U.S. Bancorp (USB) Q1 2014 Earnings Report, Transcript and Summary

Welcome to U.S. Bancorp’s First Quarter 2014 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 approximately at noon EDT through Wednesday, April 23, at 12:00 o’clock midnight EDT. I will now turn the conference call over to Sean O’Connor, Director of Investor Relations for U.S. Bancorp. Sean O’Connor: Thank you, Tiffany, 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 2014 results and to answer your questions. Richard and Andy will be referencing a slide presentation during our prepared remarks. A copy of this slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com. I would like to remind you that any forward-looking statements made during today’s call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today’s presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Richard.

Thank you, Sean, and good morning, everyone. And thank you for joining our call. I’ll begin our review of U.S. Bank’s results with a summary of the quarter’s highlights on Page 3 of the presentation. U.S. Bank reported net income of $1.4 billion for the first quarter of 2014 or $0.73 per diluted common share. Total average loans grew year-over-year by 6% and as expected 1.3% or 5.2% annualized on a linked quarter basis. We experienced strong loan growth – strong growth in total average deposits of 5.1% over the prior year and 0.2% linked quarter. Credit quality remained strong. Total net charge-offs decreased by 21.2% from the prior year and rose modestly on a linked quarter basis as expected due to the unusually high wholesale recoveries in the prior quarter. Non-performing assets excluding covered assets declined linked quarter by 1%. We continue to generate significant capital this quarter. Our common equity Tier 1 capital ratio estimated for the Basel III fully implemented standardized approach was 9% at March 31. We repurchased 12 million shares of common stock during the first quarter which along with our dividend resulted in a 67% return of earnings to our shareholders in the first quarter. Slide 4 provides you with a 5-quarter history of our performance metrics, and they continue to be among the best in the industry. Return on average assets in the first quarter was 1.56%, and return on average common equity was 14.6%. Moving over to the graph on the right, you can see that this quarter’s net interest margin was 3.35%. Andy will discuss the margin in more detail in just a few minutes. Our efficiency ratio for the first quarter was 52.9%. We continue to manage our operating expenses effectively and in line with revenue trends. We expect that this ratio will remain in a low 50s going forward and as we continue to manage expenses in relation to revenue trends, while continue to invest in and grow our businesses. Turning to Slide 5. The company reported total net revenue in the first quarter of $4.8 billion, a 1.2% decrease from the prior year and 1.5% decrease from the previous quarter. The decline in revenue year-over-year was largely driven by lower mortgage banking revenue while the linked quarter variance reflected normal first quarter seasonality within our business lines. Average loan and deposit growth is summarized on Slide 6. Average total loans outstanding increased by over $13 billion or 6% year-over-year and 1.3% linked quarter. Overall, excluding covered loans, a run-off portfolio, average total loans grew by 7.6% year-over-year and 1.7% linked quarter. Once again, the increase in average loans outstanding was supported by strong growth in average total commercial loans, which grew by 8.5% year-over-year and 2.8% over the prior quarter. Total average commercial real estate also increased over the prior quarters, with average loans growing by 7.6% year-over-year and 1.9% linked quarter. Residential real estate loans continue to show strong growth, 14.4% year-over-year and 1.7% over the prior quarter. Within the retail loan category, average credit card loans and auto loans and leases were higher both year-over-year and linked quarter while average home equity lines and loans continue to decline. The rate of decline in this category however has slowed considerably over the past few quarters. We continue to originate and renew new loans and lines for our customers, new originations excluding mortgage production plus new and renewed commitments totaled approximately $35 billion in the first quarter. Total average revolving commercial and commercial real-estate commitments continue to grow at a faster pace than loans increasing year-over-year by 11.7% and 3.4% on a linked quarter basis. Line utilization remains at low levels and was approximately 23% in the first quarter. Total average deposits increased by over $12 billion or 5.1% over the same quarter of last year. On a linked quarter basis, average deposits increased by 0.2% with growth in low cost savings deposits particularly strong on a linked quarter basis. Turning to Slide 7, in credit quality. Total net charge-offs declined 21.2% on a year-over-year basis and rose modestly on a linked quarter basis due to unusually higher wholesale recoveries in the prior quarter. The ratio of net charge-offs to average loans outstanding was 0.59% in the first quarter. Non-performing assets excluding covered assets decreased by 1% on a linked quarter basis and 11.6% from the first quarter of 2013. During the first quarter we released $35 million of reserves, equal to the reserve released in the previous quarter and $5 million more than the first quarter of 2013. 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 second quarter of 2014. Andy will now give you few more details about our first quarter results.

Thanks Richard. Slide 8 gives you a view of our first quarter 2014 versus comparable time periods. Our diluted EPS was $0.73, was equal to the first quarter of 2013 and $0.03 lower than the previous quarter. The key drivers of the company’s first quarter earnings are summarized on Slide 9. The $31 million or 2.2% decrease in net income year-over-year was principally due to a decrease in mortgage banking revenue partially offset by lower provision for credit losses. Non-interest income was essentially flat year-over-year as the increases in average earning assets was offset by a decrease in net interest margin. The $12.2 billion growth in average earning assets year-over-year included increases in average total loans as well as planned increases in securities portfolio. Offsetting the portion of the growth in these categories was $6.1 billion reduction in average loans held for sale reflecting lower mortgage origination activity versus the same quarter of last year and a $3.8 billion reduction in average other earning assets, primarily due to the reconsolidation of a number of community development entities in the second quarter of 2013. The net interest margin of 3.35% was 13 basis points lower than the first quarter of 2013, primarily due to growth in the investment portfolio and lower rates on loans partially offset by lower rates on deposits and short-term borrowings and a reduction in higher cost long-term debt. Non-interest income declined by $57 million or 2.6% year-over-year, primarily due to lower mortgage banking revenue, which reflected lower origination and sales revenue. Growth in several fee categories partially offset the decline in mortgage banking revenue including growth in retail payments, merchant processing, trust and investment management fees, deposit service charges, commercial products revenue, investment product fees and other income which was driven by higher equity investment revenue. Non-interest expense increased year-over-year by $74 million or 3%, the increase was primarily the result of higher compensation expense and an increase in other expense which was driven by insurance related recoveries in the first quarter of 2013 partially offset by lower tax-advantaged project cost and lower cost related to other real estate loan. Net income was lower on a linked quarter basis by $59 million or 4.1% mainly due to seasonally lower fee revenue partially offset by lower non-interest expense. On a linked quarter basis, net interest income was lower due to the impact of two fewer days and seasonally lower loan fees, partially offset by higher average earning assets. The net interest margin of 3.35% was 5 basis points lower than the fourth quarter, principally due to growth and lower rate investment securities, loan mix and lower loan fees. On a linked quarter basis, non-interest income was lower by $48 million or 2.2%. This unfavorable variance was primarily due to seasonally lower retail payments and deposit service charges as well as lower commercial products revenue. Partially offsetting the decline in these revenue categories was an increase in corporate payments, trust and investment management fees and other income which was driven by higher equity investment and retail leasing revenue. On a linked quarter basis, non-interest expense declined by $138 million or 5.1%, driven by lower professional services costs, costs related to tax-advantaged projects and marketing and business development costs. Turning to Slide 10. Our capital position is strong and continues to grow. Beginning January 1, 2014 the regulatory capital requirements effective for the company follow Basel III subject to certain transition provisions from Basel I over the next four years to full implementation by January 1, 2018. Our common equity Tier 1 capital ratio estimated using Basel III fully implemented standardized approach at March 31, was 9% up from 8.8% at December 31. At 9%, we are well above the 7% Basel III minimum requirement. Our tangible book value per share rose to $14.99 at March 31, representing an 13% increase over the same quarter of last year and a 4% increase over the prior quarter. In March, we received the results of our 2014 Comprehensive Capital Assessment Review the CCAR including the Federal Reserve’s non-objection to our capital plan. Subsequently we announced our new one year buyback authorization totaling $2.3 billion, effective April 1, and our intention to recommend to our board of directors a 6.5% increase in our common stock dividend at our June Board Meeting. Now I’ll turn the call back to Richard.

Thanks Andy. And to conclude our formal remarks, I turn your attention to Slide 12. Extending the advantage, words from the cover of our annual reports that appropriately describe our strategy for 2014. In this slow growth economy, our prudent risk management, efficient operating platform with industry leading profitability allow us to operate commutation strength. We will continue to manage, invest and innovate to further extend this advantage. Yesterday, I had the privilege of leading our Annual Shareholder Meeting in Kansas City. In addition to conducting the official business of the meeting, I told our shareholders how proud I am of what our 67,000 remarkable employees have accomplished and how engaged they are and helping us to be competing to our success. We remain focused on always producing consistent, predictable and repeatable results for the benefit of our customers, our employees, our communities and 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 the line of Jon Arfstrom of RBC Capital Markets. Jon Arfstrom – RBC Capital Markets: Hey, good morning guys.

Good morning, Jon. Jon Arfstrom – RBC Capital Markets: Richard, can you give us an update on some of your loan growth expectations and maybe touch a little bit on [inaudible] changes in terms of what’s driving some of the commercial growth?

Be happy to. Thanks Jon. First of all, as you see our linked quarter was 1.3% and we have been saying we’re in that range of 1% to 1.5%. Based on our ending period not just our average and based on what we’re seeing, I’ll expect that range to continue at quarter two at the high end. So, we’re actually seeing some slight [inaudible] continued improvement along the way. Now, we’re seeing it across the board, so wholesale as you’ve seen in the last many quarters has been driving the majority of that and that continues, leverage lending in middle market remain mostly active as well as loan growth in the western markets particularly the Western United States for wholesale and then seasonal increases in food, ag and in the retail groups. So, we’re seeing seasonality and continued market share growth which is not going to be stunning but at the high end of 1 to 1.5 that continue to show a trajectory and we think market share improvement. Commercial real estate, Jon, strong on both coasts as it has been in the past both East and the West as well as Texas particularly in new construction and some investment decisions being made by some of our customers. The most active cities are Seattle, San Francisco, LA and Orange County, so that stays pretty much West Coast focused. This quarter we have strong loan production in small businesses up almost 30% over last year’s first quarter, that’s all types of small business particularly for those under $250,000 and SBA itself was up more than 50% over the last year’s same quarter. So, we’re seeing small business and I think something slightly more than what you might expect to see in seasonality. Residential mortgages, we said is off from its record highs but the portfolio continues to grow. Home equity, while we see that continuing to be the softest spot as we are sliding to get enough acquisition to offset the runoff we had a very strong March, which takes me some good hope in this second quarter particularly as we introduce some new programs and some pricing in order to encourage that behavior in the spring. And then lastly, auto loans and credit cards, they’re both growing. As you know we indicated a number of quarters ago that we’re going to double our auto loan production in the indirect auto loan and lease and we are doing just that, we’re right on track. And to give you an idea, our quarter one production for this last quarter was up 33% from the same time last year and we continue to see our rankings and market share starting to move as we hope that it would. And in credit cards, the year-over-year also stronger, credit up 9%, debit up 6%, and prepaid up over 20%. So, I would say it continues to give me optimism that we can stay on the high end of that range and continue to see that getting stronger. I know last quarter I said we think that second half will be stronger than the first half, we still believe that as well. And I’ll close with one my reasons for that belief is I think the Fed in their current messaging continues to allow people to believe that we’re getting closer and closer to the moment in time when rates will move up. And I think our customers are starting to demonstrate behavior and getting really prepared for that moment and eventually they will use these unused lines of credit, they’ll use their deposits and they’ll start getting more lines on loans to I think accommodate that growth which is probably a few years out but may starting at the last half of 2014. How is that for a brief answer to a quick one? Jon Arfstrom – RBC Capital Markets: That’s wonderful. I don’t want to hog the time on the call here but just one more thing and maybe it’s related but in terms of the capital plan in the building your capital ratios and the 60% to 80% range, what is the plan for the capital that’s not returned to shareholders? Do you want to continue to build capital on the balance sheet? Is this – are you just signaling that maybe there is a little bit faster growth coming, there’s more acquisitions coming? Just help us understand whether or not you want capital to build or not and how you plan to utilize the excess?

Hi, Jon. This is Andy. First, if you think about the fourth quarter to the first quarter, part of the reason that – two reasons for the increase, number one is our unrealized loss went to an unrealized gain position with our securities portfolio because they’re lower rates and that will change by about $300 million. The second thing is partly offsetting our buybacks in the first quarter was an exceptionally high level of stock exercise, stock option exercises from our employee base, I wouldn’t expect it to continue at that level. So, my expectation Jon, is that this is sort of the highpoint, our normal earning asset growth, loan growth that Richard spoke to as well as our expected closure of the RBS transaction, the branches will drive that down in quarters two and three. And big picture, what will accommodate the reinvestment is our earning asset growth.

The only thing to add Jon we don’t [like] [ph] capital so we’re real careful about that as you know. And in addition to what Andy said we want to continue to have a little powder for acquisition, you saw we did a small [indiscernible] with Ally, Custodian Trust on Monday and we’ll continue to look for particularly payment and trust opportunities and we are still investing a lot I mean, the one thing we’re not doing and it be easy to do in times whenever things are not as sustainable is stop the investment in things like R&D. And our payments business particularly mobile, we’re spending a lot of time and energy and money getting sure that we have the best ideas the next new emerging protocol for customers and we’re not cutting back on those investments in this case because we think it’s going to be important to stay true to that. So, the retained earnings we’ll use for ourselves as well small acquisitions. Jon Arfstrom – RBC Capital Markets: Okay. All right. That helps. Thank you.

Your next question comes from the line of Erika Najarian of Bank of America. Erika Najarian – Bank of America: Good morning.

Hi, Erika.

Good morning, Erika. Erika Najarian – Bank of America: My first question, Andy, I was wondering if you could give us an update on where you stand with regards to the LCR and how we should think about securities purchases from here? And maybe help us understand how earning assets grows as you’re [growing] [ph] to pace relative to the loan growth expectations that you laid out?

Right. So, Erika, as we talked about in the last call, we did increase our securities portfolio from $80 billion to $85 billion in quarter one. My expectation is we will grow that to $90 billion in quarter two, so up somewhere similar amount another $5 billion. We’re getting very close in terms of our target here, but we’re – I’m not going to give you a final number until we get a final role, because the final role has some uncertainty particularly as it relates to the offset on municipal deposits and that can draw our number one way or the other but we’re getting very close but I would expect another $5 billion in quarter two. As it relates to net interest margin, I would expect a decrease that you saw this quarter similar in the second quarter for some of the same reasons. So, that $5 billion increase in securities portfolio will probably drive margin down 3 to 4 basis points and the combination of loan fees and mix will be another couple of basis points. So, I would expect a similar decline in quarter two. However, because we’re growing earning assets, I would expect net interest income to grow in quarter two. Erika Najarian – Bank of America: And given sort of your comments, I know there is still the swing factor, is the liquidity built in the second half potentially slower than the pace for the first half for the year?

Again, Erika it will depend on the final role as we hope to get in the summer months, but I wouldn’t expect it to accelerate certainly and it will somewhere around the same level or down. The other thing I would remind you, one of the things we talked about also is that CAA or Checking Account Advance product will start to impact margin because that fee goes to loan fees which is a component of margin, that will start to diminish over the second quarter and then more materially in quarters three and four. Erika Najarian – Bank of America: Got it. And my second question Richard if I could just ask another one on commercial real estate in particular. We’ve had comments from a large mega-cap bank, some large institutions during the quarter that commercial real estate continues to be a potential bright spot and that the competition is less fervent here than it is for C&I. On Monday, we heard from another regional bank essentially saying that they’re starting to see frothiness in commercial real estate. Perhaps, give us a little bit of your view on this.

Yes, sure. I don’t have any remarkable offers, I would necessarily align with Monday’s commentary. We’ve always been growing commercial real estate, I think this past we’ve done in a very prudent way. We were the ones I think alerting people eight quarters ago about certain markets that we’re getting sloppy as it related to multifamily as you start to intersect that with what would be for our closed property we’re coming back on to the market. So, we’ve been very, very careful not to jump into hard markets that when you predict where there will be once everything is built probably too overbuilt. So, we’ve been careful there. I wouldn’t say that we were less competitive, I would say all of our wholesale businesses are competitive. I would certainly think margin competition and as I said every quarter and I will continue to say because of our cost of funds advantage in our rating and if this will continue to compete on price and we can maybe one of those culprits for why it’s more competitive on the margins but we will not give it out if it’s a great customer. We will also not go for the customer if there is a structural need to diminish what would be a quality underwriting or something like that. So, I guess I would say I don’t see anything remarkable about CRA as it relates to other C&I business Erika, but they’re both competitive and more prepared to compete for them. Erika Najarian – Bank of America: Got it. And just a last question and maybe this is for Andy. Was there anything unusual to call out on the mortgage banking line, there is a modest quarter-over-quarter increase in given typical seasonality. I think the market would have expected that to be down sequentially. Was there anything to call out there?

Erika, we thought mortgage revenue was going to be relatively flat to the fourth quarter and that’s what it ended up being. We had a little bit of a benefit on the servicing rights effective evaluation but that has to be with earnings credit rates and so forth. So, I would say no, nothing remarkable and as I look into the second quarter I would expect a slight increase in mortgage revenue principally due to seasonality. Erika Najarian – Bank of America: Great. Thank you, for taking my questions.

Sure. Thanks Erika.

Your next question comes from the line of Jill Glaser of Credit Suisse.

Hi, Jill.

Hi, Jill. Jill Glaser – Credit Suisse: Hi, good morning. So, could you just provide some color in terms of what you’re seeing in securities of reinvestment yields and [indiscernible] and just your outlook in terms of the margin going forward. And then just overall with your ability to grow [indiscernible] income going forward?

Right. So, Jill, the – we’re going to grow securities portfolios I mentioned about $5 billion on a net basis in quarter two. The securities coming on are about 25 to 30 basis points below those that are coming off in a quarter and then we have the $5 billion of growth. So, that combination of growth and the shift in the price are the rate cost us 3 to 4 basis points and that’s the decline we’ll see in the second quarter. That, and then as I mentioned the loan mix coupled with the loan fee is partly due to CA will be another couple of basis points. So, I would expect this to be down 5 or 6 basis points in the second quarter. However, as I mentioned, net interest income should growth because of earning asset growth. Jill Glaser – Credit Suisse: Okay, great. Thanks.

You bet.

Your next question comes from the line of Paul Miller of FBR. Paul Miller – FBR: Yes. Thank you, very much. You mentioned on the first question of follow-up, the cities that are the most compelling than that are growing the most, I missed them all, you’re telling too, that was Seattle, Orange County?

Yes, I wouldn’t say it once. I apologize. I said Seattle, San Francisco, Los Angeles, Orange County. So, I would write down the specific cost line there. Paul Miller – FBR: And so, can you add some color what you’re saying in Texas and in the Midwest?

Yes. So, Texas is also the other market that I mentioned. These are markets where you got just underlying growth of populations and consumers, right. So, in Texas, you’re going to find some of the traditional markets building out where the communities are getting large rooms were all continues and Texas has been healthy as you know virtually to the south period in time. The west coast primarily provides for what would be some of the transition to multi-family where we feel that as a safe markets based on the composition of growing and also just continued growth of – and migration in some of those growth markets where we see that personal and corporate needs for real estate continue to be pretty strong. We haven’t spent a lot of time and energy talking about healthcare and some of the retail lease services because we’re very careful on that area as well because I want to make sure that they’re finding themselves in the right cities and we’re not messing around in that market right now but we are looking in where development follows people. Paul Miller – FBR: And then, on the – you did a good job CRA in the competitive nature out there but one of the areas that you’ve really been growing is the credit card and a lot of people showed lower credit card balances in the first quarter but you continue to show good growth in that. Can you add color around that, is that a big push for you guys?

Yes, it is. It is – it’s a big part of our portfolio, it’s like 7.5% which is one of the reasons why our charge-offs are always [indiscernible] number higher than most of our peers, I don’t think anyone has the portfolio risen important as we do it to our mix and we like it. So, we’re going to continue to grow that. I think you know that we have a FlexPerks program which is – it was derivative of when we lost the Northwest Airlines of airlines sold them in it. The most remarkable thing I’ll have ever been a part of my career when I’m done here, it continues to provide all kinds of new interest and we continue to get awards for it to get lot of visibility without having to spend lot of time on TV commercials and direct that branding. That brings the branch originations, with 3100 branches we really had not turned out the opportunity for that to be a significant source of really good high quality new cards. So, we have done that in the last six quarters and that’s been a remarkable contributor to the kind of growth we’ve had. And then lastly, Paul to remind you, even in our FlexPerk which I’d mentioned a moment ago, we’ve now introduced a corporate program a FlexPerk Rewards program for corporate cards which continue now to gaining a lot of favor as we realize that lot of these corporate and small business folks are interested in finding a way to retrieve some sort of benefit from using a card and that’s taken amazing success in the early stages. So, I think there is more where that came from as well. But to say, that we’re spending time and energy on credit card is an understatement for me to go back and repeat as part of our R&D cost have been protected under the area of cards not present which will be mobile banking and mobile payments, we’re seeing a lot of energy there too. So, I would expect that to exceed most of our peers going forward in the area we’re spending doing lot of money to make sure we stay ahead of the game. Paul Miller – FBR: And then one last on the order side, it’s actually an area that you are really done a nice job growing. How is the competitive nature there? How are you’ve been because everybody is focused on that but I think you’ve done the best job out there than anybody.

Thank you. The indirect auto business for us has always been a core capability but as you recall we’ve announced our [indiscernible] impact over a couple of years. We decided that we will go further down in the [indiscernible] so to the – we call them near prime. But we also realized that we weren’t a big player in used auto. So, I’ll just take you through an example, if you Paul or the F&I guy had the largest Shelby dealer in whatever city, you’ve always knowing that we were one of the best paper then pick for auto loans and leases for new cars. And now we’ve introduced used cars, you feel better about introducing the U.S. Bank’s by paper across spectrum. And then the bonus round as you get more floor planning from that same institution because you’re now wholly committed to them in a number of ways that perhaps you weren’t before. So, for us it’s kind of a two for three folks but we’re also getting a high visibility of those dealers planning interest in taking the rest of our paper. So, we already are taking an open door and pushing it further open. I will say that in the rankings we saw in fourth quarter, we’d moved up 1.5% in share from eighth place to fifth place among banks. And so that does reflect that our early stage efforts just trying to show up and I would expect that to stay in the top five which is one of our stated goals as we really double the value of this business. We’re very careful, I didn’t say subprime using clearly I just said something [indiscernible] below near prime but we’re going to get a lot of that and used autos as well. So, I think that’s the reason you’re seeing a full line kind of a holistic success and I expect this to be one of our big replacement strategies for OB and new normal for mortgage in the next couple of years. Paul Miller – FBR: Thank you, very much guys.

Thanks, Paul.

Your next question comes from the line of Keith Murray of ISI.

Hi, Keith. Keith Murray – ISI: Thanks. Good morning. Can you just touch on the expense outlook and obviously near term be interested in that but for the longer term when you think about age of compliance that we’re in and compliance cost going up. Over the long-term do you think your efficiency ratio where does it bottom in the 50s versus history?

Yes. So, first of all Keith, I’m glad you asked question if I would have found the way out do myself, so which I’d be known to do. Keep yourselves, thank you. First of all in the near term, let’s talk about I’ll remind the audience how we’ve managed the company. Every single 30 days, every 68 lines of business set with me and Andy and we look at their first performance related to their near term forecast and most of it or rest of whatever year we’re under. So, we create a placer on your call looking around corners. And we thought ourselves on that and as we look around the corners, we continue to measure and manage what it starts out a proper plan continue the year and we adjust it all through the year. And so, as we see any stress on revenue and it could be not so much on volume but it might on margins and on the total income then we’re going to manage the same thing on expenses. So, we manage expenses 30 days at the time and we are watching every nickel and dime and it’s not without surprise to you that we are very, very prudent right now and we’re watching all discretionary costs, we’re measuring it very closely, we’re watching all new hires and we’re being excessively prudent right now because until I see a sustain and a very robust revenue in future, we’re going to be very careful and we’re actually watching our expenses to a level below, we thought that would be when we set the plan six months ago. So, hopefully that gives you all confidence and we’re not to watch that. Secondly, the efficiency ratio, there is nothing more than the result of positive operating leverage and we promise you positive operating leverage this year and we’re going to deliver it. Naively, but that’s the whole part of watching the expenses but that they stay below the revenue growth that we’re of course seeing and predicting. So, you will find as long as we keep to that mandate and our efficiency ratio stays in low 50s because that’s how the math works. We don’t have the goal for our efficiency ratio but because our goal is positive operating leverage and we’re sitting at low 50s, you can grow that but not on the given quarter, but over the course of the year when it staying up to that position as well. If you want to go longer term, Richard Davis here thinks is as rates start to increase as the economy starts to pick up, we become in fact essentially much more profitable and our expenses did not grow at that same speed as our revenue and our efficiency ratio will probably does fall, that it will only be result, there is no target, there is no goal. And I think what you see now is probably one of our least attractive moments in time and the cost of compliance for all intents and purposes, they’re in full burdened and most of what you see now as we continue to look into the future with a new kind of normal for the cost of compliance and audit. Keith Murray – ISI: Thank you.

Not only excited but [indiscernible] up until. Keith Murray – ISI: And just going back to LCR for a second. Does it at all change your view on commercial deposits and how you view them going forward?

No, it does impact how we think about different deposits in the company and depending upon the LCR runoff assumption, certain deposits are certain more valuable, we try to reflect that in our pricing, we’ve actually incorporated LCR into our FTP system our Funds Transfer Pricing system. And different deposits have different value and that is a function of LCR and we’re taking that into account. Keith Murray – ISI: Thanks. And then just last one, I know it’s early stages but any update on reworking the deposit in banks product and what are the steps that you’d have to go through on that?

Yes, we’re working on it. We’re working strictly with our lead regulator the LCC and but we haven’t done a solution yet and as much as we’re all trying to figure out what’s the next step to try. If you follow the real tight balance of the user we lost some 30 some percent of total APR no matter how you calculate it on any given one day, you probably can find a price out but this is going to be the old fashion terms. So, dependent on the willingness of the regulators to allow us to try different combination of new products and new repayment practices. I know they’re working good pace with a number of us trying to find that solution, I’ve made it for the U.S. Bank’s [indiscernible] pilot and tries certain variations on a program to see what kind of loan loss we would have offset against some of the benefits. I do think this industry needs a replacement for folks who would have some form of advanced need on financials before they get their paid but we haven’t start building that yet and with number of us working with the regulators I think it’s in the offering but it won’t be here soon as our CAA products starts to wind down, so we’ll have to do this again and when it does come back it will be at the same level of profitability but be much more of a CRA kind of a program that will be intended to test and find ways to serve more customers as this recovery starts to pick up. Keith Murray – ISI: Thank you.

Yes.

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

Hi, ken.

Hi, good morning guys. This is Bryan Batory for Ken Usdin.

Hi, Brian.

Hi, Brian.

Okay. On the tax rate, it was a little bit lower in the previous guide last quarter. I’m just wondering if there is anything unusual the ramp of the tax line this quarter. And where do you expect the tax rate to run going forward from here?

It was a little lower Brian, you’re right and part of it is due to a small state settlement we had in the quarter, so the TV effective rate was 28.1%. However, I don’t expect a large variation for the rest of the year and I would expect it to be somewhere around 28.5%, 28.7% for the full year. So, right around this range, little higher but not much.

Okay, great. And then deposits are continue to grow in year-over-year basis, but the growth was a little bit slower quarter-over-quarter, looking at the averages and period end balances particularly for non-interest bearing. Are we starting to see the very early signs here of customers growing deposit funds to fund working capital needs or CapEx or was there just a seasonality impact on deposits this quarter?

Brian, it was a more a seasonality impact. We typically have a lower first quarter both because of our corporate trust activities as well as wholesale activities in the first quarter. So, I don’t think it’s yet decline that their drawing down to deposits for investment, I think it’s more seasonality and I would expect it to increase in the second quarter.

Okay. And one final question, the other fee income line was little bit higher than trend, I know you guys call out equity investment gains and some leasing items. Any sense for how big, the magnitude of these gains where?

If anything is greater than $20 million or $25 million, we usually call as reserve base so it was more a function of a number of smaller things and that can be lumpy in that category. But we’re talking about that category when you bring upon item you may have read on Monday that Nuveen was part of the transaction with TIAA-CREF and we have an ownership interest in Nuveen. When it’s offset and done, that will result in a positive in the fourth quarter for us. As it’s typical on asset management transactions there are components of revenue retention the customer retention that will determine the final price, but as we sit today, I would expect that would create a gain of a few cents in the fourth quarter.

Yeah, we’ve always have vested our first American funds almost two years ago.

2010.

Yes. And that went to the real estate with an equity position and now this transaction will positively impact us later in the year.

Okay, great. Thanks for taking my questions.

Yes.

You bet.

Your next question comes from the line of Steve Scinicariello of UBS Steve Scinicariello – UBS: Good morning, everyone.

Hi, Steve. Steve Scinicariello – UBS: Just a couple of quick questions on the fee income areas, just want to follow up on the commercial products revenue. I know you kind of mentioned you had some lower wholesale transaction activity just kind of curious has that kind of since rebounded or what the outlook be from here?

Right, Steve. So, it’s a function of a couple of things, one standby letter of credit activity is down and that has been trending down for the past few quarters, I would expect it continue to be flat to down in the second quarter. Second, there is some syndication revenue in that line and that can be lumpy and the first quarter was particularly down, that may come back a little bit in the second quarter. But, generally speaking the commercial products revenue is a function of activity on the wholesale side, first quarter is typically low, it will come back a bit in the second quarter, but I still think showing components like standbys and other credits are going to continue to trend downward. Steve Scinicariello – UBS: Got you. And then just I know there is seasonality in lot of the card lines, the deposit lines in some other areas, any reason why those wouldn’t bounce back as well or is it just purely seasonal that’s put down this quarter?

For sure, the payments component is weakest in the first quarter across most of the categories and I would expect that to continue to bounce in the second quarter. Deposit service charge is also lower in the first quarter, but a lot of that is also driven by incidents and activity on the retail side. So all things being equal, you would expect a bit of an increase in the second quarter, but it will depend on customer and retail activity. Steve Scinicariello – UBS: Perfect. Thank you so much.

Sure.

Thanks.

Your next question comes from the line of Brian Foran of Autonomous. Brian Foran – Autonomous: Hi, good morning. Can you, I guess if you separate your footprint into the cold weather bid, in the warm weather bid, was the trajectory month by month noticeably different into extent the cold weather, part of the footprint was weaker, by the end of March was a kind of back to normal level?

We really didn’t, it sounds so popular to say, but we really didn’t see much, I mean even the Pacific Southwest where you have the more traditional winter and the lack of snow and things wasn’t meaningfully different than Central and Midwest plans that we do banking and so, while there was undoubtedly some diminishment of consumer activity on those really bad snow events, but for ultimately that we’re not counting on whether to be much of a factor and we certainly don’t see a big pent-up catch up and kind of like a catch of the clock, because we don’t see that coming through. Brian Foran – Autonomous: And then on the payments business, you had a couple of comments that seems more positive. We’ve been through a kind of transition period first with the regulatory changes and with the Department of Defense. I mean, we are at a point now where we hit that turning point and certainly the comps are easier but the growth rate kind of returns back to normal or there are still kind of identifiable headwinds that you see in the near term that would depress results across those four line items?

Well, Brian, we are seeing the decrease in defense and government spending go down. So, while we’re still down year-over-year, it was down a far lesser amount, it was down may be 5% or 6% and it was offset by increased corporate activity which actually resulted in corporate payment systems revenue being up on a year-over-year basis, which is a positive sign. So, I think we’ve seen the worst of it. I think it will start to stabilize and grow. Brian Foran – Autonomous: If I could sneak in one last one on the dividend targets long term, you’ve always been very consistent about this, but if you could just remind us, both from your standpoint and a regulatory standpoint, what would have to happen for the environment to look like a 40% dividend payout instead of the 31%.

Yes, this is Richard. We have always kind of reset it some mid-90, 30% to 40% will be a dividend of 30% to 40% in buybacks and we’re relying more on the buyback at this stage. Two things, Brian, one is we have been without the Fed oversight, we’re going to be very prudent and careful to make sure the revenue we do is sustainable under renewed circumstance trust or not. And so a 30% on the lower end of that 30 to 40 per dividend and I believe that in the next year or few years, we will either get permission real comfortable permission we’d have we want in that range but we’ll start to think such a robustly strong 24 month future that will move over that number, because we like to give about 30 but we wouldn’t get above 40. So it’s going to be that slow trip somewhere in the middle. Buybacks in the meantime are a very elegant solutions to allow us to have that kind of permissions as long as the price is right and the financials are right to allow our shareholders to target a good return, we’re giving us that ability turn out and off something given the uncertainty until we see things being more I think sustained. So, we’re not disappointed where we are, all things told we would get there in a nice long methodical way anyway and I think our expectations were probably aligned pretty well with what the Federal permitted to do as we continue to prove ourselves and prove our stress that it to be accurate and other five years in a row. So we’ll get there over time, but we’re not doing a withheld and we don’t really want to send a signal that we are disappointed. Brian Foran – Autonomous: Appreciate it. Thank you.

Okay. Thanks.

Your next question comes from the line of Chris Mutascio of KBW. Chris Mutascio – KBW: Good morning Richard, how are you?

Great. How are you? Chris Mutascio – KBW: I’m doing well. Thanks. Andy, just a quick question, back on the mortgage side of the house and I’m looking at page 40 and kind of give nice breakdown between the origination loan servicing and some of the inputs on the servicing asset. The one item I was kind of looking at is the decay, you know the other changes and mortgage service and rights fair value, you know that’s been running plus or minus a $100 million, excuse me growing a negative plus or minus $100 million for the last several quarters and this quarter was down into the $80 million range. I’m assuming that decay is less than previous quarters, because prepayments speeds have slowed, is that first of all is that correct?

Yes, that’s correct. Chris Mutascio – KBW: And then is that, I guess hard to predict clearly, but if the rates were to stay where they are and it’s up on long term side, how would I look at the decay would it stabilize at a negative $80 million or does it get lower from here?

It all depends on rates as you just mentioned, because of prepayments but I would expect to reach stable to maybe up a little bit depending upon rates within this level. Chris Mutascio – KBW: Okay, great. Thank you very much.

You bet.

Thanks Chris.

Your next question comes from the line of Eric Wasserstrom of SunTrust Robinson.

Hey, Eric. Eric Wasserstrom – SunTrust: Hi, good morning. Just to follow up on a two different issues that had been raised on the call already. The decline in the credit and debit cards revenue that you showed sequentially is a bit more than what some of your peers have demonstrated and I would have guessed that weather effects may have been part of that, but it seems like maybe weather wasn’t such a driver. So I’m just curious about what in your view might have explained that differential versus peers.

I can’t speak to the peers, but our number on a sequential basis is entirely seasonality if you think about our credit card, retail credit card revenue if you look at a year-over-year we are up over 11% principally driven by increased activity and increased market share gain. So the linked quarter is all seasonality. Eric Wasserstrom – SunTrust: Got it. And then just to go back to Keith’s question on the payday events for a moment, I believe that you previously guided to us a quarterly impact of around $50 million negative in NII, is that the case and was that evidenced in this period?

We did have decline across the, as expected I would say so across all other fee categories I would say it was yes it was as expected. So, on the payday lending or at the CAA product the full year numbers about $220 million, the first quarter was a little impact. The second quarter is going to be down about $15 million then it goes almost entirely way in quarters three and four.

That goes about line at the end of May, so we just be at small slow trip down to zero as the year end. Eric Wasserstrom – SunTrust: Got it. So, sorry Andy just because I was making quickness so that was very little first quarter of 15, second and then sort of failed out by third.

Right. So, you think about it’s just a huge number, if you think about $200 million it’s sort of 503500. Eric Wasserstrom – SunTrust: Got it. Great. Thanks so much.

Thanks.

Your next question comes from the line of Matt Burnell of Wells Fargo.

Good morning Matt.

Hi, Matt. Jason Harbes – Wells Fargo: Hey, good morning guys it’s actually Jason Harbes on Matt. So it looks like you got a pretty nice blues from equity investments and retail leasing revenue and the other fee income category this quarter. Just curious how sustainable do you view that and we guys still expecting overall fee income growth in 2014 in spite of the weaker contribution for mortgage?

So Jason a couple of things in that other category, there are miscellaneous equity gains that occur that can be lumpy quarter to quarter. So sometimes up, sometimes down, this was a little bit of a positive quarter as we benefit a little bit from those investments. You really don’t know what the next quarters will be until we get the results from the events which we have, so it’s hard to tell exactly, but I wouldn’t expect material changes neither up nor down other than the gain I talked about that we expect in the fourth quarter from the Nuveen transaction, so that’s number one. Number two, in terms of overall fee revenue, we’re going to continue to have the headwind on a year-over-year basis in mortgage banking in quarter two because the decline in mortgage banking didn’t really start last year into quarters three and four. But I would expect fee growth in many of the other categories and I would expect overall fee growth in quarters three and four once we’re passed that mortgage headwind. Jason Harbes – Wells Fargo: Okay, thanks. And just I guess my follow-up would be on the impact of the affordable housing accounting rule change. Specifically, how we should be thinking about the non-controlling interest line, it looks like that’s a little bit of a different number than we’ve seen historically.

Yes. And that was a function of change we made in the fourth quarter, I would say the first quarter is back to a normal level across all categories and the first quarter impact versus the fourth quarter was about $35 million lower non-interest expense and $35 million higher taxes, but that’s now in the run rate and what you see in the first quarter now reflects all the accounting change than what we would expect to see in future quarter. So, the only change you’ll see for us is really volume related, no more accounting. Jason Harbes – Wells Fargo: Okay. Thanks guys.

Sure.

Thanks Jason.

(Operator Instructions) Your next question comes from the line of Dan Werner of Morningstar. Dan Werner – Morningstar: Good morning.

Hi Dan. Dan Werner – Morningstar: Hi. If I’d asked you guys year and a half, two years ago what a normalize net charge-off level was, you would have said around 1% and clearly since then, as the quality has improved and charge-off levels have come down, if I ask you that question now what would you consider normalize charge-off levels both near term and longer term, what kind of answer would I get?

Long-term and let Bill answer but long term is still 1%. Under the mix of the portfolio, it’s hard to remember the old division of day’s right. But if we’re all extending credit at the right level and we are taking the appropriate measured risk, especially with the credit card portfolio which has the level ours is and the kind of business that we will plan to conduct in consumer areas, 1% would be over the long-term. We actually never had 1%, you got since one way or the other. And based on the map of credit measurements and credit quality we could take a number of years to get to the one. And so we are not taking risk today to get there sooner than we should but we are also not trying to diminish what value we get from housing at 59 basis point but Bill [indiscernible].

Yes. So, Dan we will measure that every quarter and I mean it’s very plus or minus the couple basis point of that 1%. So, that just goes to the consistency of our outlook for the portfolio and how we underwrite. And as Richard said, the 1% is not a target per se. Dan Werner – Morningstar: Right.

It is a true, the cycle number. So in good times it’s going to be significantly less and then in bad times it’s going to be higher.

Okay.

And we do not going to see it for a while and even with our recovery that has been taken out, charge-offs are very, very moderate at this point and very flattish. So, at this undoubtedly, we – you know we kind of want all the banks to start going that movement northward as the credit quality becomes important and so does the volume in the more robust nature, people seeking credit in some cases not finding way to pay it back but I don’t think it is just for a while. Dan Werner – Morningstar: Okay. Thank you.

Thanks.

That was our final question. I would not like to turn the conference back over to Sean O’Connor for any closing remarks. Sean O’Connor: Thank you all for listening today’s call. And if you have any more follow-up questions give me call this afternoon. Thank you.

Thanks, everybody.

Thanks, everyone.

Hi.