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U S BANCORP (USB) Earnings Report: Q1 2016 Conference Call Transcript

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The following U S BANCORP (USB - Get Report) conference call took place on April 20, 2016, 09:00 AM ET. This is a transcript of that earnings call:

Company Participants

  • Jen Thompson; US Bancorp; Investor Relations
  • Richard Davis; US Bancorp; Chairman & CEO
  • Kathy Rogers; US Bancorp; Vice Chairman & CFO
  • Andy Cecere; US Bancorp; President & COO
  • Bill Parker; US Bancorp; Vice Chairman & Chief Risk Officer

Other Participants

  • Betsy Graseck; Morgan Stanley; Analyst
  • Matt O'Connor; Deutsche Bank; Analyst
  • Matt Burnell; Wells Fargo Securities; Analyst
  • Jon Arfstrom; RBC; Analyst
  • Paul Miller; FBR; Analyst
  • John Pancari; Evercore ISI; Analyst
  • Mike Mayo; CLSA; Analyst
  • Jack Micenko; SIG; Analyst
  • Richard Bove; Rafferty; Analyst
  • Vivek Juneja; JPMorgan; Analyst
  • Mahmood Reza; Omega Advisors; Analyst
  • Marty Mosby; Vining Sparks; Analyst

MANAGEMENT DISCUSSION SECTION Operator: Welcome to U.S. Bancorp's first-quarter 2016 earnings conference call. Following a review of the results by Richard Davis, Chairman and Chief Executive Officer, and Kathy Rogers, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question and answer session. (Operator Instructions) This call will be recorded and available for replay beginning today at approximately noon Eastern time through Wednesday, April 27, at noon -- at 12 midnight. I will now turn the conference over to Jen Thompson of Investor Relations for U.S. Bancorp


Moving to the graph on the right, this quarter's net interest margin of 3.06% was unchanged from the prior quarter as expected. The benefit we recognized from the increase in short-term rates was offset by the continued shift in our loan portfolio mix. Our efficiency ratio for the first quarter was 54.6%, relatively stable from a year ago and up from the fourth quarter as expected due to the seasonality of our businesses. We expect our efficiency ratio to remain in the low 50s% going forward as we continue to balance decisions about operating costs with investments in our franchise.

We remain focused on our efficiency efforts as they provide opportunity to invest in our businesses and in technology to meet our customers' needs. For example, during the first quarter, we launched real-time, person-to-person payments on the clearXchange network, and we continued to invest in enhancements in our mobile banking application. We were pleased to be named as Mobile Leader by Corporate Insights in March, which acknowledges our commitment to being a leader in the rapidly changing landscape of banking technology. Turning to slide 5, the Company reported total revenue of $5 billion in the first quarter, a $131 million or 2.7% increase from the prior year. The revenue growth we are seeing is primarily being driven by core loan growth, as well as strength in a number of our fee-based businesses, including our payments business. Kathy will now provide you with more details about the first-quarter results. Kathy Rogers (Vice Chairman & CFO): Thanks, Richard. Average loan and deposit growth is summarized on slide 6. Average total loans outstanding increased by over $12 billion or 5.2%, compared with the first quarter of 2015, and grew 1.6% on a linked quarter basis, both adjusted for the retail card acquisition. In the first quarter, the increase in average loans outstanding on a year-over-year basis was led by strong growth in average total commercial loans of 10.2%. Consumer loans again showed positive momentum, led by credit card growth of 13.6% year over year, which included the retail card acquisition. Residential mortgage loan growth was also strong, increasing $2.8 billion or 5.4% year over year, and, finally, the momentum in our home equity portfolio continued, resulting in a year-over-year increase of $471 million or 3%. On a linked quarter basis, our core loan growth of 1.6%, excluding the card acquisition, was again driven by total commercial loan growth of $3 billion or 3.5%, the strongest linked quarter growth for the previous five quarters and growth in residential mortgages of $1.2 billion or 2.3%. We currently expect linked quarter average loan growth to approximate 1.5% in the second quarter. Total average deposits increased $17 billion or 6.3% compared with the first quarter of 2015 and were up modestly were on a linked quarter basis. The linked quarter growth in the first quarter of every year is affected by seasonal factors, notably in our Corporate Trust business line. On a year-over-year basis, the trend continues to show strong growth in non-interest-bearing deposits and low-cost interest checking. Money market and savings deposits also remain strong year over year, more than offsetting the runoff in higher costs and time deposits. Let me now turn to slide 7. As Richard mentioned, challenges in the energy sector affected some of our credit metrics in the first quarter. However, credit quality in the core portfolio, excluding energy, remains unstable. First-quarter net charge-offs increased $36 million or 12.9% compared with the prior year. Net charge-offs were $10 million or 3.3% higher than the fourth quarter. Net charge-offs as a percent of average loans were 48 basis points in the first quarter, up 1 basis point compared with the fourth quarter. Compared with a year ago, nonperforming assets increased 1.4%. On a linked quarter basis, nonperforming assets increased by 12.9%. The increases were entirely (technical difficulty) related credit. Excluding energy-related loans, nonperforming assets decreased 4.1% on a linked quarter basis. Turning to slide 8, let me now provide some additional color around our energy exposure. At the end of the first quarter, approximately $3.4 billion of our commercial loans were to customers in energy-related businesses. Energy-related loans are 1.3% of our total loans. Our energy loan commitments were $11.9 billion at the end of the first quarter of 2016, down slightly on both a year-over-year and linked quarter basis. During the quarter, we recognized $138 million of reserves related to the energy portfolio, and the reserve for energy loan now stands at 9.1% of outstanding balances at the end of the first quarter of 2016. This compares with the 5.4% at the end of the fourth quarter of 2015.


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Finally, approximately 43% of our energy commitments and 17% of our outstanding energy loans are to investment-grade companies.

Given the underlying mix and quality of the overall portfolio, we currently expect linked quarter net charge-offs and total provision expense to be relatively stable in the second quarter of 2016. Slide 9 gives you a view of our first-quarter results versus comparable periods. First-quarter net income decreased by $45 million or 3.1% on a year-over-year basis. Improvement in operating income was offset by higher loan-loss provision and higher income taxes. The higher tax rate was primarily due to the resolution of certain tax matters that benefited tax expense in the first quarter of 2015. On a linked quarter basis, net income declined by $90 million or 6.1%, mainly due to seasonality in some of our businesses, an increase in the provision for credit loss due to energy, and the impact of the previously reported fourth-quarter 2015 gain on the sale of the health savings account deposit portfolio. Turning to slide 10, net interest income increased by $136 million or 4.9% on a year-over-year basis. Strong average earning asset growth was offset by the impact of a 2 basis point decline in net interest margin to 3.06%. The modest year-over-year decline in margin percentage primarily reflected the impact of higher short-term rates, offset by loan mix shift and lower reinvestment rates in the security portfolio. Net interest income increased by $17 million or 0.6% on a linked quarter basis. Growth in average earning assets and the impact of higher short-term rates were partially offset by the impact of fewer days in the quarter. We currently expect linked net interest margin in the second quarter to be relatively stable and linked quarter net interest income to increase modestly. Slide 11 highlights noninterest income, which decreased $5 million or 0.2% year over year. The year-over-year decrease in noninterest income was primarily due to lower mortgage banking revenue, partially offset by higher payments revenue and higher trusted investment management fees. Continued strength in the payment business is reflected in our results. Credit and debit card revenue grew by $25 million or 10.4%, reflecting higher transaction volumes, including the acquired portfolio. Sales volumes, excluding the impact of the credit card portfolio acquisition, were up 6.4% year over year, an improvement from the 6% year-over-year growth delivered in the fourth quarter. Merchant processing services revenue increased by $14 million or 3.9%. Adjusting for the impact of foreign currency rate changes, year-over-year merchant processing services revenue growth would have been approximately 6.4%. The growth was driven by higher transaction volumes, account growth and equipment sales to merchants related to new chip and card technology requirements. Equipment sales related to chip card technology continued to trend modestly lower versus growth reported in prior periods. On a linked quarter basis, noninterest income was lower by $191 million or 8.2%, principally due to seasonally lower fee-based revenues, along with the impact of the fourth-quarter HSA deposit sales. As expected, our payment fees and deposit service charges declined due to seasonality in those businesses. Mortgage banking revenues also declined as expected, principally due to lower rates impacting the valuation of our mortgage servicing rights. We expect linked quarter mortgage fees to increase 10% to 20%, based on seasonally higher application volume. Moving to slide 12, noninterest expense was $84 million or 3.2% higher on a year-over-year basis. Higher compensation expense primarily driven by merit increases and higher compliance and acquisition costs were partially offset by lower pension expense and an insurance recovery recognized during the quarter. On a linked quarter basis, noninterest expense decreased by $60 million or 2.1%. Seasonally lower costs related to investments in tax-advantaged products and lower professional services expenses, along with the insurance recovery, were partially offset by seasonally higher benefits expense and higher variable compensation. The variable compensation expense includes costs related to an all employee grant that was issued in the first quarter. We expect linked quarter expenses to increase in quarter two, driven by expected seasonality and higher expenses related to our brand positioning that was launched in the first quarter. Additionally, we expect professional services related to compliance to peak in the second quarter and then modestly decline as costs related to our residential mortgage default consent order concludes. Our efficiency ratio is expected to decline slightly in the second quarter. Turning to slide 13, as Richard mentioned, our capital position remains strong, and in the first quarter, we returned 80% of our earnings to shareholders through dividends and share buybacks. We expect to remain in our 60% to 80% range going forward.


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Our common equity Tier 1 capital ratio, estimated using the Basel III standardized approach that has been fully implemented at March 31, was 9.2%, which is well above the 7% Basel III minimum requirement.

Our tangible book value per share rose to [17.94] at March 31, representing an 8.7% increase over the same quarter of last year and a 2.9% increase over the prior quarter. I will now turn the call back to Richard. Richard Davis (Chairman & CEO): Thanks, Kathy. I am very proud of our first-quarter results. We maintained our industry-leading performance measures, and we reported an 18% return on tangible common equity in the quarter. We continue to operate from a position of strength as we grow our revenue and manage expenses, while strategically investing in our businesses to create value for our shareholders. While not immune to the broader economic and market conditions, including the continued low rate environment and the weakness in the energy sector, we are confident in our ability to manage through these challenges, to win market share and continue to deliver consistent, predictable, and repeatable financial results for the benefit of our customers, our employees, and our shareholders. That concludes our formal remarks. Andy, Kathy, Bill and I would now be happy to answer your questions. QUESTIONS & ANSWERS Operator: (Operator Instructions) Betsy Graseck, Morgan Stanley


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I would like to ask Andy to give a little more color on it since he is overseeing all of our performance in real-time payments and helping coordinate our own bank's position on that.

Andy Cecere (President & COO): Thanks, Richard. Betsy, I would add two facts. One is the current P2P is principally consumer to consumer and is principally on a mobile device, and what you will see as we continue through this year is that more and more banks will be added to that network so we will be able to continue real-time exchange with other additional banks. Secondly, on the wholesale or business-to-business side of the equation, you will see more of that activity come later this year as we continue to develop other capabilities beyond consumer, and again, I expect that to be later this year. Betsy Graseck (Analyst - Morgan Stanley): On the payment question, with NACHA moving to same-day settlement in October for push transactions, does that reduce the risk that you take as an institution and have an impact on the fees you are charging? Andy Cecere (President & COO): No, it doesn't. It is all part of this larger consortium of getting everybody aligned properly. The ACH is owned in part by the Clearinghouse and in part by the Fed. NACHA is just one of the partners that we all deal with. And I am happy to report we are all working and playing well together so that we don't create confusion or, I'll call, price disintermediation on what would otherwise be something we want to keep simple for the customers. So add NACHA to the stable of partners that we are working with and getting this, I think, right in the minds of both the consumers and what investors would want us to do. Andy Cecere (President & COO): And what that does is essentially add an additional window. So it is not really real-time, per se, but it is an additional window during the day. Betsy Graseck (Analyst - Morgan Stanley): Just wondering if there is also a benefit to you from this product in terms of account acquisition and expense management, more real-time pay over the mobile, less check, less cash? Andy Cecere (President & COO): Certainly, there is a lower expense from that, and I think the principle reason we are doing this, though, is from a customer experience standpoint. So customers who have the need to have a real-time exchange for whatever reason would have that capability on their phone, and again we are one of the first to introduce that. So that is what it is about. It is how the customer is interacting with the bank and with other individuals. Richard Davis (Chairman & CEO): Yes. I do think there will be an advantage to the banks that go first, and there will be a window, like in anything else, where you can attract other customers who don't know that their bank will ever have it. This will become ubiquitous over time, which, at the end of the day, is okay as long as the industry finds the right value proposition it gets paid for. And, to go back to your question to add a little business-to-business on here, where Andy mentioned on NACHA, give yourself an example of you are a state of whatever, and in the middle of the day, you realize you made a mistake on one of your payrolls to your state employees and you need to remedy that before tomorrow morning. There is opportunities now to get in the middle of the payment system and do something that day, but I think that should have a cost to it because that is convenience that was otherwise not present for value services added. So I think we will find some both competitive benefits and some financial benefits, but it has a lot to do with how the industry performs in the next probably three to four quarters as we start rolling things out. Operator: Matt O'Connor, Deutsche Bank. Matt O'Connor (Analyst - Deutsche Bank): Can you talk a bit about how far along you are in some of the systems spend and related investments you are making and then weave that into maybe the longer-term outlook for expenses? You gave us some visibility on Q2, but as we think about the back half of the year and just maybe get towards the end of the ramp in that spend, how that plays out.


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I will go first. The system spend, if you mean technology and operations, that is a steady state. If you take a 10-year view -- my 10 years, at least, the first five were higher than what I will say is a run rate because we were trying to catch up -- and you know that story -- and we did that. And now we are back to a steady state. I would say, in the next few years, there won't be a significant difference in appreciated costs, capital expenditures. They are higher than they used to be because we need to stay at that level. But we also have never cheated the innovation and technology piece in any of those years to have to either catch up or to either ramp down. So our expenses are going to move more likely on the cost of personnel attachment with compliance-related activities, which we said will peak in this quarter that we are in, and rely on just the fact that we are going to continue to have to pay up for making sure that employees have the proper level of compensation. Think of all the minimum wage issues that are out there and issues like that. So that is going to drive a big part of our expenses. Technology will be at the run rate it is now, and it is going to be very thoughtful. But we are going to continue to apply the efficients we get on one side of it to the opportunity for innovation costs on the other. But I don't think we will add it as a save in the future. Andy Cecere (President & COO): And I would add, our area of focus is in three principal areas. Number one is customer relationship management. So better information about our customers, both across the retail, as well as the wholesale platform. Second is customer capability. So increasing what a customer can do, not only within a branch, but on their mobile device, as well as on the Internet. And, finally, data. Data overall. Just data better in the Company with the benefit of the bank, as well as the customer. Matt O'Connor (Analyst - Deutsche Bank): As we roll out beyond Q2, how meaningful is getting the peak and compliance cost behind you? And what I am getting at is, obviously, you are extremely efficient industry-leading, but we are in such a low revenue growth environment, 3% expense growth just makes it tough to consistently grow earnings. So trying to get a sense of how much more you can do on the expense and efficiency side from (multiple speakers). Richard Davis (Chairman & CEO): Yes, I got it. Let's go back and do a quick back set. We are two parts revenue, one part expenses. Our recipe. And that is good. So when revenue does move, it has got a twofer on expenses. We only expect one more interest rate increase in the second half of the year in order for us to accomplish what we pretty much telegraphed to all of you. And, if it doesn't, it won't be Armageddon, but it will be something we hope to get. In the response to that expenses, the compliance costs are something that we don't like because they are related to expectations that we didn't have for ourselves. So if there is a consent order, it means that you have been deficit in some way. One of the ways to fix that is to bring in both third parties and to bulk up your staffing. And then you come back down to a more normalized level. I will say, our compliance costs and FTE have really nearly tripled in the last five years. We did that review for our board just yesterday. And I would have said probably two-thirds of that would have been present anyway, consent orders or not. So it is not like just an order peaks you out and you never come back down, but there is a run rate impact. So, as we finished the mortgage consent order and this quarter wraps up in its completion, and then we move into now the AML/BSA consumer that we are moving through, that is where I think we are peeking out, and this is the overlap quarter. But coming down, Matt, we are talking tens of millions of dollars. We are not talking hundreds of millions of dollars. We are talking hundreds of FTE, not thousands of FTE. It is really more a settling kind of a moment. Probably more germane to that is, as long as we can grow our loans, at, I think, the kind of level we have been, high quality loans -- I can say that twice, high quality loans because that is an issue now, and we can out run that, even if margin stays flat. And with that 2 to 1 on expenses, we can grow expenses and grow revenue and still have positive operating leverage, and we are still shooting for it for 2016 and we can still make money.


Securities. Matt Burnell (Analyst - Wells Fargo Securities): Thanks for taking my question. First of all, in terms of your guidance on the provision, Kathy, I noted that you think that that is going to be relatively stable quarter over quarter. But if I do a little bit of simple math, it looks like outside of the energy portfolio, you released reserves last quarter, whereas you clearly added reserves in the energy portfolio.

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First of all, is that correct, and second of all, if we are correct on that, how do you think about the energy portfolio reserving going forward? Is this something where you are just going to sort of cover losses and maintain reserves where they are or possibly add the reserves going forward? Bill Parker (Vice Chairman & Chief Risk Officer): This is Bill Parker. I will take that. You are correct. We did have continued improvement, particularly in our residential mortgage portfolio. So that did, in part, offset some of the increase to the energy reserves. You can see we did build the energy reserves to 9.1% of our outstanding loans. We had a pretty conservative price stack that we used during the quarter. So we feel like we have got embedded in those reserves what we will need for the future quarters. So that is really -- that is where we get that stable outlook. Matt Burnell (Analyst - Wells Fargo Securities): Okay. That's helpful. Thanks very much. And then, if I can, just on the expenses, a little tricky tech question, have you disclosed the amount of the proceeds from the insurance recovery? Because we would, I think, deem that as sort of a not one-off or non-core, but just curious how (multiple speakers) provided that. Kathy Rogers (Vice Chairman & CFO): Yes. Matt, what I would say, we didn't disclose it. It is really not material to the numbers. Matt Burnell (Analyst - Wells Fargo Securities): Okay. And then, just finally for me, we noted a higher money market savings rate this quarter versus the fourth quarter. Can you provide some color on what was going on there? Kathy Rogers (Vice Chairman & CFO): Yes. I think a lot of where you see in the money market account are going to be some of our deposits with some of our corporate customers. So, as our short-term rates started to increase, we did see a little bit of pricing increase on the commercial side or the wholesale side. I will say that, from a consumer side of the house, we have really seen no changes in our overall deposit pricing. Operator: Jon Arfstrom, RBC Capital Markets. Jon Arfstrom (Analyst - RBC): A quick question on your loan growth guidance. High end of the range, obviously did pretty well this quarter. And with the flat margin, I would actually suggest maybe a little better revenue environment. But can you just give us an idea of the drivers that are putting you at the high-end of that range? And then maybe, Bill, if you can comment on what you expect on energy draws? Do you expect energy loan balances to kind of up, down, sideways? Thanks.


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Yes, Jon, first of all, we have got -- we telegraphed to you guys 1.5% for quarter two, which, if you read between the lines, we would have moved up the bottom. So we already know what quarter two is starting to look like, and it is feeling pretty robust. It is very much the same things you have seen. Commercial is still strong and growing at that same clip, particularly M&A transactions where balance restructuring is by corporate customers. We have got nice growth in home equity. I know it is a very rare thing, but we continue to grow our home equity portfolio, I think, against the comps to the other banks. Auto continues to grow. Credit card continues to grow. So we are on all cylinders on loans. Mortgages, particularly, are growing nicely. They didn't a year ago. So we are feeling good across the board, and I would say what you have seen in the last four quarters is going to be a lot of what you see in the next quarter or two. So we are telegraphed strong. We also said that net interest income will be up slightly or modestly because we do expect a stable margin, increasing balance sheet. That gives you a slight positive. Margin, it is too early to note. We have to watch and see all the moving parts. So stable just means that it is close to where it is now, but we don't know yet at this point which direction how flat it will be. But we do think that interest income will be strong enough, based on the loan growth to at least accomplish a positive linked quarter. As to energy, I will turn it over to Bill. Bill Parker (Vice Chairman & Chief Risk Officer): Yes. And so on the energy portfolio, we did have a small number of borrowers that did draw during the first quarter, so our loan balances there were up a couple hundred. You can see that our commitments declined. We expect the commitments to continue to decline as we go through the borrowing base re-determinations. It wouldn't surprise me if there were another handful of borrowers that did draw during the quarter. But I can say we have also had a lot of success with other borrowers in restructuring the loans and where they have been able to provide additional collateral. So overall, a little up, probably a little more on the loans and then the commitments will continue to come down. Andy Cecere (President & COO): And we have also done the re-determinations (multiple speakers). Bill Parker (Vice Chairman & Chief Risk Officer): Yes. We are about 40% of the way through the borrowing base, spring re-determinations. And so far, that is going pretty well and allows us to feel comfortable about this stable outlook. Andy Cecere (President & COO): Yes. And oil at 40% doesn't hurt. One more thing, Jon. I should have added, I didn't talk about commercial real estate. That is flat for us. It has been flat for us. We are different there, to. A lot of the banks are growing that a lot. I have said in prior calls that we want to be very watchful on commercial real estate, and we are being -- we can be wrong. We could be missing some of the market growth. There are some pockets of good strength and we are in them. We have got our customers who are selling who are going to grow the balance sheet, but not by a lot, because we are protecting what we have and probably being more careful and not getting into some areas and things we don't really understand at this point in time. So add that to your thinking. While loans will still grow, commercial real estate will be flattish, protecting the good customers we have. Jon Arfstrom (Analyst - RBC): Okay. Good. That is very helpful. And then just, Bill, to clarify, you just -- you don't expect another -- if oil stays here, you don't expect another big step-up in energy reserves. Is that the right way to interpret what you -- in the last question? Bill Parker (Vice Chairman & Chief Risk Officer): Correct. Yes. Operator: Paul Miller, FBR. Paul Miller (Analyst - FBR): On the energy side, are you seeing any of the areas where there is energy credits are going bad? Have you seen any deterioration in any of your CRE products or loans?


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Yes, we looked at a couple of our markets that are energy dependent. The ones that we are most focused on are Denver and Houston. Denver, there has been little to no impact. It is not that energy dependent anymore. Houston, of course, is. We do have commercial real estate down there. We also do home-building in the state of Texas. So we are watching that carefully. We have seen stress in the office market. That has obviously slowed in Houston. We do have four properties that we are watching, but that is not a material amount. We underwrite to our sponsors, our client base, as opposed to the area that they are in. So we feel that we have good secondary support on all the credits that we have in Houston. Richard Davis (Chairman & CEO): And, you know, Paul, we look at secondary and tertiary impacts on -- particularly those markets, the Gulf Coast and things where we have auto loans. We might have credit cards and things, and we see absolutely no impact at all at this stage of the game. So no one who lives or works down there that has our cards or our cards are showing any stress. Paul Miller (Analyst - FBR): And then, a follow-up question, just on the mortgage side. Are you seeing any big pickup in the purchase market? We are seeing some indications that the purchase market finally is starting to get some life. On any of your applications for the second quarter, are you seeing any pickup in that? Andy Cecere (President & COO): Yes, the mortgage application on the purchase side was up about 12% and, as you know, the refinancings are down. So that is what is causing the overall decline. And I would expect it continue to increase in the second quarter, principally due to the seasonality in that 10% to 20% range. Operator: John Pancari, Evercore. John Pancari (Analyst - Evercore ISI): On the C&I loan yields, it looks like it was up 11 basis points in the quarter. Just want to get a little bit of color on the drivers of that. I know the Fed hike is certainly part of it. And then, if it is sustainable at that level and what your outlook would be. Kathy Rogers (Vice Chairman & CFO): Yes. Thanks, John. I am going to say if it is really all driven by the Fed hike, there is the increase in the short term. As you know, where we see the increase in future loan rates is going to be in our wholesale portfolio, and we get all of that typically in the first 90 days a little bit more frontloaded. I would not, unless we see another increase in short-term rates -- I would not see that lift continuing into the second quarter. Richard Davis (Chairman & CEO): But I would also just add, we benefited by deposits ongoing as much as we thought they would. Kathy Rogers (Vice Chairman & CFO): That is right. John Pancari (Analyst - Evercore ISI): Okay. Got it. And then, on the payments side of the business, wanted to get your updated thoughts on how we should think about the growth rates, and as businesses, particularly the merchant processing business up about 4% year over year, what is a good growth rate we can assume for that one and the same thing around the credit and debit card businesses? Just want to get an idea of what you think in terms of growth possibility for the year. Thanks. Andy Cecere (President & COO): So merchant. Let me start -- this is Andy. Let me start with merchant. Merchant was up, as you said, about 4% adjusted for FX about 6.5%. And that is -- the principal driver of that growth is going to be same-store sales. And same-store sales was down a little bit in North America versus Europe, for sure. Maybe about 2% versus 2.5% or so over the last few quarters. So the consumer was a little bit more cautious in the first quarter. Spend was a little bit down. But I would expect to continue to have, even at that level's growth, in the range, adjusted again for FX, in that 5% to 6% range on a go forward basis for merchant. On the card side of the equation, that was a little higher because of the purchase of the Fidelity acquisition that we talked about. If you adjust that out, we are talking about 6%, 6.5%, and I would expect growth, again, in that range. That is also going to be driven by same-store sales and then what is happening, so to speak, with what the customers are doing. We are seeing modest growth there, but nothing substantial, neither up nor down in that category.


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And then, finally, you didn't ask, but I will just give you the corporate paying side of the equation. Two big moving pieces there. The first is on the government side of the equation, which is actually down almost 6% -- 5.7% on a year-over-year basis. That is principally due to defense spending going down.

Now, on the flip side of the equation, corporate spend was actually up a bit, almost the exact same amount, 5.7%. And, interesting, we are seeing there, while companies continue to be very conservative (inaudible) T&E spend, payable spend is actually starting to increase, which is a positive sign. John Pancari (Analyst - Evercore ISI): All right, Andy. Thank you. That is helpful. And one last thing on energy. What was the percentage borrowing base reduction so far that you have seen in the spring redeterminations that have been completed? Bill Parker (Vice Chairman & Chief Risk Officer): The values came down about 20% to 25%, and that translates into commitment reductions in our E&P portfolio of about 10% to 15%. Richard Davis (Chairman & CEO): Yes. The 40% redetermination has been accomplished. 75% of the Company has had a reduction. 25% did not. So they are not all being reduced, but that takes you down to the numbers that Bill gave you. Operator: Mike Mayo, CLSA. Mike Mayo (Analyst - CLSA): This goes in the category of no good deed goes unpunished. Your efficiency ratio remains really good at 54.6%, but it is just not clear how it gets better from where it is. And I would point out, as you know, it is the worst it has been in the last five quarters. You guided higher for expenses in the second quarter. And, when I look at the 54.6% five years ago, it was 51%. So it has drifted up, and I hear you -- tech, compliance, regulation. So how do you move that lower? And that is my segue into why not pursue acquisitions, and what is your appetite, and when would you be able to pursue those acquisitions? Richard Davis (Chairman & CEO): Okay. Well, thanks Debbie Downer, for that. You are right. The 54% is higher than we have been in a long time. I know you know this, but I will say it again. We do not set a target. It is a result because we keep watching our revenues and our expenses and always try to grow revenue over expenses when possible. The 300 basis points in the last few years is not only not surprising, but I think it is actually much better than it could have been given the fact that, with a zero interest rate increase up until last quarter, and with a very slow, steady, almost not recovering economy, we obviously have been taking market share on high quality customers and been able to offset that margin compression. So I am actually pretty pleased with it. But I do think -- we said it was going to be coming down slightly next quarter. So we are telegraphing to you all that this will be our high watermark for the year. It also was the high watermark last year. I think it is always the high watermark because quarter one is by far our weakest quarter. It will come down on that basis. But, Mike, two things have to happen. I don't know which one is more valuable. One is that the economy just needs to get stronger, and we have got to be doing old-fashioned lending for people who want to grow and acquire and organic kind of things that we haven't done in a long time in this industry. That will be huge. The second thing will be that we enjoy interest rate increases or a steeper yield curve. They are also both quite important because interest rates not moving up will harm some of the projections for the industry. But make sure you guys are watching the slope of the curve, too, as the high-end came up -- or the short end came up, the long end came down. And that has the same kind of impact on interest income that you would see on lack of rate movement. So nothing has gone in our industry's favor in the last five years to improve an efficiency ratio. So we are holding on for dear life with this effort that we think we can outrun expense growth by revenue. But I do think that the 54.6% is the high watermark for us, and we are not loving it. But we are, also, by the same token, I am not trying to patronize you guys, give you guys a 52% by suffocating the Company and not investing and then living later on to explain myself two years from now why we didn't invest and why we didn't make the decisions we should have.


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So I like the way you asked the question. There is a possibility for it to get better.

In terms of M&A, we are always interested, particularly in the payments and trust business. You are reminded that with the AML consent order, we are disallowed from looking at whole bank transactions. And, again, it is okay right now because we haven't found one we wish we could have had, and there is nothing we have lost that we would have otherwise sought. But we want to move through that order as soon as we can so we can get back to the permissions, which I think we will be starting next year. And I have said this many times before, we are at kind of the statute of any boldest limitations should be away and gone from any acquisition such that when you buy something, you know what you are buying, and you don't by old problems and you couldn't possibly detect it and due diligence. And so we are still hungry for that. It is not going to make or break this company because we are not going to change who we are or the mix of business, but we are always on the lookout for good opportunities. The Fidelity portfolio, the out of club portfolio. You will see more of those and hopefully more merchant portfolios, particularly overseas. Mike Mayo (Analyst - CLSA): As a follow-up, on looking at whole bank deals, so you can't even look? I mean, could you -- when do you think you would be able to look at whole bank deals, and what sort of merger criteria do you have in terms of IRR or accretion dilution? I know you haven't done a big bank deal in a while, but it seems like you are a more efficient bank. It makes sense to buy a less efficient bank. That is way the industry is supposed to evolve. Richard Davis (Chairman & CEO): That is the old-fashioned way of doing it. And not just for expenses, but for revenue, right? I would say, first of all, there is a firm prohibition on buying a holding company while you have an AML consent order. You saw us buy branches before, and you have seen us take on core portfolios. Those are the rules. They are a little less clear, and we haven't found anything to test it. So, again, we are not being thwarted at the gate here. But what you wouldn't want to do is, once we get through the consent order, we will be back into the market and looking at those opportunities. But, I have got to tell you, the reason I haven't done anything we like is because this Company isn't thirsting for any unfinished business. There is not a market we are in that we don't want to be in, and there is not a market we are dying to get in that we are not. I would actually rather double down where we are. And the fact of the matter is, I am still very concerned for all kinds of reasons that, to pick up any full company, even if I could, I probably wouldn't right now. Because I don't think there is a lingering impact of Attorney Generals and SECs and all kinds of other actions that are still yet to be lobbing on some of the smaller banks as we move down through that cycle, and I don't want to be holding one of them when we get there. But I would tell you, as soon as the AML thing is cleared and our regulators are quite clear that we want to clear whatever parts of that particular order would allow us back into bank transactions, we are making that job one so that we have all the alternatives available to us as soon as possible. Mike Mayo (Analyst - CLSA): And do you think you can clear that by the end of this year? Richard Davis (Chairman & CEO): I don't know when that is going to clear because they take a long time. That is why I bifurcate it and say we are seeking permissions to get the part of it that would allow us back into the M&A -- whole M&A business to be accomplished first. And as long as the regulators will allow that, then we can bifurcate the full exit by getting to the pieces that matter the most, and that is what we are working on. And, as you would expect, the regulators haven't given us a timetable, and I wouldn't be dumb enough to get to this stage. But that is what we are working on.


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Jack Micenko, SIG. Jack Micenko (Analyst - SIG): Richard, you guys have been a leader in the payments space for a long time and obviously very focused on continuing as the nonbanks. I am curious what your thoughts are personally and then broadly U.S. Bank's strategy around the peer-to-peer side. Obviously, a lot of investor tension in that space. There's some structural differences for sure. We have seen some banks partner. We have seen some banks buy loans. Give us your thoughts on how that evolves and how you see U.S. Bank fitting in? Andy Cecere (President & COO): Jack, this is Andy. You're absolutely right. It is a topic of a lot of focus for our Company. What I would say is we are very comfortable with our underwriting process and use of our balance sheet. I think where some of the fintech and other companies have done a good job is the customer interaction, customer convenience and access. And so if there is a partnership, that is where we would focus, is on that end of the equation, not the underwriting end. And we are actually looking at different opportunities there and experimentation in terms of improving the customer experience, which I think they have done a pretty good job on. But we are very comfortable with our underwriting. It is proven through cycles, and we are going to stick with that. Operator: Richard Bove, Rafferty Capital Markets. Richard Bove (Analyst - Rafferty): I would like to explore for a second your relationship with the Minneapolis Fed. I mean, I am guessing that you are a member and that you probably provide about 50% of the revenue of that federal reserve bank. And that bank has published formulas, which would suggest that you are too big to fail, and that your bank should be broken up. And I am wondering, number one, what your interaction is with that bank. Number two, did you have any say in the selection of the President of that bank? And, most importantly, number three, does it become an embarrassment for the Minneapolis Fed if you acquire anything or if you grow, forcing them to make some sort of statement against U.S. Bancorp


. Vivek Juneja (Analyst - JPMorgan):

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A couple of questions. First, a simple one. What is the percentage of (inaudible) loans for energy? You gave commitments. Can you give loans also, please? Bill Parker (Vice Chairman & Chief Risk Officer): Yes. I do have that with me. You ask your other question and I will get back to it. Okay? Vivek Juneja (Analyst - JPMorgan): Okay. Second question is on the credit card charge volume. As I look at -- you had obviously a very good increase in volumes from the Fidelity acquisition, but when you look at fees, the growth was much less. So clearly, a sharp drop in pricing. Can you talk a little bit about how you came up with the pricing on the Fidelity deal? Because it seems like your fee average fee rate is down pretty sharply year over year when you look at that. Andy Cecere (President & COO): The Fidelity portfolio is a higher quality portfolio. It is a lower charge-off rate portfolio, a higher spend portfolio, and a little lower rate portfolio, as you said. But it is very profitable overall, and we are very comfortable the pricing is there. The other thing I would say on pricing is the impact has also been impacted by gasoline prices as they compound, and you will see a little bit of a reduction there. But the Fidelity portfolio is actually a very good portfolio for the bank overall. A little different -- a higher quality, a little bit of restructuring than what we had in the quarter. Vivek Juneja (Analyst - JPMorgan): Okay. Thanks, Andy. And, Bill, would you have the number? Bill Parker (Vice Chairman & Chief Risk Officer): Yes. 52%. Vivek Juneja (Analyst - JPMorgan): Okay. Can you talk a little bit about that? That is pretty high, given that you have been a pretty cautious lender, and you have been small in that portfolio. Can you talk about why you are at one of the highest levels? Bill Parker (Vice Chairman & Chief Risk Officer): I can because according to how we rate those loans is our price deck, and our price deck, we feel, is -- we like it. It is conservative. That is the way we like to do things. So our price deck right now is at $30 throughout 2016, and it slowly goes up over the next five years to $44. So I think if you looked at any of the futures markets, you will see that that is a fairly conservative outlook, and that is how we risk rate our loans. Operator: Mahmood Reza, Omega Advisors. Mahmood Reza (Analyst - Omega Advisors): Just a quick one going back to the student loan portfolio, which, I think last year, went held for sale in Q1 and then back to held for investment in Q3. There was sort of a few transactions, and it seems like that market has thawed in the first quarter. And I would be curious to get your review, if you think it is sort have thawed enough to get you interested in testing the waters again.


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And as a follow-up, does the move from held for sale to available-for-sale and back to held for sale last year in the span of three quarters limit your ability to sell the portfolio again this year? Thank you.

Kathy Rogers (Vice Chairman & CFO): We said last year when we moved that portfolio back into our investment -- held for investment, that we were going to stick with that. We are not really looking at any opportunities to move on that again. So I would expect, going forward, that you will just continue to see that in our loan portfolio. Operator: Marty Mosby, Vining Sparks. Marty Mosby (Analyst - Vining Sparks): I wanted to ask about the seasonality. If you take out mortgage, which you gave us some good insight into what you thought was going to happen there, do you have strong seasonality from first, second quarters and a lot of the processing businesses? Typically, that is in the 6% to 7% uptick. Just wanted to see is that kind of the same progression you are looking for this year.

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Andy Cecere (President & COO): Yes. Marty Mosby (Analyst - Vining Sparks): Perfect. And then, that comes through loud and clear. So that is then, if you look at the efficiencies improving even with the uptick in some expenses, you really will set, after you have kind of had to work through a couple of years of relatively flat earnings, this will be a nice step up, which you typically get seasonally. So just would expect to see that. Just wondering if that is kind of in line if you bring it altogether. Kathy Rogers (Vice Chairman & CFO): Yes. You know, I will say that -- I will go back to the efficiency questions that have been asked. I do think that is exactly right. So we are going to have an increase in our revenues from a seasonality standpoint. But I think as importantly, as our loan growth continues to tick up at the higher end of the range, that is going to add additional revenue, and the fact that our margin has stabilized is really helping us from an overall standpoint of being comfortable, thinking about the efficiency ratio declining a little bit as we move into second quarter. Operator: And there are no further questions. Richard Davis (Chairman & CEO): All right. Well, thank you, everybody, for joining our call, and we appreciate your attention and support of our Company. And if you have any questions, please let us know or call Jen Thompson at Investor Relations. Operator: This concludes today's conference call. All rights reserved (c) 2014 TheStreet, Inc. Please feel free to quote up to 200 words per transcript. Any quote should be accompanied by "Provided by TheStreet" and a link to the complete transcript and www.thestreet.com. Any other use or method of distribution is strictly prohibited. THE INFORMATION CONTAINED IN EACH WRITTEN OR AUDIO TRANSCRIPT (the "TRANSCRIPT") IS A REPRODUCTION OF A PARTICULAR COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION. THE TRANSCRIPTS ARE PROVIDED "AS IS" AND "AS AVAILABLE" AND THESTREET IS NOT RESPONSIBLE IN ANY WAY NOR DOES IT MAKE ANY REPRESENTATION OR WARRANTY REGARDING THE ACCURACY OR COMPLETENESS OF THE TRANSCRIPTS AS PRODUCED, NOR THE SUBSTANCE OF A PARTICULAR COMPANY'S INFORMATION. THE TRANSCRIPTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY. THESTREET IS NOT PROVIDING ANY INVESTMENT ADVICE OR ENDORSING ANY PARTICULAR COMPANY.