U.S. Bancorp (USB) Q1 2012 Earnings Report, Transcript and Summary

Welcome to U.S. Bancorp's First Quarter 2012 Earnings Conference Call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer; and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 11:00 a.m. Eastern Daylight Time through Tuesday, April 24, at midnight Eastern Daylight Time. I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Thank you, Brooke, and good morning to everyone who has joined our call. Richard Davis, Andy Cecere and Bill Parker are here with me today to review U.S. Bancorp's first quarter 2012 results and to answer your questions. Richard and Andy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analysts' schedules, are available on our website at usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Richard.

Thank you, Judy, and good morning, everyone. We're pleased to share our results with you today, and I'll begin with the highlights on Page 3 of the presentation. U.S. Bank recorded net income of $1.3 billion for the first quarter of 2012 or $0.67 per diluted common share. Total net revenue was higher by 9.1% over the same quarter of 2011, driven by 7.3% growth in net interest income and 11.3% growth in fee revenue. Total average loans grew year-over-year and linked quarter by 6.4% and 1.5%, respectively, and we also experienced strong loan growth and total average deposits of 11.7% over the prior year and 2.2% linked quarter. Credit Quality continued to improve as net charge-offs declined by 8.2%, and nonperforming assets decreased in total by 8.5% from the prior quarter. We continue to generate significant capital each quarter. Our Tier 1 common equity ratio was 8.7% at March 31, or 8.4% using anticipated Basel III guidelines, while the Tier 1 capital ratio ended the quarter at 10.9%. Capital actions this quarter included a 56% dividend increase, and we repurchased 16 million shares of common stock during the first quarter. The 5-quarter trends of our industry-leading performance metrics are shown on the left-hand side of Slide 4. Return on average assets in the first quarter was 1.6%, and return on average common equity was 16.2%. We've stated that our company can achieve a normalized ROA in the range of 1.6% to 1.9% and an ROE between 16% and 19%. Both performance ratios have now reached their respective ranges. Our net interest margin and efficiency ratio are shown on the graph on the right-hand side of Slide 4. This quarter's net interest margin of 3.6% was 9 basis points lower than the same quarter of last year but equal to…

Thanks, Richard. Slide 11 gives you a view of our first quarter 2012 results versus comparable time periods. Diluted EPS of $0.67 was 28.8% higher than the first quarter of 2011 and 2.9% lower than the prior quarter. Recall that the fourth quarter EPS included $0.05 related to 2 notable items. Slide 12 lists the key drivers of the company's first quarter earnings. The 27.9% increase in net income year-over-year was the result of a 9.1% increase in net revenue and a decrease in the provision for credit losses, partially offset by a 10.6% increase in noninterest expense. Net income was slightly lower on a linked quarter basis. The unfavorable variance was the result of a 3.4% decline in net revenue, partially offset by lower noninterest expense and a $16 million decrease in the provision for credit losses. Excluding the impact of the 2 notable items detailed on Slide 13, net revenue increased by 1.8% quarter-over-quarter and noninterest expense was flat. Slide 13 provides you more detail about the notable items that impacted the comparison of our first quarter to prior periods. In the fourth quarter of 2011, total noninterest income included a $263 million litigation settlement gain related to the termination of a merchant processing referral agreement. We also booked $130 million expense accrual related to mortgage servicing and foreclosure-related matters. On a net basis, these 2 items increased fourth quarter net income by approximately $92 million and EPS by $0.05. The first quarter of 2011 included a $46 million gain related to the acquisition of First Community Bank of New Mexico from the FDIC. Also noted in the bottom of Slide 13 are 2 revenue and expense classification changes that had an impact on comparisons to prior periods. Moving to Slide 14. Net interest income increased year-over-year by…

Thanks, Andy. And to conclude our formal remarks, I turn your attention to Slide 20. The momentum continues. Words from the cover of our annual report that appropriately describe our 2011 accomplishments and performance, and our first quarter results demonstrated the momentum we've built over the past several years continues to build into the new year. In the first quarter, we grew our balance sheet and our customer base. We grew our net revenue. We continued to invest in our organic growth initiatives, as well as small but important fill-in acquisitions, including: the 10-branch banking franchise of BankEast in Knoxville, Tennessee; the Indiana Corporate Trust business from UMB Bank; and an institutional trust business from Union Bank in California. In the first quarter, our credit quality continued to improve. Our capital liquidity positions remained strong. And we grew our earnings and achieved industry-leading performance metrics for the quarter, and we were able to return 66% of our earnings to our shareholders through dividends and buybacks. We continue to benefit from our investments in growth initiatives and innovation and in acquisitions. We continue to benefit from our prudent risk management and our diversified business model, and we benefit from our markets, both established and new. Today we'll be holding our Annual Meeting here in Minneapolis, our headquarter city. In addition to conducting the official business of the meeting, I'll be sharing our story of how we have managed this company through the downturn and we are continuing to capitalize on the momentum we've built. I'll also tell the shareholders how exceedingly proud I am of what we've accomplished and of the 64,000 remarkable and engaged employees that have contributed to our success. I look forward to the coming year as we grow even stronger for the benefit of our customers, employees, communities and, importantly, our shareholders. That concludes our formal remarks. Andy, Bill and I would now be happy to answer questions from the audience.

[Operator Instructions] Your first question comes from Chris Kotowski with Oppenheimer. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: First of all, I guess I just wonder if you can give some color commentary around loan demand trends through the quarter. Do you still see -- are there any particular pockets of strength, weakness, sector -- either by sector or by geography?

Sure. This is Richard. As we stated 90 days ago, we thought that the trends would slow from quarter 4, partly because of the seasonality of the new year. And we saw the ending of the quarter kind of slowing down, and we turned out to be correct. In this case, we're starting to see what I expected was a slow but seasonal increase as we move into quarter 2. Quarter 1 got stronger as it aged, and quarter 2 is looking at least as good as quarter 1, if not with slight biases on the positive side. It's across-the-board, Chris. Corporate Banking, commercial banking, Community Banking, small business, consumer, credit card, they're all showing slight improvements in terms of volume and applications. All of them are showing improvement in credit quality. And except for Commercial Real Estate, where we see strengths on the coasts and the larger cities that kind of line the 2 oceans, we don't see any other distinct geography to note except a nice, steady, kind of even increase across all business lines across all states where we do business in all 50. So we're feeling quite positive about the year as it ages. And as spring has sprung, we're looking -- things looking up pretty nicely. I've got Bill Parker here with me to maybe bring a little more color to the quality and the application volumes.

Yes. So I'll highlight small business because we did see a pretty good uptick in our small business application volume. It's been double digit in all of our different areas, whether it's SBA or the branch-originated small business. So that bodes well to see some strength in the small business markets. And I'll just comment on the credit and Commercial Real Estate. Multifamily is the one area that's very strong and particularly on the coast. In the other areas, Class A properties are highly valued. But if you get below Class A and the other asset classes, it's still -- I don't want to say weak, but it's not as strong, so. But overall, pretty positive.

And we won't – we've said this before. We can compete on price, and we will to the right level, but we won't engage in price competition where it doesn't make sense for our company. And we won't get our loan volume on lower underwriting. We simply won't do that, and we haven't had to and we're not going to. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: Okay. Then the other thing I wanted to ask about was your mortgage servicing portfolio has started to grow significantly, and it had been flat the prior couple of quarters. And the last 2 quarters, it's kind of grown significantly. I'm wondering is that just a function of the strong production volume that we've had recently, or is -- or do you see that as a particular strategic growth opportunity in that some of the larger players are probably constrained in how they can grow their servicing business?

Yes and yes. So it is a function of -- the latter informs the former. So we're having really nice market share improvement because we've stayed very active in this. We've added a lot of resources to continue to be relevant as a mortgage originator and a servicer. And because the market -- the dynamics have changed, we continue to enjoy even greater growth maybe than we might have thought. We have no limits on the kind of resources that we might pursue to this level because we see a market shift that you only get once in a lifetime. And we intend to enjoy it now and come out of this as probably, I don't know, in the top 5 for sure of mortgage servicing and production, and we're seeing that to come sooner than we thought. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: Okay. And specifically, that -- is that something that you could imagine getting into the kind of stand-alone mortgage company kind of business and through acquisition? Or do you want to maintain mortgage production primarily out of the branches?

Well, we do it through the branches and through corresponding networks, so that's not going to change. But like everything else, we don't want to be dominant in any one line of business. So no more that I want to be a credit card company with branches attached to it, I don't want to be a mortgage company with a credit card business. We really want to be a business that does the work for most of our customers and meet their needs, where we know them firsthand and where there's opportunity to extend that based on market share improvement, we'll take that as well. But Chris, you'll see us continue that kind of balanced view of revenue achieved through spread and fee income on a basis of diversity of types of business as well.

Your next question comes from Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: Could you maybe kind of flesh out some of your comments on the capital front? I mean, obviously, you're now kind of -- you're past the point where you would likely see any SIFI buffer or anything like that, and obviously, 2/3 of the capital is a nice capital return. But as you kind of look out there, are there acquisition opportunities that we should be thinking about? Or how could that evolve over the course of the next year?

Moshe, this is Andy. So our Tier 1 common Basel III standard is at 8.4%, probably a little higher than we would plan to be at, and part of that is the volatility around that ratio as it relates to OCI and the available-for-sale portfolio, as we enjoyed a bigger gain this quarter due to lower interest rates. So you'll see us somewhere in that 8.2% to 8.4% range depending upon that gain. Our capital plan was approved. And as we've talked about, we have a target of that sort of 30 to 40 dividends, 30 to 40 buybacks, somewhere within that range. That leaves us plenty of room for opportunities that present themselves in the marketplace for portfolio purchases or small deals, just like we've done been in the past. And I think we're sort of in a normal, regular ongoing capital distribution methodology as we sit today with some dividends, some buybacks and some return for internal investment.

And Moshe, what you saw last quarter would be a great proxy for future quarters in terms of M&A branch opportunities where they come along, FDIC or otherwise, payments businesses, corporate trust opportunities. The stuff you've seen us do over the last 4 years, 5 years. We see a pipeline for that opportunity. And as Andy said, we have plenty of room left within our retained capital to do that. Moshe Orenbuch - Crédit Suisse AG, Research Division: And just a follow-up on the Corporate Trust. I mean, there've been some recent lawsuits looking at the questions around the trustees' responsibility as -- in some of the sub-prime securitizations. Do you have kind of any thoughts on -- as to how that might shake out?

Yes, absolutely. I'm glad you brought it up. And as you know, it's not new. We've been dealing with this for as long as I've been here. One of the benefits of Corporate Trust is it's a really good business, particularly when the market is strong. It's a good relationship and fee business, and it provides -- there's pretty high cost of entry. So you're either in it and you're good or you're not in it at all. We've got the benefit of being in it and good. But with it comes the risk of confusion, and it's a reputation risk that we manage every single day. And it can be anything from foreclosed properties, where we are often cited as the owner of the property, or REO property, where there's some problem with the quality of the structure, and we're identified as the owner. And it turns out we're most often the trustee. And in fact, that causes people to be confused because that's still a complicated topic. When a company might file bankruptcy and we're acting as trustee, it looks like we were the lender who put them into a bankruptcy. And then more times than not, as you're talking about now in some of the MBS and other kinds of structured deals, we are often hired in as the appropriate legal source and the broker between 2 parties and often confused as the party in between. So we will deal with that confusion because the business is so good, and it has such a great upside potential and we're so deep into it. We just recognize it's something we have to manage. And each time we get a chance to clarify and educate either for us or civic leaders who are confused about it, we find an opportunity to do so. But it will take quite a while for people to understand what trustee looks like. I'll close and give you my pseudo-legal point though, that as a trustee, we don't have the rights to reach in and touch the properties or change the rules of the engagement on the escrow. It's our responsibility to execute as the law would have us and to do that within the bounds of whatever the construct of the trustee relationship is. It's not ours to overreach or to step in and fix something we weren't asked to do, despite the temptation by, sometimes, people who want us to do that. So we'll deal with the confusion. And the more times people give us a chance to clarify, the more times we'll take it.

Your next question comes from Matt O'Connor with Deutsche Bank.

You've obviously been outgrowing the industry in the loans. You've talked about some NIM pressure going forward. When you put it all together, do you think you can still grow net interest income dollars from here?

I think the short answer to that, Matt, is yes. So our NIM pressure was principally related to our increase in our securities portfolio, and that's true on a year-over-year as well as linked quarter basis. We took advantage of our long cash position this quarter to accelerate some of our purchases. But I think we're going to remain fairly stable in that securities portfolio going forward. And we have a good amount of debt at higher costs rolling off in the second half of the year, so that'll create some stabilization. As I mentioned, I expect us to be down a few basis points in the second quarter, but then I expect some stabilization.

Let me also add, Matt, that I know this would be the case for everybody. But as well as we're doing on loan growth, we're doing even better in commitment growth. And while that doesn't show up in the balance sheet, it shows up in the future. And I think you're all going to be very pleased that whenever the robust economy comes back, and it will, we're going to stand to enjoy a second round of, I think, a comparative benefit because the commitment growth is so significant and yet to be tapped because utilization stays flat. We're actually quite optimistic that to answer your question with a strong yes.

Okay. And then separate topic, in terms of buybacks and just capital return overall. Not that I'm looking for a specific price in which you'd be buying back stock but you have had some banks come out and say, "We'll be aggressive buyers up to here." And I'm just wondering conceptually, one, how you think about valuation? And then two, one could make the argument that maybe special dividends, over time, might make more sense. So how do you just think about balancing that over time?

Yes. Matt, this is Andy. As you know, the trade-off with the buyback is buying back the stock at times 0, or the cash flows at times 0 plus 1 and forward. And we do have a specific view on that. We look at that every month in the perspective of our company. And we have a very good view on the future. At this price, we are still buying back our stock. And there is a price well above the level we are at today that we would have consideration about holding back a bit, but we're not to that level now. So we're very comfortable buying back at today's price. We're also comfortable with the balance between dividends and buybacks, because it gives us the opportunity to move in terms of buybacks up or down, give other opportunities in the marketplace that we talked about before.

Your next question comes from Erika Penala with BofA Merrill Lynch.

My first question is on home equity classification on the credit side. I know this is a much smaller piece of your pie, but we saw from larger banks an increase in problem loans as they reclassified some of their seconds that are still paying as the first is in trouble. Did you stick to that cost, or did you also stick to that same classification this quarter? Or is that already reflected in your numbers?

Erika, I'm going to have Bill answer the technical issue. But for us, I just want to highlight, it is very, very small, and the numbers that you've seen from some of the larger banks are significantly greater than. So for us, we're talking $15 million to $30 million, well below the $1 billion-plus that you've seen elsewhere. And so for us, we believe that the classification we have today is accurate and reflects appropriately, and we did do some actions last quarter that Bill can talk about. But I'll also say that if we discover that there's a prevailing view on how things should be handled, then we can do that. But if you look at our nonperforming loans, they improved by almost 8% linked quarter. If we were taking that $15 million to $30 million, they would've improved by 7%. So just to reiterate, the immateriality of it and the fact that it's not a big number is important for me to highlight. And, Bill, you might talk a little deeper dive.

Yes. So I mean, if -- our home equity portfolio has 2 distinguishing features. One, a lot of it is -- about $5 billion of it is actually lines that are in the first lien position, so there's not even another loan to look at, so obviously, that's very high quality. And then those that we do service, about 30% of the portfolio, that's where that $15 million, $30 million comes from. So it's just not a material number. The other part of what that reclassification was about was really on the reserving side, and that's, I'd argue, the more important side. And we'd implemented that sometime last year. So we feel very comfortable with the adequacy of our reserves on home equity.

Okay. And just to veer into another topic. Richard, could you give us a sense or an update on your ability to reprice the deposit product in 2012 on the retail side? I know a lot of banks had talked about mitigation efforts sort of in the first half of last year in anticipation of debit interchange reform. And just wanted to get a sense on how some of the fee transfer to the consumer is panning out this year.

Erika, we've said that of the total loss of revenue that was derived by CARD Act, Reg E and Durbin, that we would eventually get to 50% of that back. And I think we said we were at 30% last time. Our plan is to get to that 50% by year's end, and I also said it won't be before year's end because we're going to be very thoughtful about this. But I'm comfortable we can do it. And in doing so, there's a couple things. One is market share gain really helps a lot. You can improve your fee revenue by just having more customers who are paying the current fees that you offer and feel good about that, with our Checking With Choice and some of the way we packaged our products, people are seemingly happy to pay those fees and get the services we provide, especially some of the things we're adding to the capabilities, like mobile and more technology. I would say, however, there will also be some increases in certain fee categories that we will continue to provide because we need to do that to return to the shareholders what they've been waiting for. But we had to be very thoughtful about market positions, and we are not a one-size-fits-all. We have basically business in every state. We have 25 states where our consumer business is located. And if we have to have 168 different solutions for that many different pricing markets, which is how many we have, we would do that. So we're going to be very careful and thoughtful and look at where the market competition will allow us to increase the current fees. And we're really going to go after with some market share grab and competing to have more customers that pay what we think is a fair assessment for the service we provide. Nothing magic. And what I did say is we will get to that 50%. We'll use the whole year to get there. I'm not rushing it. We've got a good momentum everywhere else. And I'm not going to mess up what's happening right now and the good momentum we have in the branches where they're getting more customers, deeper relationships and not putting them through the fits and starts of having to decide what prices we change all the time, because we're very consistent and I wanted to give them that benefit.

Your next question comes from John McDonald with Sanford Bernstein. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Just a broader question. You guys are executing well. Your profitability ratio is within the targeted ranges. Kind of wondering where do you think you're still under-earning, whether it's low interest rates or mitigating some of the reg reform, where are areas that you can improve the profitability over the next couple years?

Well, the best part of the story, and I mean, the best part of the story is that we're just so not finished getting great at what we already do. So hard as it is to talk about organic growth and pursuit of investments from prior periods, that's really what the story is all about. And in fact, John, the recent quarter 1 2012 was as good as it was, was because of things we did in third quarter 2010 and the commitments we're making through employee engagement and technology. So I would tell you, we hit our peak in capital investments in 2010, but we'll have to continue to work that off. Our investments in the first 5 years of 2001 to 2006 were 45% less than they were in the last 5 years of 2006 to 2011. So we've spent quite a bit of money, with your all's knowledge and permission, to reinvest in the company, and that's starting to show up in capital. Acquisitions are all accretive, most of the time on day 1, and I think those continue to show as beneficial. But this last part is organic growth. And I know it's so unexciting to talk about, but it's exactly what's happening here. And so from Wealth Management building out to become a national first-class wealth manager, to adding our new Ascent ultra-high net worth business, which is only a couple of quarters old, to this amazing buildout you've seen us take to a national level on our Corporate Banking capabilities and then adding our payment skills across the globe and our consumer retail bank and small business now taking altogether new levels of performance. Add it all up, and that's what you get. So I think on top of that, a stock market that's actually, at best, kind of flattish and interest rates, which we all know are as low as they're going to be, we've got upside on every single cylinder. And if this is an 8-cylinder car, we're running at about 4.5 right now. So if you like what you see now, just wait until things start getting better. I think there's nothing but upward bias toward what we can do the old-fashion organic way. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. Richard, that's helpful. Maybe a question for Bill. Where are you on the kind of cycle of reserve release, and how do you see that playing out over the next couple quarters? And then also, if you could just comment, what drove the higher reserve build for the rep in warranty? Is that due to higher origination volume or something else?

Yes. So the reserve release, I mean, we're in the point of the credit cycle where we'll continue to get credit improvement, probably for another 18 months. We have Commercial Real Estate assets that still need to be resolved, and that's going to take some time. And some of the residential mortgage portfolios are still stressed, so that's going to take time. But the improvement is slowing. I mean, some of our portfolios are performing at extremely good credit levels. Credit cards, auto's doing extremely well. So you're not going to see a lot more improvement in those areas. I think of the reserve release as something that will -- it will continue, but at a lower level. That will continue to decline.

And, John, this is Andy. Regarding the mortgage question, the principal reason for that was the recent changes from the GSEs in terms of increasing their sampling size. So I would not expect a significantly higher quarter-to-quarter loss rate, but perhaps a longer or more extended period. And that's why we have a higher reserve level.

And -- yes, John, let me just add because God knows I've got to speak if you guys speak. It's only fair. I want to remind you that as you saw our charge-offs hit a level of 1.09%, we've said to all of you for a long time that over the cycle, this is a probably 1% charge-off bank, especially because of our credit card size. We're hitting that 1%. We're hitting close to it, and I predict we'll go below it. And my goal is to do our best to make sure that our reserves, within accounting rules, stay to a place where we don't have to rebuild them all back later on. As an industry, I'm arguing for that as well because I think we've learned a lesson and we don't want to do that. But you have to appreciate that I think Bill and I both think that 1.09% goes to 1% and probably falls under that for a little while, not as a goal necessarily, but over the time and term of our long history, we think that we'll be at 1%, and we're getting very close to that. John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then one just follow-up for Andy. To the extent there's a nuance change in the GSE sampling behavior, is that them looking at a wider range of indices, Andy, or putting -- trying to put back stuff that's been paying for longer? Any color on that?

It's just, John, just going deeper in the loans that we're looking at and going back further. So it's deeper and further in terms of the sampling size. And there's going to be -- the more you look at, the more you may find, and that's why we increased the reserve.

Your next question comes from Ed Najarian with ISI Group.

Question sort of asked, but maybe I'll ask in a slightly different way. So you're 109 basis points on the charge-off ratio this quarter and have given that long-term guidance of 1%. Richard, you've said in prior calls you expected to dip below that 1% level. That sort of looks likely now for next year. Any thoughts as to how far you might dip below that level as you sort of continue to clean up credit and we see this big decline that we're seeing now again this quarter in the delinquency trends? I mean, could we go down to 70 or 80 basis points at some point?

Yes, yes. I mean, Ed, I don't know where we end up. When I say under 1%, I just want you all to know that it's probably going to be -- it's going to overperform for a little while there. It could be 90 basis points, could be high 80s. I don't know. It's not going to be 50 or anything like that. We're still making loans. We're still taking calculated risk, and you want us to do that. But we're also not -- what I'm also telegraphing to you is we're not going to start reaching into riskier categories. We're not going to start underwriting more aggressively. We're not worried about protecting our position as one of the larger market share growers in the credit. We're doing it the way we're doing it, and we're not going to change. So I'm also telegraphing to you that we're not expecting it to get so pristine that you think we're missing opportunities. But I do think this a high-quality book. The stress test would have said so each time they do it. And I think you guys should be comfortable that if we fall below 1%, it's not a goal. It happens to be an outcome. But our goal is to manage this company right around 1% because that, we think, is the right level of risk and reward.

Okay. And then secondarily, if I add back the repurchase provision on mortgage side, I think I'm getting to a mortgage gain on sale, sort of gross number of about 230 basis points on the production. First of all, is that about -- do you agree with that? And then second of all, what are your thoughts on how long that can last or the pace that, that might decline, over what time frame? Or we all know that's a very wide number, but I think we're all struggling with how quickly and over what time frame that declines.

Ed, so the production gain is based on net applications net of a projected fall-out number, so it's closer to 200 basis points in terms of the math. And it is wider than I would expect it to continue in forward quarters, but we are enjoying robust business in our Mortgage group as we talked about. We're taking share, and we're expanding our capabilities. So I would expect it, the second quarter, to have another strong quarter in Mortgage, and it's hard for me to see beyond that right now because there's just too much uncertainty out there.

But at least for the second quarter, it looks like another quarter in terms of very wide gain on sales spread?

Our pipelines continue to be strong. There might be some slowdowns just given the -- about 75% of our first quarter activity was refinanced activity. I would expect that to slow somewhat given that rates have stabilized, but the pipeline continues to be strong.

Right. But that's more of a comment on volume. I'm just talking about the gain on sales spread.

Yes, in the first few months of the quarter here, I would expect it to continue strong.

Your next question comes from Ken Usdin with Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Two quick questions on loans. Number one, Commercial Real Estate is an area that's started to grow again a little bit for you guys, and just wanted to understand how much of that is still moving over from the C&D book versus opportunities that you're starting to see in the marketplace? How is CRE looking as far as maybe the next part of the loan book to pick up, and where are you guys in terms of your aggressiveness in that market?

This is Bill. The -- it's not really moving over from the construction and development. That continues to decline. So the growth we've been picking up is more in stabilized properties. And they're going to be Class A properties, a lot of them with our institutional investors. We have a pretty high-quality group of clientele that our Commercial Real Estate group has enjoyed many years of performance with, and that's where we pick up the loan growth.

Yes, in fact -- Ken, it's Richard. It's unremarkable in where it's coming from. It's remarkable it's coming from everywhere. And I think also the buildout of our Corporate Bank capabilities, as you've been hearing about for the last couple of years, make us more of a one-stop shop for some of these larger real estate national companies that have used us now for higher positions, allowed us to be in the deals longer, have used us for capital market capabilities. So for us, it's just like I said in the beginning, it's everywhere. It's a little bit of every category and I think it's the flight to quality that we continue to enjoy that I don't know how long that lasts. But every time we get to talk to you, it's still there, and we'll enjoy it until it's not. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Great. And my second question just relates to just loan pricing. Obviously, yields came down a little bit in both C&I and CRE. I just want -- if you had some anecdotes to share in terms of how you see loan pricing across the markets and across the commercial products.

Yes, this is Andy. We've talked about the fact, the last few quarters, that loan spreads have stabilized. And I would say that continues to be the case in the first quarter. There are pockets of increased competition, particularly in the commercial area and maybe a little bit below that. But overall, commercial wholesale loan spreads are stable.

Your next question comes from Paul Miller with FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: I had a quick follow-up question on the pushbacks. You talked about increased sample size from the GSEs, a change in policy. Can you just add more color to that?

I don't know how else to define it other than they're looking at more loans, both from the perspective of the depth of the categories as well as the time frame. So if they were looking at 10 loans before, they're looking at 12 now for whatever period, and that's it. So we applied a similar expectation on that increased sample size. It could be that the increased sample size will result in actually a lower loss expectation. We just don't know until we get through the data. Paul J. Miller - FBR Capital Markets & Co., Research Division: Okay. And then on the loan portfolio, which has grown very nicely for you guys. But one of the areas that has grown is residential, and I think part of that's probably because or your market share increase in the Mortgage Banking space. Is that mainly jumbo loans, or is any of that 30-year conforming product?

Yes. There's definitely jumbos; that primarily come through our private client channels. So we do book those jumbo loans that are not GSE qualified. And then the other area of origination is out of our branches, and we have -- it's a refi product only. Average loan size is less than $100,000. These are low loan-to-value first-mortgage refinance originations out of our branch. So those are the 2 main categories.

And those are likely to have a life of 10 to 15 years. Schedule of 10 to 15 versus 30 years. Paul J. Miller - FBR Capital Markets & Co., Research Division: And what type of yield?

The spreads on those are probably 50 to 75 basis points above what you might expect from a GSE qualified. Paul J. Miller - FBR Capital Markets & Co., Research Division: Okay. And then one last question on HARP. I know there's been a lot of media reports, and we've been publishing a lot of stuff about how HARP is better than expectations. And as April 1, I believe, banks like you can start to pick at other servicing portfolios with somewhat limited reps and warrants. I just wondered, are you going to continue to try take market share and maybe go after some of these loans and other portfolios?

Well, we'll -- first of all, I'll just comment that our HARP volume has been pretty strong. We had about a 47% application increase quarter-over-quarter, so we have seen a good HARP refi production. Hard to say how aggressive we'll be on going after the other people's business. I mean, we've been very active in our own portfolio, and we'll continue to be active on our own portfolio. That's our first priority.

Your next question comes from Mike Mayo with CLSA. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: Just to follow up on Ed's earlier question. So what -- if you're 200 basis point mortgage gain on sale now, what would be typical? And again, why is it greater than average? And it's not just you. It's the whole industry.

Typical, Mike, would be somewhere between 125 and 125 (sic) [150]. It's higher right now because there's so much demand in the marketplace, and there's a fairly long -- healthy pipeline. And the number of suppliers in the marketplace is down. So it's just a function of supply and demand in the current market, and that gives us some pricing opportunity. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: And did you mean 125 to 150 is normal?

Yes, correct. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: Okay. And who are you getting share from in your pursuit to be the top 5?

Well, we're already there actually. I was just being generous. We're taking it from the large -- some of the larger guys ahead of us. There's a couple of large banks that are backing it down on that business and just not putting their energy into resources. And then on the other side, there are some smaller partners that are getting out of the business and looking like they're trading. So it's exactly what you see, Mike. I don't have to name names, but you know who's in it big and who's growing and you know who's either backing down or not very present. And we're getting it from there. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: And then switching to your Corporate Banking buildout which you've talked a lot about. But when I look linked quarter, period-end commercial loans without commercial leases are up 18% annualized. And we can look at average, and average is up 15% annualized. However, you want to slice that, that's a big number. And my question relates to how much of that growth is due to syndicated lending, and how much of that growth is due to purchases of loans?

Well, we are -- I mean, in the large corporate space, you're going to be active in the syndicated market, and that complements our corporate bond issuance area. So that is a piece of it, but we're also active in the middle market. So our middle market group is included in those statistics. We have a ABL unit that's enjoyed nice growth. So it's really across the board.

And, Mike, we haven't done much to buy. We're not big acquirers of somebody else's loans. There've been a couple of deals we've looked at. We pass on almost everything that you see in the public market. And if there's a deal, we'll cherry-pick a loan or 2. It'll have to mostly be a customer we already know and just a position and a hold level we're willing to take, but it's not a growth strategy for us to go acquire portfolios. If they come along, we'll look at everything, but we are not as hungry for some of those deals as some others are. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: And then lastly, as you pointed out, your profitability ratios are within your targeted range. But are you leaving money on the table by not having a greater variety of capital market features to give your clients, especially with your Corporate Banking buildout?

O-M-G, no. And I say that because we like -- we only do what we understand and that we can control. And as trite as it sounds, I really like the consistent, predictable, repeatable business we've given you all. I thought you were going to ask if we're going to stop at 16 and 1.6, and that would be no way either. Are you kidding? But we love what we are because I think you can count on it and you can -- it's an annuity. And you can watch it grow, and you can watch it adjust if you don't see any big surprises. And adding to some of those additional opportunities are not hurting us at all because we've got all the ones we wanted to in the last few years by building out our Wholesale Bank and capital markets, nothing left we covet. There's nothing we don't have that we want, and there's nothing we have now that we don't want to keep. So what you see is what you're going to get for quite a while.

Your next question comes from Nancy Bush with NAB Research.

Richard, a question for you. We still are yet to find out about the G-SIFI. We kind of know what it is, but not really. Volcker is yet to come. Are there any other major regulatory pieces outside whatever the CFPB may do that we're waiting for?

Nancy, this is Andy. Only one I -- that I know we're all watching is the final LCR ratio. There's a definition out there today. I know there's some discussion occurring with Basel and the Fed in terms of potential adjustments to that. We've built a lot of liquidity on balance sheet. And whatever those final ratios are will guide us to whatever we finalize from the securities portfolio, but that would be the only other one I could think of.

Yes. Nancy, I was about to say, "No, I don't think so." And then I'm getting the eye cross from Andy like, we have one thing. But let me say what I would characterize. Between Volcker, Dodd-Frank, CFPB, as it relates to the financial impacts to our company and to shareholders, substantially, most of that has already been seen by those other activities of Reg E and Durbin and CARD Act and things like that. Now it'll change the course of how we run the company because we'll have to maybe dot our i's and cross our t's twice. We'll have to confirm certain behaviors. We built our capital markets business knowing that the Volcker Rules were going to change. Dodd-Frank, at just probably 65% of Dodd-Frank will touch our company, and the big majority of it's going to be more paperwork transactions and managing the details, but not the financials. And CFPB, I remain optimistic that it hasn't done anything I haven't seen yet to argue with, and we'll watch and see to see how they perform. But I think if their original true goal of being transparent, clear and helping customers understand what they bought, we're going to be in great shape there. If they get into things like price fixing and things like that, then we'll deal with that when we face it. And it'll affect everybody, and as usual, probably affect us a lot. But for now, I think, we're, as a management team, keeping our eye on so many things but not sitting here worrying about the peril that it will create for the investment that you guys have in our company. And if it's a deal, we'll manage it like we have before and we'll find an offset.

So you think the regulatory regime, as we see it right now, is pretty much what we get going forward?

Well, I think the details are -- yes, I've got the canvas. I've seen the paint on the side, but no one's has painted it yet. But I mean, I don't think there's a hidden trap door that -- of any significance that we can't at least predict or work within as the next couple of years go forward. But as you know, I mean, Dodd-Frank's only 25%, 33% done. Volcker's got a lot of TBDs, and CFPB is new. So I'm not saying it's at all known or done, but I'm telling you what I think. Its worst-case scenarios are something we can manage.

And, Richard, would you care to make an intrepid prediction about when you might get the ability to make or to decide capital actions without going through the CCAR, et cetera, et cetera? I mean, are we at a point now over the next several years where capital actions are done once a year based upon the results of the CCAR, or is that going to change?

Yes, Nancy, I really don't have any facts around it to offer. But I would say we're going to learn a couple things this year, because we know there are a couple of our peers that are seeking midyear capital actions based on what they didn't get in the CCAR. And I think that will inform all of us because we have no evidence that it will be anything less than an annual activity. And then I also am betting that it will take a few more years, few meaning more than 1 or 2, for the global regulators to believe that banks can manage themselves without oversight. But I think the stress test is an annual event that makes sense. And as long as the rules are understood and we know how to participate in predicting our own outcome and make our own decisions that are hopefully approved, I don't think it becomes a burden all but one that we all just have an extra step than we had before. But I think in terms of annual nature, I think we're about to learn that this year some of our folks have -- for a midyear correction.

Your next question comes from Betsy Graseck with Morgan Stanley.

Just a quick question on the commitments. You called out the 5% q-on-q growth in CRE and C&I. I'm just wondering, you've been having nice commitment growth for a while now. How long does the commitments take to translate into outstandings?

Well, currently, forever. I mean, really, our commitment levels, just to give you an idea, when I give you 25%, this is for the large corporate and middle market clients. So it's not credit card. It's not consumer. It's not even small business. Back in 2009, that was 37%, right. So 37% of $65 million was used as a line of credit. Last quarter, we have 25% of $90 billion. So while the growth -- the actual loans outstanding are virtually flat, the increase in the outstandings open to buy is remarkable. So I got to tell you, in a recession, it really is. I have no idea how long it will take. But what I know is when it happens, it'll be amazingly quick. And you guys can watch us like a Doppler radar. The first thing that happens when companies start getting ready to move is the cash balances get used. And then the line of credit gets used and then new loans are made. And so we are still at record levels of deposit held based on companies being strong enough right now and kind of husbanding cash until they know what to do with it. And that's the first, I think, canary in the mine that says, no one's actually taking any big steps at this point in time. But they are getting those lines of credit, Betsy. And they're planning to use them, I suspect, because they're paying for them, and it gives them a lot of alternatives. And I think the country's business community is much stronger than people think it is because they are cash rich. They are line of credit capable, and they're ready to jump when something comes along. We just need that trigger event, and I don't see it on the near term, but surely it will happen because of the cycle.

Okay. I see the macro numbers in your release. I just wondered if you, in tracking individual companies that you're extending commitments to, is that translating into loan growth at all over the last year or so? And I guess your answer is not yet.

Yes. Not yet. And it's a great question because if I -- I would tell you, if that 25% was a few companies that are 100% and the rest at 0, that would be information. But it's not. It's the average company has a line of credit and uses a part of it, and then the rest they leave open to buy. And so for us, this represents a behavior, a consistency, but an absolute growth opportunity.

Your next question comes from Greg Ketron from UBS.

Just a couple of questions. One, the of course, commercial loan growth has continued at a very impressive pace, and maybe some color -- it looks like you would be getting market share, and maybe some color on the strategies that you're undertaking to approach the wholesale or commercial lending business.

Sure. This is Richard. Warning, here comes something else that sounds not that exciting. We work on advocacy. And we've been training all of our lenders, many of whom have been doing this for 30 years, on a special training program we created here in our company on customer advocacy. And that is, Greg, code word for building deeper relationships and having the entire company available informationally to a customer when we meet with them. So we're not -- we don't have the relationship manager now calling on a line of credit, talking about line of credit, praying for a line of credit and coming back home. This relationship manager is working with an entire team doing pre-call activities, bringing the right people out to the client, selling the entire company, if not now, later, and getting a lot of market from other places. So the relationship depth we have is intensely higher than it was before. And to answer a question about 45 minutes ago, amazingly still, an infant in its growth opportunity. So what we're doing now is just getting started on a new way of taking market share. Our guys figured out that flight to quality is a real deal. It translates to new business. So telling the story better helps us do a better job. And so it's really training and making the entire company available through every relationship manager. See, I told you it wasn't going to sound exciting. But I'll tell you what, it's a big deal and it's a big change from where we were a few years ago.

This has legs that could run for beyond next couple of quarters if it's...

That's right. This has years of legs because it's got nothing but upside. And again, if you like what you see now, just imagine what we can do when we really get good at it.

Great. And, Andy, a question for you on the margin. On the liability side, what remaining opportunities do you have, such as may be debt restructuring or elimination, that may help support the margin through the rest of this year?

We have some TGLP paper coming off here in the May-June time frame. And then in total, if you think about the second half of the year, another $7 billion to $9 billion of higher-cost debt rolling off, some of which will be replaced, some of which will be sort of re-substituted with deposit growth that we're enjoying. So that benefit will start to show in the margin in the second half.

Okay. So you'll see your cost come out of debt that will be replaced with lower-cost funding sources?

Correct.

Our final question comes from Chris Gamaitoni with Compass Point. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: I just had 2 questions, one around deposits. Noninterest-bearing deposits looked like they decline about 5% quarter-over-quarter and that looks to be mostly in the community bank, small community bank segment. Can you just give a little color on that? Is that people becoming more comfortable and willing to spend and thinking about their current position?

I would attribute more of it to seasonality, typical seasonality related to tax activity and just first quarter spend. So I don't think there's so much of a decline or utilization as much as the seasonal impacts. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Okay. And then on the deposit service accounts charges, they were down 10%, 10.5% quarter-over-quarter. It was attributed to seasonality. I haven't seen the same trends across other banks. Is there a geography issue or a business change that's impacting that?

There is no geography issue. There are fewer days, business days, in the first quarter than the fourth quarter, and that's the principal reason for the decline and the key driver of that number. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Okay. And then just to clarify a statement. You talked about a significant increase in HARP volume. Was that HARP 1.0 or was that HARP 2.0?

We implemented 2.0 in the first quarter, so it'll be some of both.

I will now turn the conference back to Mr. Davis for closing remarks.

Well, obviously, thank you, guys, for your continued support. The questions were great, and they helped us clarify what's on your mind. I'd also ask you to remain optimistic about this economy. I mean, it's starting to show some real signs of permanent but slow recovery. And we're going to be watching every step of it and being engaged in part of it. And hopefully, the banks in America will get a little more credit for the kind of good work we're going do to help get America back on its feet. So spread the good word. That's what I would say, and thanks for your interest in our company.

Yes. Thank you, all, for listening. And as always, if you have questions please free to call me or Sean O'Connor. Thank you.

Thank you. This concludes the conference. You may now disconnect.