I still think rates were move sometime in ’15 and net effected sales were have a pretty stunning impact and then - steady rate put the what happens on the back side, that will be positive under any circumstances and was just move from one side of the balance sheet to be other all giving us net inertest income which is what you all want.

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

Yes, it’s a very long path, like multi year path, if you think about were 46 basis points and we’ve declared all of you from a bottom up basis that over the cycle, we thought we would be had about 95 basis points, so we’re now actually under half of that and over the cycle as, you never actually had you just pass through at on your way to either the next recession, the next recovery but I will tell you, its many, may years until we get to that number because it takes that long to get the loans on the books, takes that long to have them stress unless there is a money – event. And then it takes a long time for our results to be used in order to accommodate that so, you will see interest rates move, up probably three to five years before you will see the kind of credit quality that would be impacted by what would be some maintain either for underwriting decisions or aggressive, underwriting decisions either when we’re not going to make but I think you will see the credit quality would be better than average for many years and will be the least thing what we talking about in the next couple.

Got it. And just one last question. You continue to do well in the CCAR process. Are you confident that at least for the banks that are not considered SIFIs by the Fed that the CCAR process from here will be steady state? I'm sure there is going to be the transition to advance, but less stringent or less change for non-SIFIs in the US?

So do you mean, do I think that the non-SIFI’s will get relief from where they are or that they won’t be brought under these structure?

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

I mean we do believe that there will be a distinction, I don’t know where the lines going to be SIFI, non-SIFI, it doesn't matter to us, because we are SIFI, we think we are we, finally not to be do SIFI but will be a SIFI. And so according to that, I think that will be plenty of the regional banks and smaller banks that will not be brought into that same kind of a routine which is where we planned for all the way and not something we’re going to see as a disadvantage. On the other hand, I do think we can play our advantages to not being a do SIFI as it relates to normally the oversight the additional capital requirements and some of the expectations that have been placed on them. So we're going to call this sweet spot and based on our own preparation, we have been working on, the SIFI and the CCAR process, it's well ensconced here , there is no reason to not want to keep it up and frankly I feel better now I know the we passed all the SIFI test and if I would ever require another bank, I would be more attractive to them if they gone to the same rigger because it improves half of my due diligence. So I'm actually supporter of it and knowing that we are in it anyway, we're going to make the best of it.

Got it. Thank you.

Your next question comes from the line of Ken Usdin of Jefferies.

Hey, everybody. Good morning. One big picture question, just following up on that normalization effect. Given that -- and the structural changes to the balance sheet given LCR and some of these intersecting points between that path to growth and rates, do you still see a path that long-term 1.6-1.9 ROA is achievable? And is there anything that has happened over the last couple of years that would prevent the company from getting back to that point as you look further ahead?

I'm quite bullish that is not a problem, we will get there because the income will be so much higher. The ROE well for ever be lower for all banks based on the requirements that have been placed in this new world for higher capital and that's the e part of the equation. But the ROE is really a function, just how much money we can make and the quality which we do and that is no one is really taken that from us as long as consumers and business needs banks and use us and I have ever reason things that 1.6 to 1.9 ranges quite still reasonable and I think for our ROE, the 16 to 19 lower not there yet will also find its way through our normal standards and I think also think it will be at the high end of the peer group. So we’re sticking with those numbers, they are not evidential the day but I think at a year or more two you will see them again very quickly.

Okay, got you. And then on a short-term question, just on mortgage banking, can you talk a little bit about the drivers of the really strong gain on sale margins and whether they are sustainable? And then also, if you have it, just the mix purchase refi in both the volume and the apps?

This is Kathy, well I will go ahead and start with the - just the mix of the volume. So, as, in quarter four, we were kind of in that purchases versus refi kind of 70 percent purchase, 30 percent refi. We did as rate started coming down, we did see a shift of that into the first quarter probably in that more closure to that 55, 44 so we did see a little bit of a pick up and the refis, we look out, we still see volumes increasing, we would expect to see seasonal impacts related to second quarter people , should go out or probably will be out buying and we would think, that we would start to see a little bit of shift back to purchase versus refi markets. And I think if we think about the rates, as you know kind of our margins have been up on a linked quarter basis about 10 basis points year-over-year about 28 basis points and I would think that has we look to quarter two, we would expect to see that trend be slightly increasing margins.

Okay, great. Thanks very much.

Your next question comes from the line of John McDonald of Sanford Bernstein.

Hi, good morning, Richard. Question on the CCAR. You've been a leader in payout and cap returns for the last couple years. That said, the magnitude of your requested increase in dividends and buybacks this year was a little less than the Street was expecting and relative to peer increases. Did you look at the results and kind of feel like, wow, I left some money on the table or we were conservative here, particularly on the dividend payout? Maybe just some thoughts on what you were thinking as you went through the request and kind of how you felt when you looked afterwards?

Yeah, that’s a really fair question. I had no regrets after I read everybody’s but I did studied hard as you would expect we would, let me put this way and just in my just be– philosophy but until interest rates start to move again and we have a higher sense of control over the final outcomes that we provide you guys. It didn’t seem reasonable to me and had nothing to do with the fact that we should increase our dividend above that 30%, 31% level, until which time we had more control. So you’ll never hear on this call that we’re going to wave our ability to create outcomes because something else is changing our future like interest rates. We has to manage to it but it does take away our ability to be certain that we have control over the bottom line and this whole discussion today about when interest rates move, its torture for us but at the same time, I haven’t stretch so hard that I have to worry that something doesn’t go like we hope to, - that the company is now over expending or that I miss my opportunity to work with the fact to exceed that 30%. Another way to say it is, I’m prepared to as effect from more than 30% on dividends, what I feel that we got to control over the profit we put together in October and like in the old days, it’s highly deliverable in the next year solely based on our execution not on somebody’s else decision on when the rights move. So, that’s where you are seeing as a company that is conservative to control its own destiny and not wanted to send signals and tell that we can confirm it. I would not have asked for more than 30%, 31% and in terms of buy backs that will probably be the other place you’ll see us extending ourselves a little further because we do have control over that, we can shut them up if we need to. And so at the end of the day you probably will see our buybacks go up a little more than our dividend request double and I think as soon as we get that confident that we have the control of the entire company like we want you’re going to see us to be a little more aggressive. But for now, I’m satisfied with where we are and actually quite pleased with how this has moved out nice and slow and predictable, repeatable. I think our shareholders at least can count on a steady state return and that’s what I promise them.

Okay, thanks. That's very clear and fair. On that point about the controllable/non-controllable, you mentioned that you've got the plan for a modest positive operating leverage, but it could get tough if you don't get the midyear rate hike. What is the debate that you have there? It sounds like you don't want to cut too much and cut into muscle. Do you have some kind of break the glass program to use? This is going to be longer than we thought? Is there room on deposit funding costs or other expenses even though you are already pretty lean where you can pull and try to get this balance right?

That is the dilemma, right, broken glass. And so we've never invited a third party to come and tell us how to watch our expenses. We have never created a special campaign and named it tell people that they are going to lose their job and stop with that. We are not going to do that and I am not. Maybe it is the effect of being in this for eight years but what I like to do is have gone through this whole recession and not have had to do that because I just can’t describe to you the impact of execution when the employees trust the company and trust that they are going to be safe. It’s just its remarkable. So I rather have 67,000 people here who feel really good about their job and the company that has their back through the tough times that has 69,500 we're at any time 2,500 wonder if they are going to lose their job and the other 67,000 wonder if they are the next. So, I can’t explain that very well as a CEO, its almost, we will have somebody to try to write a book on it but that’s really important to me and this team into this board. If you told me interest rates are going to be flat for the next three years, I believe that to be the case, we do have the broken glass scenario. It would be reduction in force. It would be a very aggressive but thoughtful, precise reduction in people and in expenses and things that honestly you would know would impair the near term and long term but you would have to do it to get to the other side. I’m hardly convinced after this eight years of recession that we're going to get interest rates to move again. I do believe it’s worth hanging on. So, I will give you my Richard Davis dorky way of thinking about it. Remember in high school, the bar hang, the bar hang was a test we have to take for the President's Fitness Award. The bar hang was 90 seconds on the bar and if you remembered it all, the last 10 seconds were a torture. But they were equal to the exact same value as the first ten second which were nothing. And I feel like we are here at the last 10 seconds and this company is going to hang on longer than anybody and it is torture but I want to do it for the right reasons because in two years and four years and six years, you guys are all going to be asking how we are doing in a positive environment with a great economy and I want to harken back to times like this and say, we gave up a 10 year to a near term profit in order to be able to say to you here in the future that we are amazing company doing as well in great times as we did in the tough time. So that is the discussion around the table and I am holding up for your advice not to do any reduction in force so that we can have a great future while watching every penny which you know we have done for years that we do have expected extended this point in time. It’s tough.

All right, well, keep hanging and thank you.

Well thank you. Good one. I should have violins in the back too -

Better than pull ups.

The next question comes from the line of Mike Mayo of CLSA.

Hi. How much did the low tax rate help this quarter?

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

Okay, so I guess versus consensus you would have been a penny short or maybe there are some offsets to that. But if you were a penny short, then what are some of the risks that you are not taking that might have held back your earnings? Richard, you just mentioned the bar hang and 67,000 people who will be more productive over the next 5 to 10 years because they don't have to worry about a strategy of the day. But in addition to that, what else are you doing that might hold back earnings now for the benefit of the future?

To tell people, people because I’ve got all the other expenses quite well aligned, our compliance cost are still at the high point but they’re not getting higher because we manage that and we’re moving through the momentary stages of some of these creation of the compliance groups, the order functions and even the first-line defense in the lines of business. There is no expenses that we’re not watching and haven’t and there is really no other activity but FTE paying people fairly and compensating them well. So Mike that’s and following John’s question they are perfect back to back, it would be simply around sitting on the table and say we cut people and we simply don’t want to do that. So that’s all we’re doing is asking them to work harder, your decision is whether or not we’ve got enough of a good culture here that our people will work harder, they will sustain it and they will do better than others and that’s good enough and otherwise you can challenge the fact that I either should be taking a reduction of – or that should be adding a bunch of people and taking hits from you guys for having really negative operating leverage and I’m not doing that either, it is kind of right down the middle. But we’re not withholding on anything else that would cause us to be unable to deliver on everything we said we would in tough and especially in good times.

I guess I am stuck on that last 10 seconds of the 90-second bar hang. And sometimes, especially as you get older, I am finding this out, it makes sense just to let go, so --.

This is funny because last night I told my wife, what I was going to say if this came up at some – talking to this stupid bar hang, what you will think and she smiled and she turned around and she said and just a record tell them you actually hung on for two minutes. So the fact is this company can hang on past the 90 seconds, we can. We are not all actually ready to roll. But it’s tough always I was trying to say not that we are about to follow, it just gets really tough and as long as you know that it’s the gut that carries you through the stuff and the best companies and our business are going to be the ones who have the will and the ability and the trust to get through it. I’m just convinced it again the book on the right but it’s that degree spirit of a company acting like a person that believes anything is possible and delivering it with the certain level of pride. But I‘ve got nothing more to show you forward.

Last follow-up on this Richard Davis versus the 10 year bond?

Yes. I thought that. I stop a minute, it’s down 25 basis points since we last talked, it has fallen below two but go ahead ask your question?

Well no, just the quarterly update. Seems like you're feeling better about the economy, but we are still waiting for it. Is -- what -- how -- do you feel better than last quarter about the economy, or are we just all still waiting here?

John’s question is very beginning exactly I feel better about the economy, I did 90 days ago, I can see that it’s not better for banking in the near term. It is that simple and when rates move up, I am going to love the economy and I’m going to love the Fed, I am going to love our future. But right now I think the economy is really that strong, record stock market performance, Europe is coming back, we have got customers – cash all over the place, they have got money in their pocket because fuel prices are down and they don’t need bankers much as they are going to need us. So we just want to keep them all, it is happy customers and we will be there when they are ready but right now we are probably on the low end of their need to get through the day priorities and for that it’s not correlated, a great strong economy and improving economy is not necessary good for banks until rates start to kick in.

All right. Thank you.

The next question is from the line of Paul Miller of FBR.

Hey, can you talk a little bit about -- because you've got some of the best, I think, mobile apps out there and how -- and everybody is seeing mobile banking really pick up especially with the new accounts. How do you see the mobile banking, online banking in your branch system work together?

I will go first and have Andy jump in, you know I were really good in mobile banking is because we’re great in mobile payments and I take into out much that matters and I actually wouldn’t know if I had a bank that didn’t have this large payments, I would just, I would know what I don’t know. We have a thing called the grove, grove down in Atlanta where we have our payments group it is hundreds of people is that they are going to do nothing but work on merchants and consumer paradigms and modules on how to change the way they move money around. And it’s a ton of customer who is up for lot of money we spend and by the way I haven’t taken that out all of our forecast but because we have merchants who work with us to create better mobile apps, the net transfers backwards to mobile banking because mobile banking is just kind of a mini app to people moving money intrabank and between them and merchants and the merchants are really the smart ones that had a good stuff and sold and stuff moved about. So that is one of the reasons we’re so good at it and because we have people in house that are focused on something even greater than that. And I’m kind of excited to showcase that particularly high at our next investor meeting little over a year from now. So that is one of the reasons we do well, it relates to the branch staying there or the benefactors of that and Andy you might carry on.

In addition to why Richard said, I would mention that the other key aspect of this is making sure the branch is working together with the mobile payments and mobile banking side of the equation. So they’re working as one, so the seamless delivery of transactions and products and the ability to buy or sell looking at it from the perspective of a customer and if they start something on mobile, want to finish it the branch or vice versa that we’re all in sync in terms of the process from a customer’s perspective. And Paul I appreciate bring it up because most of you guys live on East Coast and bank on East Coast and you actually don’t get to experience us so there is not a branch down the street that I can send you to or you don’t just walk, buy and see whatever our current collateral is but if you all want to come online and take a look at it, it’s really, really good stuff and it would be our pleasure to have you experience us through a more mobile approach than just perhaps the old brick and mortar.

Well, I know we've seen when somebody comes up with a really cool mobile app, it's copied very quickly. But one of the things that you have that I have not seen anybody else have is the automatic bill pay app. Is that just because you work with the merchants so close you are able to develop it? Do you think other people will be able to develop that same product?

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

Okay guys. Thank you very much.

Your next question comes from the line of Bill Carcache of Nomura.

Good morning. Thank you. Richard, I had a follow-up on your comments about rate increases and positive operating leverage. To the extent that the frequency and magnitude of rate increases came in lower than what the market currently expects, do you have a sense for how much of an increase you would need to see to achieve operating leverage? Maybe if you could just give us a sense of whether you have kind of run through the math and what that breakpoint is?

Yes I’m pretty transparent, we expect it to increase starting in June, June, July, September, December 25 each, if that doesn’t happen you can back into our math and do a pretty quick calc and that flows down and moves pay to September and only one in December which is now the prevailing view that will put pressure on our positive operating leverage. I have no idea what the next nine months of this year going to be, they will be very, very tough will be very close to flat or even slightly negative and that would be where I get back around the table like John and Mike talked and sit down the group and say does that enough of the reason for us to carry favor with the investment community to try to be positive from one year which you may or may not remember in order to do something draconian or do I take my lumpsum, have you guys little disappointed but understand why we had a slight negative operating leverage to live to fight next year when things will be highly positive. I will probably go to the latter but I will promise you - conversation and every time there is an adjustment we will see the impacts and decide whether or not it’s worthy of taking a near term or longer term view.

Understood. That's very clear. Thank you. If we look at your loan growth -- on a separate topic -- on a year-over-year basis to take out seasonality, the growth in residential mortgage in particular has been decelerating for about nine quarters and turned negative this quarter. And I think we are kind of -- by looking at it year-over-year, we would strip out seasonality. So I'm not sure like some of the comments about weather and stuff would really play a role. I was hoping maybe you could talk a little more specifically about your outlook there and address how you are thinking about that deceleration and what gives you confidence going forward in the resumption of growth in that area in particular.

Bill this is Andy, the principal reason for that decline is our smart refinance product that is a branch originated high quality refinance product that has been shrinking because refinance volumes were coming down throughout the year as rates were not moving down as rapidly. The pipeline for that right now is little stronger because of what we saw in the first quarter, so I think you will start to see a little bit of an uptick certainly done a downtick in that category in the future quarter and then the other wildcard in the overall category is home equity loans as I mentioned in the retail category which we’re seeing strong growth and strong pipelines.

Excellent thanks very much and I appreciate it.

And your next question comes from the line of Nancy Bush of NAB Research.

Good morning. Sorry I came into the call late. Another of your competitors' call ran way over, but --.

No matter what you say I am going to say we already answered it.

No you are not going to get away with that.

All right, I will try.

Yes, one of your competitors just did a material purchase of CRE loans from GE Capital and it looks like GE Capital is going to be the gift that keeps on giving. So I am wondering if you have any appetite for that or if you are looking in other places for portfolios of loans?

Yes and yes. More than I have in the past because if I can’t deploy it in normal course, then I have got deposits, I honestly love and tell that but don’t know what to do as the answer is yes to both. GE is way too early to know until they get out some RFPs and take a look at what pieces particularly leasing would be of interest to us as we look at our big equipment financing business that we have here in the company and there are other portfolios that we would be interested in defending that could be credit card portfolios, it could be high quality auto portfolios but it’s got to be something that we do already. It has got to be underwritten qualities that we would do ourselves and if we do something of any size, we are going to spend more time and due-diligence will be a nightmare for whoever it is because we want to due diligence likely underwrite it ourselves and if we can’t get that level of comfort. I will pass all day long because I really don’t need to introduce anybody else’s problems into our otherwise high credit quality but my appetite is definitely higher based on the lack of alternatives on how to deploy both the deposit growth we have and capital that we are starting out to build.

And given the portfolios that you may be seeing right now, is the pricing attractive? We're still scratching our heads over that.

That’s a good question in fact as we put our student loan portfolio out for sale, they are attractive to us because there is a market out to the people who want to pay a premium it seems for something that we have less value for. So I do think that it’s going to be the expensive proposition if you don’t get it the right way and if you don’t due diligence and underwrite it properly for potential risk as we all think the world we have today is a good proxy for how loans will perform. So I think, I think it’s going to be rough tough to find something you like at the right value and that’s why we won’t overpay either and that is one of the reasons we are attracted at this moment to put our portfolios, student loans out for sale because there seems to be a fairly robust level of interest and premium out there that will take. So it may just come down the fact that will look but we won’t like the pricing will step away anyway.

Yes, and just a final note on that. It looks like the deal that Wells Fargo did was something of a joint venture with Blackstone. Are you seeing other private equity pools or whatever out there that you might want to do some kind of similar transaction with?

I don’t know their deal but no we don’t like partners. We are not great good partner. We want to own it, we want to control it, and with third party particularly, third party in every way now in banking has become an intensely added risk. It is like more than a two. So anything we do with the third party we have to operate it though we have full control, we have to have information that allows us to have full control and then if you don’t have full control even if you have all the information, it is a whole lot less rewarding when something happens you are not absolutely able to predict. So for us probably not.

Okay. Thank you.

Thanks Nancy and by the way we have not answered that question.

There are no further questions.

Perfect thanks, operator.

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

Thanks everybody.