U.S. Bancorp (USB) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the U.S. Bancorp’s Fourth Quarter of 2015 Earnings Conference Call. Following the review of the results by Richard Davis, Chairman, President and Chief Executive Officer; and Kathy Rogers, U.S. Bancorp’s Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately noon, Eastern through Friday, January 22nd at 12 Midnight, Eastern Time. I will now turn the conference call over to Bob Kleiber of Investor Relations for U.S. Bancorp.

Thank you, Maria, and good morning to everyone who has joined our call. Richard Davis, Kathy Rogers, Andy Cecere and Bill Parker are joining me today to review U.S. Bancorp’s fourth quarter and full year 2015 results and to answer your questions. Richard and Kathy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules, are available on our Web site 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, Bob. Good morning everyone, and thank you for joining our call. I will begin our report with a few highlights from U.S. Banc’s 2015 full year results on Page 3 of the presentation. U.S. Bancorp reported record net income of $5.9 billion or $3.16 per diluted common share. We achieved industry-leading profitability with the return on average assets of 1.44%, a return on average common equity of 14%, and an efficiency ratio of 53.8% for the year. Total average loans grew by 4.1% adjusted for student loans and average deposits grew a strong 7.7% year-over-year. Credit quality continue to improve with the 12.1% of decline in net charge-offs and a 15.8% decrease in non-performing assets. Our capital position remains strong and we returned $4 billion or 72% of our earnings to our shareholders through dividends and share buybacks during 2015. Turning to Slide 4 and our quarterly highlights, U.S. Banc reported record revenue of $5.2 billion and net income of $1.5 billion or $0.80 per diluted common share, an increase of 1.3% year-over-year. The fourth quarter of 2015 included a gain from the sale of an HSA account deposit portfolio with diluted earnings per share up by $0.1. I am very pleased this quarter with the momentum in our linked quarter loan growth, the continued strength of our payments business and the improvement in our operating leverage. Total average loans grew 1.7% linked quarter adjusted for student loans, which exceeded the high-end of our 1% to 1.5% range. In addition, we continue to see strong growth in average deposits which included consumer net new account growth of 3.2%. Credit quality continued to remain strong. Total net charge-offs and non-performing assets declined on a year-over-year basis and non-performing assets declined on a linked quarter basis as well. Slide 5 provides you with the five quarter history of our performance metrics and they remain among the best in the industry. Moving to the graph on the right, you can see that this quarter’s net interest margin of 3.06% was relatively stable as expected, improving 2 basis points from the third quarter. This was primarily driven by a higher loan growth which reduced the amount of cash balances. Our efficiency ratio for the fourth quarter was 53.9%. We expect this ratio to remain in the low 50s going forward as we continue to see the results of our expanded efficiency effort that we introduced last year, which includes prudent FTE management and a renewed emphasis on other discretionary spending. As I said earlier, I am particularly pleased that we were able to achieve positive operating leverage for the quarter which reverses a trend of negative leverage over the past several quarters. I believe this positions us well as we move into 2016. While prudent expense management remains a priority for our company, we also continue to focus on revenue growth and innovation, which means investing in those businesses and products that will provide strong returns. During the quarter, we announced a new agreement with Fidelity Investments. U.S. Banc is now the exclusive issuer of the Fidelity Investments’ rewards card program. As part of this arrangement which closed at the end of 2015, we purchased the existing card portfolio of $1.6 billion. This follows the announcement from last October about our card issuing partnership with the Auto Club Trust and the purchase of an existing $500 million portfolio. These agreements exemplify the strength of our payments business model and a continued commitment to strategic growth for our Company. Turning to Slide 6, the company reported record net revenue in the fourth quarter of $5.2 billion, a 0.8% increase from the prior year which included core revenue growth and a gain on the sales of the HSA deposit portfolio, partially offset by the Nuveen gain recorded in the fourth quarter of 2014. The revenue momentum we are seeing is primarily due to our growing balance sheet and growth in the number of our fee based businesses including our payments and trust businesses. Kathy will now give you a few more details about our fourth quarter results.

Thanks Richard. The average loan and deposit growth is summarized on Slide 7. Average total loans outstanding increased by over $10 billion or 4.2% year-over-year and 1.7% linked quarter adjusted for student loans. As you may recall we moved our student loan portfolio to held-for-sale in the first quarter of 2015 and subsequently retuned it to held-for-investment during the third quarter. In the fourth quarter, the increase in average loans outstanding on a year-over-year basis was led by strong growth in average total commercial loans of 9% and 2.5% linked quarter. The strongest linked growth I've seen in 2015. Line utilization however remained relatively consistent with the previous quarter and flat year-over-year. Consumer loans again showed positive momentums lead by credit card and auto loans. Average auto credit cards increased 4.7% year-over-year and 5% on a linked quarter basis, which included the acquisition of approximately $500 million Auto Club portfolio at the end of quarter three. Auto loan growth remains strong up 13% year-over-year and 2% linked quarter. Residential mortgages grew 2.1% year-over-year reversing a declining trend over the last several quarters and rose 2.2% on a linked quarter basis. We currently expect total average linked quarter loan growth to be in the 1% to 1.5% range in quarter one. Total average deposits increased $19 billion or 6.9% over the same quarter of last year and 1.7% on a linked quarter basis. Growth in non-interest bearing and low interest checking, money market and saving deposits remained strong on a year-over-year basis, and continue to more than offset the run-off of maturing larger dollar time deposits. Turning to Slide 8 and credit quality, total net charge-offs declined 1% on a year-over-year basis and increased 4.5% on a linked quarter basis primarily due to lower recoveries. The ratio of net charge-offs to average loans outstanding was 47 basis points in the fourth quarter, a slight increase over the third quarter. Non-performing assets decreased by 2.8% on a linked quarter basis and 15.8% over the fourth quarter of 2014. The fourth quarter provision for credit losses was equal to net charge-offs which compares to a release of reserves of $20 million in the fourth quarter of 2014 and $10 million in the third quarter of 2015. As we move into 2016, we would expect that reserves will begin to build the support loan growth. Given the mix and quality of our portfolio, we currently expect net charge-offs and total non-performing assets to remain relatively stable in the first quarter of 2016. Slide 9 gives a view of our fourth quarter and full year of 2015 results versus comparable time periods. As I mentioned, our diluted EPS of $0.80 includes $0.01 related to net impact of the sale of our HSA deposit portfolio partially offset by accruals related to the legal and compliance matters. Fourth quarter net income decreased 12 million or 0.8% year-over-year, this is principally due to a higher provision for credit losses, increase in net interest income primarily driven by growth in earnings assets, lower non-interest income impacted by the 2014 Nuveen gain, partially offset by increases in payments related revenue, trust and investment management fees and the HSA deposit sale gain. On a linked quarter basis, net income was lower by $13 million or 0.9% mainly due to predicted seasonal increase in non-interest expense and an increase in the provision for credit losses partially offset by higher net revenue primarily due to loan growth. Turning to Slide 10, net interest income increased year-over-year by $72 million or 2.6%. The increase was the result of growth in average earning assets of 5.1% partially offset by a lower net interest margin. The net interest margin of 3.06% was 8 basis points lower than the fourth quarter of 2014. The decline was primarily due to a change in loan portfolio mix, as well as the growth in the investment portfolio at lower average rates and lower reinvestment rates. Net interest income increased $50 million on a linked quarter basis, primarily due to higher average total loans. The net interest margin of 3.06% was 2 basis points higher than the third quarter. The increase in the net interest margin was principally due to higher loan growth which resulted in lower cash balances. We currently expect that the net interest margin will be relatively stable in the first quarter. Slide 11 highlights non-interest income which decreased $30 million or 1.3% year-over-year. The year-over-year decrease in non-interest income was primarily due to the impact of the 2014 Nuveen gain partially offset by fee revenue growth and the HSA deposit share gain. Higher credit and debit card revenue, trust and investment management fees and merchant processing services were partially offset by lower mortgage banking revenue primarily due to an unfavorable change in the valuation of mortgage servicing rights net of hedging activities. Momentum in our payment businesses was reflected in our fourth quarter results. Credit and debit card fees grew 8.1% on a year-over-year basis, principally driven by higher volumes which were up 6% compared to 5.3% in quarter three. Merchant processing revenue increased 2.3% year-over-year, and approximately 6.5% excluding the impact of foreign currency rate changes. The growth was driven by higher transaction volumes, account growth and equipment sales to merchants related to new chip card technology requirements. These equipment sales were modestly lower than the amount recognized in quarter three as expected. On a linked quarter basis, non-interest income was higher by $14 million or 0.6% principally due to seasonally higher credit and debit card revenue and the HSA deposit sale gain partially offset by lower corporate payment product revenue reflecting the seasonally higher quarter three government related transaction volume. Mortgage banking revenue was also lower as expected primarily due to seasonally lower origination revenue. We would expect that fee revenue in quarter one will be seasonally lower on a linked quarter basis. Moving to Slide 12, non-interest expense was essentially flat year-over-year. Higher compensation expense which reflected the impact of merit increases and higher staffing for risk and compliance activity, along with higher employee benefit expense driven by pension cost were largely offset by lower marketing and business development expenses, principally due to charitable contributions recognized in the fourth quarter of 2014 and lower other expense reflecting a net year-over-year impact of legal accruals. On a linked quarter basis, non-interest expense increased $34 million or 1.2% as predicted reflecting seasonally higher costs related to investments and tax advantage projects and accruals related to legal and compliance matters, partially offset by the favorable impact of reduced mortgage related compliance and talent upgrade costs which were elevated in quarter three and declined as expected in quarter four. Compensation expense declined reflecting the impact of expense management initiatives and declines in variable compensation. Employee benefits expense also declined driven by lower payroll tax expense and healthcare costs. We would expect expenses to be relatively stable in quarter one compared quarter four, seasonally higher benefits expense will be offset by seasonally lower tax credit amortization and the impact of the credit card portfolio acquisition. Turning to Slide 13, as Richard mentioned our capital position remains strong. We returned 61% of our earnings to shareholders during the quarter. Dividends accounted for 32% while stock repurchases accounted for the remaining 29%. For the full year, we returned 72% of our earnings to shareholders and we expect to remain in our 60% to 80% range going forward. Our common equity tier 1 capital ratio estimated using the Basel III standardized approach as is fully implemented at December 31st was 9.1% which is well above the 7% Basel III minimum requirement. Our intangible book value per share rose to 17.44 at December 31st representing a 9.3% increase over the same quarter of last year and a 1.4% increase over the prior quarter. I will now turn the call back to Richard.

Thanks, Kathy. I’m proud of our fourth quarter and full year results. We reported record full year net income and record revenue for the quarter. We remained industry leading performance measures and reported a $0.19 return on tangible common equity in the quarter. We delivered on our promise to work toward positive operating leverage with the efforts that we've made through our efficiency program. And we continue to make strategic investments in our businesses and focus on innovation for the benefit of our customers. As we look at 2016 we start the year from a position of strength as we continue to build revenue momentum, thoughtfully manage expenses, work diligently to exceed customer expectations and to create value for our shareholders in a competitive marketplace. We remain focused on delivering consistent, predictable, and repeatable financial results for the benefit of our customers, our employees, our communities and our shareholders. That concludes our formal remarks. Andy, Kathy, Bill and I would now be happy to answer your questions.

Maria we can go ahead now and open for questions.

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

Richard, maybe a question for you on just winding and your overall move, obviously pretty negatives some of the global macro stuff that we're seeing but at the same time you've held your growth guidance, your typical growth trends you are actually come in a bit ahead of that. So, maybe if you could just step back and give us a bit of the state of the union of winding and how you're feeling about the economy and I guess I'm also curious in terms what you're seeing from the consumer in terms of their all time loan demand there?

First of all, I have predicted that question, I was thinking of it this morning, but a club with American bank, we do primarily business in the domestic United States and we're very much a consumer small business payments kind of a company, so just by what is going on in the backdrop around the world with the China re-evaluation and what's happening in oil and some of those areas which we’re not immune to balances and process, we're not seeing the majority of that on our books or by our customers. So, we're actually seeing a continued steady, I'll say slow but steady improvement every quarter and our customers are reflecting that across the board from the large corporate customers, who are still doing robust M&A transactions to restructuring the portfolio, all the way down to the small businesses which continue to grow for us double-digits based on their interest and setting themselves up for our better consumer wide recovery and just general people who are using banks for their retail services. So, I am quite optimistic against that negative backdrop and I know we won’t be immune to all of that. But based on our geography, based on our mix of business, based on our history, and based on our appetite for risk I think we’re actually fairly immune from most of those issues at this stage, and yet we trespassed for the worst scenarios that would of course affect us. So I would say the across the board from a lending perspective that same range you see in the 1% and 1.5% we’re predicting again for this quarter already off to a really nice start and we’re not seeing any disruption neither from the 25 basis point increase which we knew would be more symbolic and actually not yet from the impacts of the stock market of the China re-evaluation. So at this point we’re remaining optimistic and have cautious and careful way.

And then is Bill Parker there?

Bill is here, here you go.

Yes hi John.

Hey Bill. Anything to add in terms of from a credit perspective and the cash you talked about the reserve releases are over and you’ve all been very transparent on that. But anything from a credit perspective that’s making you a bit more nervous so that is a change maybe compared to a quarter or two ago?

Yes Jon first I’d direct you to the dependency slide and you can look through those. And if you look at of the portfolios if you see sort of year-over-year delinquency patterns are either stable or better than last year. So, overall, very strong of course the one exception is energy and some of the metals and mining related credit. We do have that small energy portfolio of 1.2% of our total loans. So I’d just say we have seen some downgrades there and we’ve been building our allocated reserves for that all year long. But we built that at low 30s price of oil. So we feel like we’re good for now but we’ll see where oil settles down, but either way that’s not going to have a material impact on kind of the overall go forward credit performance.

And in terms of the way we see things just the assumptions should be maybe go right pass back up in terms of the provision over charge offs just building for loan growth. Is that how we should approach it?

Yes, exactly, yes.

I would still jump in there Jon it is the old fashioned days where you’re supposed to provide for the next new loan right and I think we’re at that inflection point. I don’t know if we’ll start moving up very quickly because we’re settling here at that turning point of no provision. But we don’t see anything in the near-term that’s going to harm that and I want to pick up on energy and metals and mining. We do stress test our portfolios routinely and not just for those particular categories but tangent effects it might have on other parts of our customers and portfolios and in certain geographies. And as Bill mentioned we’ve increased the reserve levels for both of those categories and continue to have the room and the expectation if we need to do more we can.

Our next question comes from the line of Erika Najarian of Bank of America.

When we last spoke Richard I think you were fairly optimistic about your prospects for 2016, and I think we talked about the concept of USB being a maximized franchise. As we think about building revenue momentum, slow but steady into 2016, could you give us sort of what the top-three drivers are in terms of what could drive year-over-year of improvement in revenue outside of, of course? And any more increases on the short-end?

Yes, sure I will, actually I asked her more than the question, as I think I also mentioned when you and I have the fire side chat, I might add without the fireplace. You’re talking about what kind of assumptions we would in our plan, and we actually expected to have two rate increases from the last time I talked to you. We hope for one in December, we expect a one in June. And that is really the amount of the risk we have placed into our plan this year so when we’re halfway with one of them at least at this point if it's fixed. So that alone does actually help us. So we’re not relying on that to the very point you made. The most important thing that happened to us is just a continued improve recovering economy where people feel they can consume, people feel they don’t have to save quite as much and that they’ve got a higher backstop and either in their own statements account or in their home equity or in their own debt positions where they can start spending money and feel more comfortable about it, that’s going to be huge for us. That’s way more important than any interest rate because as I said earlier, we’re a consumer middle market wholesale bank and those sort of things that matter the most. But I want to say the things that we could, our shoulder against to watch for improvement this year one will the continued success we’re having in relationship management with our customers. I think I’ve said this before but we’re developing a much smarter technology around who our customers are, what they expect, what they’re likely next needs are, particularly around the mobile banking aspect. And so we’re investing a great deal of our money and time. And in this whole efficiency program you never heard me take anything away from our investment and innovation and entrepreneurship and we’re not because I do believe that’s going to be the next big idea. So having a payments business and a bank connected together we have the best of both roles because we can touch virtually any paradigm buyer, seller and moving money back and forth. So that’s our number one we’re going to lean on the bank and the payments business that’s coming together. Number two the corporate trust business, that’s been remarkably good for us doesn’t get a lot of visibility it’s actually confusing to a lot of people, but we’re not only domestically quite large and capable but when you start looking at who that’s starting to build over across the pound over in Europe with both our front administration and our new class of corporate trust we’re going to expect a lot from those two businesses as well in 2016. And finally I'll say the next chapter in our wholesale bank becoming we've moved out of the audition stage and we’re now bonafide one of the important banks to deal with the large Fortune 100 companies and you think from an M&A deal to our first pallet lead on the deal to just moving money on a very sophisticated way. We are continuing to see momentum there I'm quite proud of what the wholesale commercial bank has done we are celebrating Dick Payne’s retirement this quarter and we are also celebrating the addition of two new leaders coming up from within the company to run the wholesale bank and the capital markets and I expect a lot from the two of them and they've got the capability and energy to pick up where Dick has left us which is a really good starting point. So I would say those three things Erika to answer your question.

Thank you for that. And just a follow-up on the question on credit oil and gas and metals and mining aside charge off level for the industry have been abnormally low and I guess maybe Bill if you don’t mind jumping in could you remind us what you think given the risk portfolio embedded U.S. Bank right now. What would you think is your normal charge off rate and how long does it take to get there?

So again when we talk about normalized we call that through the cycle rate and that a rate that we've talked about before this between 95 and 100 basis points but you don’t really get there you just go through it when you are going into a recession or you are in a recession. So in times where there is stable employment as running right now the rate you see for us is sort of the what would be a normal rate in this kind of economic environment but that over the cycle rate is something that we calculate every quarter and it remains between 95 and 100 basis points it really has not materially changed for us for many-many years.

Understood, thank you.

Our next question comes from the line of John McDonald with Bernstein.

Richard I guess I was kind of wondering how should we track the progress of your new emphasis on the non FTE expense control this year where should we look at to kind of see how you are doing from the external metrics and then what kind of confidence level do you have and the ability to deliver a positive operating leverage this year in the environment that you are planning for?

First of all you can measure all of our expenses quarter-to-quarter and I think you know we are as transparent as silathane so we’re going to tell you exactly any moving parts and then you can model what's left but you will see the benefits in this quarter and will you see them in the next this two current year of both the FTE watch hold placement we have had on adding people unless we needed them and the non the more discretionary expenses. I will tell you however and we are also going to tell you about along the way how we are going to spend money on things that we think are quite important I will start bringing more visibility to our innovation budget and the kind of money we are spending to be at the front-end of some of the those new ideas and we’re going to be introducing a very significant branding and reputation campaign in 2016 which impacts some of that savings will go toward because I want to keep investing I just want to put in the more of the right places. So no watch for existing number but watch for the moving parts and I will give you the visibility of that so that you can make that assessment over the course of time.

In terms of what you are expecting for kind of revenue expense growth this year Richard and?

Well done, I forgot [Multiple Speakers] yes we are, we, no one quarter is going to be a positive operating leverage in this environment but we are still planning this year our plan say positive operating as if for 2016 I will also remind all of you that quarter one is our weakest quarter so it’s not the one I'm going to be able to showcase and show off as our strongest quarter because this is seasonally lower for us, but it will I think a better first quarter than you have seen than the lot but it is certainly is going to be on its way to a positive operating leverage if we don’t get at least that second of two rate increases that will put a challenge on that ability so I'm not going to make any guarantees but I'm more concerned less about the rate itself and the fact that rates moving up will continue to reflect that the Fed believes the economy is stronger what we care most about is just strong economy, the metrics and the arithmetic of the 25 basis points is far or less important so we will get to watch it as we go and I'll keep you as clearly outlined on how we think that's going.

Okay. And then just a quick follow-up on the loan growth, what got better this quarter it gets you into that 1.7% growth and what are the assumptions underlie the outlook for the 1% to 1.5% range going forward is it more of a consumer pickup driving that and do you assume as the United slows a bit here going forward?

Hi, John, this is Andy. I would corporate continues with the strong as you saw year-over-year growth about 9% and strong on a linked quarter basis I think what's turned a little bit more positive is the consumer side of the equation our two fronts our mortgage activity on balance sheet that jumbles principally continues to be strong and home equity for the first time in a whiles we’re seeing growth in that category and as we dig into that a little bit further I understand what that's about we are seeing consumers taking home equity and using it for home equity so using it to improve their homes, furnishings and things of that sort so those two categories are strengthening and finally card spend and card balances are also growing so I do think we see continued strength on wholesale with increasing strength on consumer.

Our next question comes from the line of Matt O'Connor of Deutsche Bank.

Kathy, if I could just follow-up on the 1Q expense outlook I think you said stable linked quarter, are there any one time expenses related to that Fidelity Card deal because I think you normally have some seasonality on the way down on expenses on one tier?

Yes let me talk about that, there's a couple of things that are going on with that, because you're right, we normally would see a first quarter decline in expenses but I'll answer your first question and add some more light, so yes, we would expect to see some onetime expenses related to the Fidelity card deal that will come through in the first quarter and then just the overall operating expenses related to that will increase as we move through the year starting in the first quarter. Additionally, if you think about first quarter expense, we usually have the seasonally lower first quarter of course our tax credit expense in fourth quarter was lower than we normally would have seen and that's really due to a mix of where that's recorded so you also saw that our tax rate was a bit higher. So, that benefit that we get on a linked quarter basis for tax credit is going to be lower than what you'd have seen in the past and that coupled with the Fidelity card business shows to be relatively stable.

Okay. And then a bigger picture Richard for you, maybe you can comment on your ability and appetite on the acquisition side of things, I think you guys talked about in the third quarter 10-Q, some things around to know your customer and obviously there's some price resetting occurring right now as we speak, so maybe you could update it for the current environment and how you can re-apply your net if at all?

Yes. So the answer I'll give you Matt, first and foremost is what you see we've done is what we want to do more up, so you saw these two fairly large portfolios in the card business that we continue to be attracted toward, these are picking up portfolios that already have momentum, the picking up portfolios and we're finding more and more people interested in allowing us to take a look at that. So, I hope there'll be more of those. We've talked before about our merchant acquiring business and the -- where we've cobbled that together over the last now 15 years is to find a partner, work with him on a JV kind of a basis with their rent to own sense and there's more of that in Europe that we're continuing to look at and hopefully opportunities in that regard as well. And then finally the more classic kind of opportunities, I talk about innovation and there maybe some small businesses of small companies from small garage, deal that we might find where we want to bring the capability in house and not outsource it and if those come along at the right price at the right moment, we'll also not hesitate there. As it relates to full bank in acquisitions and interests, our interests remains exactly what it was, we don’t have a high interest and there's no one knocking on our door and yet at the same time it's a good thing because given the consent order that we entered into in October we wouldn't be allowed to do a full bank acquisition until we're through and of half that considerable on which we're moving swiftly along and actually have been predicting that we can move that as swiftly as anyone ever has. So, we're well aware that at the point in time we want to buy someone we want to be past that point and our goal is to be there but now it's not inhibiting anything that we would otherwise want to do and I think portfolios and merchant acquirer will be the two places you should watch the most.

And what so fast as someone else's gone through a consent order?

You actually don’t know because I am not exactly should roll us into one but I know that there is in our case we've talked with our OCC which is the lead regulator here, and made it clear to them that our goals to satisfy the aspects of the consent order that would otherwise preclude us from being able to buy things and make that our number one area, they've made that clearly well that they understand that's our goal and I don't believe you have to be all out to be all done, you just need to be accomplishing the things that are most concerned to them as it relates to branch related, know your customer thing. So, we're going to approach on that basis. And the OCC has also been on record saying how one of their goals this year is to move more swiftly with the closure of open issues and we're going to hopefully be one of the first to prove that and we'll work through that swiftly and we've been working on it actually for quite some time and have lined everything up now to move out of that as soon as they give us permission as we prove our sustainability. So, it's not impairing us now I mean well, if we're not out of that in a year or two but it's not in the harms-way at this point now.

I mean I could just squeeze in one more here, I guess the point I'm getting at is -- you've been more conservative while pre-crisis, during the crisis, post-crisis, and I'm trying to get sense of if the mentality is let’s see if some of our conservatism and capital and deposit base to look for opportunities out there, I mean my guess some sellers maybe interested at a much lower price than before, there's some assets in the capital markets that are being significantly re-priced, you could probably gain a lot of share on energy if you wanted to now, so I'm just trying to get a sense if like is that the mentality or is it just [Multiple Speakers].

We've been together the whole time, so, what you know about us is we kind of set a monster in place which is we will never do anything that doesn't look sustainable and repeatable, and it sounds corny but we've done it long enough it's real. And you think about opportunities that come along if it is a portfolio and it's priced perfectly and it's within the scheme of our risk tolerance absolutely we're all over it. Many of them that will come to us at a slightly disadvantaged risk perspective and if we don't convince ourselves to make it up in volume or to buy it now and change our original mantra we'll take the hit from you guys for not having that acquisition but we will take the benefit years later or months later and we don’t have a problem. So, what I'd say, our conservatism is every bit exactly what it was before and during the downturn and we're not tinted by anything right now that would otherwise cause us to change that thinking and that could disappoint a few people that slow and steady it kind of wins the race, so we’re going to stay in that boat.

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

Let’s see first one is sort of a piggy back question did you guys quantify the specific size of both the extra taking and then the legal and compliance accruals? And if not, I mean could you please?

Yes.

I mean it is our job to do. We have the best to know it out so I could [Multiple Speakers] either away so it is not...

So thank you very much.

I am calling you for the money.

Yes. So the, Scott yes so the gain on the HSA sale is right in that $50 million range and I would suggest you think about half of that were related to the regulatory and legal accruals.

And then just so I am certain the guidance for fees and expenses in the first quarter is off the reported numbers out, am I right?

That’s right.

So thank you for that and then second question either for you Kathy or Richard just as it relates to margin. Even though you guys characterized as relatively stable it was still up which I consider a good thing. Just curious in your mind what it would take whether it’s how much more rate increases, how many more rate increases I should say, or an increased pace of the increases until sort of the buyers get a little more optimistic, in other words at what point do we more visibly see the margins starting to expand?

Yes. I think there is a couple of things I do think we need a couple of more rate increases to see a material change in our margin. I think that was as important Scott is that we have to we’ve been talking a lot about this pricing pressure on some of the different portfolios. And I think we need to see that start to stabilize a little bit. But certainly as we think about where we are today and if you think about where our margin improved from last quarter. We did have some nice growth in our loan portfolio which allowed us to essentially fund out some cash for that allowed us to go forward. So as if we move forward I think the mix of our business interest rates increasing will certainly help in some of that price pressure easing will certainly be in potential list.

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

Just back on that on the margin comment just to clarify that, so basically if you don’t see any incremental rate hikes, if you don’t get that June hike, is it fair to assume that you expect a relatively stable margin through all 2016 or could you see degradation?

I think it’s going to come, and I would suggest that it would probably I would say it start with relatively stable. But I think some of the caveats for that would be really around some of the mix of our portfolio and then of our loan growth and then also as you know in our securities portfolio we have about $2 billion run off, so to the extent where those reinvestment rates falls could potentially impact the margin. And then also I would tell you we’re keeping our eyes very close on the long term rates and what’s happening on the long term rates. So I think all of those together would impact it, but with no rate increase I would say we’re probably in a little bit of a steady state here.

And then back to the M&A topic, Richard I heard when you said about interest and M&A. If you did not have the consent order in place, what would be your appetite around larger whole bank deals? I know you used to say you had no interest in the holding company transactions, and shying away from large deals. But is that appetite steadily changing given the disruption and the opportunity maybe to capitalize on valuations et cetera?

No, you can all exaggerate on no. But the reason I said I am on record for a quite while John saying that from our own experiences of the statute I am going to call it a statute limitations it’s not legal by any means was that you can still pick up a company and you can still be placed in harms away for dealing with any of their potential problems involving their own. And I think it’s all the way back to 2007. When you think of ’07 that is in your window on when things start to roll off in terms of statute and we’re already seeing things continue to come to and people try to get under the wire. I’ve always said 2017 will be the first time we want to look at where our appetite for bringing on a risk into our company as we simply couldn’t do diligence for and couldn’t possibly imagine that at least elegantly have lined up with our current moment where we can’t do it anyway but we don’t want to anyway, and I wouldn’t be interested. The pricing doesn’t change you can’t get a good enough deals if you don’t know what you’re getting. And I could be wrong but I feel very strongly about that and have for a long time and I would say that as the moments clear let’s say a year or more from now our ability is there, our appetite will be higher, the moment and time I think will be safer and all those things will line up and then we could be very much involved and engaged in that. But the reason we’re most importantly of less interested is we don’t really need it, I mean much of is attractive to have the wallpaper behind me and somebody else shaking hands it's really not necessary for this company and we are in every business line that we’re in that we want, we’re not in anything, we don’t want to be in if we do we sell it like the HSA deposit business. And we don’t covered anything we don’t have, we just want to be better at what we’re doing and do it better deeper wherever we are. That would be attractive to me but it’s not going to be a headline on kind of the deal at least as long as I am around, this never has been, it’s just going to be a steady state kind of an approach. But I would hope that all those stars would line up, so our options are better in a year or two from now.

And then if I could just throw in one more on the loan growth side on the residential mortgage front can you just I know you indicated that growth could remain around where it is I think you implied that and so you still have the appetite to continue to add to that portfolio regardless of what the longer end of the curve is doing here?

Yes. We continue to add residential mortgages principally jumbo prime mortgages home equity as I said is the other category that's growing and balance credit cards. Those are areas that can, the slope is upward the area continues to be strong as auto lending and as Kathy mentioned a little bit the challenge on the loan lending as well behind this great, spreads are challenged but given our cost of funds we are still very profitable but not as profitable as they were a year ago.

Our next question comes from the line of Paul Miller of FBR.

On the mortgage banking side, we know we had the new disclosures in the CFEP trade, but it looks like your mortgage banking was in line with what we expected. Can you talk about how you managed to do the trade? It looks like it wasn't that big of a deal for you guys?

Yes Paul. So we had a significant team of folks who are focused it is growing effort and we were able to automate much of the process we had about 40 major conversion to do that last weekend in fact so it was a little bit of a backlog that occurred because just natural process of the new disclosures new requirements costs more time but it wasn’t usually impactful and as you said our results were pretty much in line with what we expected we might have a little bit of a pickup in the first quarter from that lag but we are principally automated in that and very good shape.

And then on the other side, because you do have a pretty good pulse on the consumers out there, do you see a big pickup in purchases? We had a very strong purchase market, probably the strongest we've had in seven years in 2015. Do you see that continue in 2016?

So the year started as you know all about that so the year started in about 50-50 purchase versus refinance ended the year about two thirds one third and sort of the normal environment is 75-25 and that's what we expect as to go into 2016 about 75% of the volume being new money and 25% refinancings.

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

On your Fidelity co-brand win, it seems like that's a product that's going to give you exposure to national spend from a fairly affluent customer base. Should we conclude that you guys are seeking to become more of a national player in card? It certainly seems like you're expanding beyond -- well beyond your footprint?

While we already are a national player in card so this was just adding in that what we’re seeking is always a good portfolio with good customers and this is a great example it is a high quality portfolio it offers us a great opportunity for growth and our customers service levels with this portfolio I think is what's going to make the difference so it's a continuation now we’re doing that will be also the same with the Auto Club portfolio. So as Richard mentioned I think those are focus areas for us have been and will continue to be.

Hey Bill, it's Richard. I don’t know how long you have followed us but many-many years ago one of our biggest moment in time was when we had lost the WorldPerks card from Northwest airlines and it went to American Express were in Delta by Northwest and we came up with the FlexPerks card which I am going to say this now when I retire would be one of the top three things I think we ever did really-really well here and is very national. In fact when I talk to you guys if auto were to go down to $10 to $15 and would shut at the thought but if I had to talk to you about where the tangent risk would be we would be talking about the unemployment issues in those areas affected mostly by oil and the energy and our very own customers you may be surprised have a lot of people in parts that we don’t have branches that have that credit card and like it a lot so it will be our own victim of success here but it's been quite national for five-six years and Andy is right we just want to be more perceived at that and we are not going to hesitate to take national forward growth just like we worked commercial real estate or wholesale banking if we want book for branches to be considered a national player and everything else.

If I could ask one more on a different topic, there are some banks who many would put into the quality bucket who have significant excess liquidity parked at the Fed. And there are others that use their excess liquidity to restructure the right-hand side of their balance sheets and therefore don't have that liquidity available today. Obviously everyone regards you guys as being in that kind of high-quality camp, but you don't appear to have as much excess liquidity that you're holding at the Fed. Can you remind us of why that is?

Yes. We look at our liquidity as you know we have got 9.1% on our common equity tier one ratio that's about 110 basis points above our target of 8%. And if you think about it we’re holding that excess rate between our target and where we’re actually performing because we haven’t been able to really reinvest or grow our loan balances as much as we would want so if we can get back into that 6% plus the balance sheet growth and so forth I think that you will see our capital to be right in line with kind of our real target.

And it is exactly right Kathy and I would add actually the one of the reasons we don’t access liquidity on the balance sheet is because we were building our securities portfolio to adjust the LCR exactly the right time at the time the deposits were growing faster than loans and we used the excess to build securities so we are very balanced and we sit in that situation today so we are not lying at the Fed in an any material way you are right.

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

Well, I'll repeat the same question as in the past Richard Davis versus the 10-year. And the 10-year has been winning recently, and here you are talking about faster loan growth, which seems to be that you should be winning over the 10-year as far as what the 10-year is saying about growth. On the other hand, you are seeing what's going on in the market. So my question is, is the economy getting better or worse? What's your conviction level and confidence? And also, as the capital markets, at least in certain areas of the capital markets, liquidity is less plentiful. Is that an opportunity for you to step in and lend even more? Because you said the expansion in loan growth is on the consumer side and on the wholesale side it's the same. But is this an opportunity for you to step in and borrow where some of the nonbanks might be retreating -- I'm sorry, a chance for you to lend more where some of the nonbanks are retreating?

Let's start first on just general lending appetite, as a junior lender years ago there's still a steady state paradigm that you only make along based on abilities, stability and willingness and the willingness is a low part, people are able to take loans, they're more stable than they had been and other than 8 years but they're just not willing so we can't create willing and we're not going to create willing and those are the most willing are the ones that are too eager, and we don't want them so, that's impart why you're going to see our loan growth I think be steady but not robust because we're going to reflect whatever the economy sets, I also do think our market share has grown a lot and you've all the data to prove it. So, we're getting first look from a lot of customers that maybe in a decade before didn’t think of us as much. On the capital market side I think you'll also find answers yes we can step in and now be a lender of support for those who have the other alternatives and want to use it in more traditional balance sheet approach to growing their business and as I've said earlier we're no longer auditioning, We're well ensconced now one of the top two or three banks in most large companies’ portfolio or the place they would have called for the opportunity and that comes from our debt ratings Mike. I mean if you're a C suite person at a fortune anything or one of the largest private companies, you really do value our ratings and you value the top notch level that we have and that means more to you than sometimes pricing which we also offer. So, I think in many cased we'll get more than our fare share of the capital markets where there's an interest in using that as an alternative to traditional financing and we set ourselves up perfectly to be early call and a chance to deliver and you might add to any of those since you run them.

I think that's right, and I think the point that you made which is the market share point of the equation and I saw that growth perhaps is a little higher than what the average and most of that's coming from taking market share and that's certainly driving the wholesale side of the equation and it comes back to that ratings discussion that you discussed.

On that last point, as you see private equity firms back away from some energy companies and you see some loan funds that have gotten burnt back away, is that an opportunity for you to step in and lend more to say oil and gas companies? And I'm sorry I got on the call a couple minutes late. Did you indicate what are you reserves against oil and gas loans?

Yes I will jump in first of all, nothing you said changes our appetite for risk, we're not going to change it no matter how attractive things look and you targeted that part earlier. As Bill talked earlier, our energy portfolio is only 1.2% of the company, we've added reserves to at this particular quarter, we're at 5.4% reserves against the energy portfolio for our company which I think will prevail to be a reasonable place at this point in time with oil at $29, $30, I also said we've plenty of room and appetite and willingness to move those new reserves higher up if we need to and we're watching as we stress test, the heck out of those things. But as it relates to taking alternatives, we want to be a capital markets alternative to more traditional lending but having to do with the risk profile that's unique and different than it is today, it doesn’t matter what it is we're not going to do it.

Our next question comes from the line of Vivek Juneja of JP Morgan.

A couple of questions, just trying to get a sense of what you are seeing in the marketplace, C&I loans, your yields were flat, LIBOR was up through the quarter. Can you talk a little bit about -- we're not seeing any impact of that -- why? And then yields are fairly low at 286 or something like that I believe, so -- or no, 268 actually?

This is Andy so the corporate spreads are a function of two things, one is where our growth is coming is more from the high quality side of the portfolio so a little bit less on the highly levered things like that that are falling off and some of the leasing portfolio and we're seeing high quality corporate growth which is a little thinner strategy all right. The second is some of the growth that you're seeing is also short term in terms of the tenure which is causing -- it is a little bit of a thinner spread perhaps our linkage to a bond deal that's short term in nature related to an M&A transaction, so it is a little thinner again and what is typically on the books, but again high quality, still profitable but just a little different mix.

Secondly, on the NIM side, going back to the comments you and Kathy and the others made, you've got a very healthy amount of noninterest deposits, even though I know it's only 25 basis points. I'm presuming -- are you firstly, are you passing -- have you begun passing anything on at all to any of your customers? And secondly, given that shouldn't we -- what's offsetting the NIM benefit from all of your low cost deposit base?

Yes. So at this point, we are passing we're seeing some interest rate increases particularly around our wholesale side. We haven’t seen a whole lot of movement right now on the consumer side and I think that’s pretty true across the industry. So that is as we look into quarter one that the fact that those re-pricings are starting but starting a little bit maybe lower than what we would have potentially modelled I think is basically benefiting us.

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

Richard, several quarters ago I asked you about projects that you might be investing in, if you saw better revenue trends. I think you said at that time you had a whole list of projects that you wanted to dive into when things looked a little better. Are we at that point yet? Do you still have that list, or have you started to implement some of these investments?

I remember saying that, and first of all what we didn’t do is with our efficiency program we didn’t stop as I said earlier our innovation and our investment in our technology. So one thing is that I would have put back first was something I never took out. The other one I think I mentioned was wealth management and the ultrahigh net worth and building more locations, physical locations, people to come in visit. We currently have six I’d love to move that to a much higher level. It's going to be a long investment lead so I’ve got to be thoughtful I do it if I could right now. But the investment we did so long and until I see a more robust economy with interest rate increases I would be putting too much ahead of that and put ourselves on harms-way. So those would be the two that I would mention, I meant when I mentioned it to you and one of them we’re still doing the other one we’ve got on the place where they’re ready to roll in to.

Yes, and could you just give us -- Andy, this might be a question for you -- you mentioned the auto business. What's your outlook for this year? You're coming off such a strong year. Can you just sort of give us some color on that segment?

I would expect the growth to be similar with what we saw off 2015, more focused on the lending side versus the leasing side and with it principally trying auto on the lending side. So, to stress this situation what might have been 110, 120 basis points is maybe down to 100 or right around that area, a lot of that’s because of the aggressive nature of the manufacturers. But I think on a growth prospect a very -- prospects for ’16 are going to be very similar to what you saw in ’15.

Are you picking up market share there? Is that part of your growth picture?

Yes. We are both with dealers as well as certain manufacturers that we’re trying to partner with in different ways a little bit on the lending side but also on the leasing side.

Our next question comes from the line of Chris Mutascio of KBW.

A lot of my questions have been asked and answered. A couple nitpicky things I guess. Kathy, can you refresh my memory, who did you sell the HSA deposit portfolio to?

That was Optum Bank.

I am sorry, to who?

Optum Bank.

And then, and Richard, I appreciate you calling out the gain in HSA and maybe the possible offset in terms of the expenses in the quarter to get more of a run rate. And I hope you don't think I'm beating you up too much, but should I really back out the expenses in the quarter tied to legal and compliance since first quarter your level expense is supposed to be similar to the reported level in fourth quarter?

There is going to be a lot of moving parts of this and we’re very early in the quarter. But I think that if you go with the guidance of just relatively stable because I think you will -- that’s what we’re thinking of as we look out into the first quarter.

I am going to give you something you don’t know which is why you called. This year we’re going to look back on 2015 and we’re not going to payout 100% of our bonus pool. This is my 10th year as CEO and that’d the first year we didn’t and I am okay with that because we live and die by the sword and our guys are amazingly competent and capable. And when we have great years we pay them out handsomely over 100% of target and when we don’t we don’t. And so what that means to you is the accrual goes back to 100% in first quarter because you expect to make your plan. And so that’s a fairly interesting delta I am not going to slide it for you exactly but that would be something that I would have told you more next quarter but I might as well change that because you are struggling to think it through why we would otherwise want to stay stable that is another fairly meaningful part of it.

Our next question comes from the line of Eric Wasserstrom of Guggenheim.

Just one final question on expenses, which has been discussed at great length, but I just want to understand how -- what is actually funding these growth initiatives. Is it strictly the benefit of the top-line growth that's occurring in some measure? Or is it coming from efficiency savings that continue to be gained in other places?

Well, in terms of you are speaking innovation particularly we just have that in the run rate for about seven or eight years it’s just something that would be easy to slowdown and that’s the part of descending that we didn’t. I can’t underestimate enough when you have a acquiring payments business not just in issuing you get to work with the merchant not the commercial customer the merchant the one who sells stuff and then you get to bring your consumers in and we pilot and test all kinds of relationships and partnerships and we learn best practices, consumer preferences, merchant progresses and some of the stuff never makes it to the street because it’s really a bad idea but it looked good. So that we don’t want to slowdown that's been in the run rate for Eric for as many years as I could remember so there is no new increased cost and as I said earlier things like our large brand reputation campaign we are going to launch this year will cost money we haven’t have the run rate so it is going to come impart from the efficiency program some we will give it back to the shareholders some we will keep for ourselves and investment in things people always wanted to do so that's kind of the way to think about it.

Okay. And you've given I think very clear guidance about the first quarter, but has anything that's occurred in terms of portfolio acquisitions or other kinds of dynamics further disrupt what would be the typical quarterly cadence in terms of expense seasonality?

That is all. You are right to ask that in fact I think in this quarter we are going to go back at our next opportunity to show and remind people how steady our fourth quarters are and how -- which quarter is strongest which one is weakest and how the linked quarters move and I am only saying that because it's a really it's so consistent you can set your watch by it and it is a probably a good way to go back and look.

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

Credit quality for you guys has been good and you continue to expect that it's going to remain very good, but the world is obviously starting to worry about bigger other things. So you guys don't have to worry so much about energy, but Rich, I'm just wondering -- I don't know if Bill's there -- but back in all of your industries and your subgroups, what are you starting to watch for? What, if anything, are you concerned could go the wrong way? We're certainly not seeing it in NPAs, delinquencies, et cetera, across the Company. So can you just tell us your underlying comfort in terms of how things are going and what you will be watchful of?

I will have Bill answer that but I do want to call out what a good question that was because dealing with our Board of Directors we haven’t really focused on credit in many years and I'm putting it right back at the front runner because I want to start watching trends and we are going to watch competitors and we’re going to watch different buckets and tranches and we are going to learn a lot all of us by what's about to happen if we start learning about these small moves now don’t look very big that they can be quite tell-tell of what is going to happen so you ask more questions like that because that's going I think give us a chance to I'll talk about risk profile and likely future losses but Bill why don’t you answer the question and what's your -- more or so a word about after energy and precious metals.

Yes I mean really it is the impacted areas in the country that we would look most closely at so if you think about the Dakota there is not a lot of people or infrastructure out there other than what's in the oil and gas but if you get to a state like Texas and the Houston area where it is a fairly energy dependent economy so you really look at a kind of newly unemployed trend and that's a thing that's going to generate potential delinquencies in the consumer portfolios and then that just has a ripple effect in terms of lower demand for small business both etcetera so we would focus very closely on watching the economies around the kind of the energy belt areas in the United States we do have as Richard said earlier we’re national and for real state national and our own card so we have been watching carefully we have not seen any impact yet even though we would be seeing 50,000 oil workers have lost their jobs in the last year or so but it really has not shown up and I feel bad but those are the kinds of things that we want every day.

Okay, and one follow-up just you guys talk a lot about the strength in the payments businesses and then we still have that offsetting potential benefit from the energy subsidy that's not quite coming through. So in terms of just payments growth and underlying, can you just talk about do you envision the energy subsidy starting to get spent? Or do you think that's just an ongoing drag in certain parts of the businesses and we're not quite seeing it offset to the positive in other?

This is Andy so I wouldn’t say that the energy subsidy is being spent into a large degree so we are seeing steady growth in our card growth as you saw is very good we had a very good Christmas season the holiday season if you compare our contrasted our master card numbers would show up from Black Friday through Christmas Eve would say of 7.9% growth that was just over 10% growth which is better than it was last year but it's not substantially better so we are good and steady but we are not seeing all the dollars saved on the energy side moving to spend on the consumer side.

Our next question comes from the line of Terry McEvoy of Stephens.

I was wondering if you could just talk about the headwinds to credit and debit card revenue in 2016 just from lower equipment sales that kind of were up in Q3. You mentioned they were down a bit in Q4. And then maybe just as a follow-on, that same question on revenue given lower gas prices and what that does to the fleet vehicle card at Elavon?

Right so actually the spend activity on merchant terminals peak in the third quarter came down about 1% or 2% in the fourth quarter and I would expect it to be fairly level going into 2016. There is still a number of merchants who have been purchasing terminals that we would expect to steady state without occurring but the headwinds so to speak as you described it was about a 1.5% to 2% in the fourth quarter but I don’t expect there is a lot of further headwind going into 2016.

And then just a quick question for Kathy, the tax rates kind of jumped around. Could you give us a little insight into full-year 2016 for the tax rate?

Yes, you're right, the tax rate did rise in the fourth quarter and that was principally due to the fact that we had some mix change in our tax credit business so as I look out into 2016 I'd put that rate in the kind of in that 28% to 29% range and as I've said today we're probably right in the middle of that range.

This concludes our Q&A portion for today's call. I will now turn the call back over to management for any additional or closing remarks.

Thank you for listening to this review of our fourth quarter 2015 and full year 2015 results. Please contact us if you have any follow-up questions. Have a good day.

Thank you.