Jennifer Ann Thompson - SVP, IR Richard K. Davis - Chairman, President and CEO Kathy Rogers - VC and CFO Andrew J. Cecere - VC and COO P. W. Parker - VC and Chief Risk Officer Terrance R. Dolan - VC, Wealth Management and Securities Services.

John McDonald - Sanford Bernstein Jon Arfstrom - RBC Capital Markets Timothy Hayes - FBR Capital Markets & Co. John Pancari - Evercore ISI Scott Siefers - Sandler O'Neill Kenneth Houston - Jefferies Mike Mayo - CLSA Erika Najarian - Bank of America Vivek Juneja - JPMorgan Securities Bill Carcache - Nomura Kevin Barker - Piper Jaffray Nancy A.

Bush - NAB Research Terry McEvoy - Stephens.

Presentation:.

Welcome to U.S. Bancorp’s Second 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 Daylight time through Friday July 22nd, and 12 midnight Eastern Daylight Time. I will now turn the conference over to Jen Thompson, Director of Investor Relations for U.S. Bancorp. .

Thank you, Mellissa. And good morning to everyone who has joined our call. Richard David, Kathy Rogers, Andy Cecere, Terry Dolan and Bill Parker are here with me today to review U.S. Bancorp’s second quarter results and to answer your questions. Richard and Kathy will be referencing a slide presentation during their prepared remarks.

A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules are available on our website at usbanc.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 statements are described on page two of today’s presentation and 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. .

Thanks, Jen and good morning, everyone and thank you for joining our call. I’ll begin our review of U.S. Bank’s results with the summary of reported highlights on slide three of the presentation. I’m pleased to report that U.S. Bank reported record net income of $1.5 billion for the second quarter of 2016 or $0.83 per diluted common share.

The second quarter results include several notable items that together increased earnings per share by $0.01. These notable items include $180 million of equity investment income, primarily the result of our membership in Visa Europe, which was recently sold to Visa Incorporated.

Additionally we recognized $110 million in accruals related to legal and regulatory matters and the $40 million charitable contribution.

I’m very pleased with our second quarter results where we once again delivered industry leading profitability and posted record results for revenue, net income and earnings per share on both a reported as well as a core basis.

Record revenues were driven by growth in average linked quarter loans of 1.6% as expected and continued strength in our fee businesses. While we saw a reduction in our linked quarter net interest margin as expected, we did report modest linked quarter growth in net interest income and strong growth in net interest income on a year-over-year basis.

Total average deposit growth also remained strong at 7.6% versus the previous year, and included net income growth -- net new income account growth of 2.8%. Credit quality was stable for the second quarter as expected. The net charge-off ratio was unchanged at 48 basis points compared to the previous quarter and the previous year.

And we recognized a modest improvement in non-performing assets, which was driven mainly by improvements in the energy credits. Slide five provides you with a five quarter history of our profitability metrics, which continue to be among the best in the industry.

Moving to the graph on the right, you will see that this quarter’s net interest margin was 3.02%, 4 basis points lower than the prior quarter, which was in line with our expectations.

The industry continues to face headwinds from low interest rate environment and the flatter yield curve, which became more pronounced at the end of the second quarter and continues as we begin the third quarter. The lower long-term rates will have an impact on our second half results, if the rates remain at these low historic levels.

We would that given the current yield curve and expectations that the short-term rates will remain flat for the near-team, that the interest margin -- net interest margin will decline on a linked basis in the range of 3 to 4 basis points.

However, we also expect net interest income to increase on a linked quarter basis, principally driven by an increase in earning assets. Expenses excluding the notable items increase 3.4% at the bottom end of our expected range. And our efficiency ratio improved to 54% versus 54.6% in the prior fiscal quarter.

As projected, quarter two expenses included a linked quarter increase in marketing expense related to the investment in our brand advertising, and also reflect the expected peak in our compliance related costs.

As we look out to the second half of the year, we’d expect expenses to grow, however, the rate of growth will be lower than the 3.4% linked quarter growth reported in the second quarter. Turning to slide six, the company reported record net revenue of $5.4 million in the second quarter.

Excluding the Visa Europe sales, revenue increased $226 million or 4.5% from the prior year. Our revenue growth was primarily driven by core loan growth, as well as strength in a number of our fee based businesses, including our payments, mortgage and wealth management businesses.

We also saw strong results from our capital markets business, as we were well positioned to provide product and services to customers as they navigated through the recent market volatility. Kathy will now provide you with more details about our second quarter results..

Thanks, Richard. Average loan and deposit growth is summarized on slide seven. Average total loans outstanding grew 1.6% on a linked quarter basis and increased by over $20 billion or 8.1% compared with the second quarter of 2015.

Excluding the recent retail card portfolio acquisition and student loans that were carried in the held for sale in the second quarter of 2015 loans grew by 6.5% compared to the prior year.

In the second quarter, the year-over-year increase in average loans outstanding was led by strong growth in average total commercial loans of 10.7% and improved residential mortgage loan growth of 8.6%. Other consumer loans continue to show positive momentum, led by credit card growth of 14.3%, which included the retail card acquisition.

Finally, home equity loan growth continued reflecting the year-over-year increase of 2.7%. On a linked quarter basis, our core loan growth of 1.6% meeting our expectation, and was driven by total commercial loan growth of $2.3 billion or 2.6%, and growth in residential mortgages of $1.3 billion, or 2.4%.

We currently project linked quarter average loan growth in quarter three to be similar to the growth reported in prior quarters. Total average deposits increased $22 billion or 7.6% compared with the second quarter of 2015, and were up 3.9% on a linked quarter basis.

On a year-over-year basis, the trend continues to reflect strong growth of 9.5% in our low cost deposits, which includes our non-interest bearing and low cost interest checking deposits and more than offset the run-off in higher cost time deposits.

Turning to Slide eight, as Richard mentioned, credit quality remain relatively stable in the second quarter. Second quarter net charge-off increased $21 million or 7.1% compared with the prior year, and reflected a modest increase of $2 million or 0.6% on a linked quarter basis.

Net charge-offs as a percent of average loans were 48 basis points in the second quarter, unchanged from the prior quarter and the prior year. Compared with a year ago non-performing asset increased $95 million or 6% mostly due to the down grade that occurred in prior quarter due to recent energy credits.

Linked quarter non-performing assets improved 3% or $47 million driven mainly from improvements in our energy credits. Slide nine provides an update of our energy exposure.

At the end of the second quarter $3 billion of our commercial loans and $11.3 billion of our commitments were to customers in the energy portfolio, which was down from the previous quarter. The decline was primarily driven by the completion of our spring borrowing base redetermination on reserve-based loans within our energy portfolio.

During the second quarter criticized commitments within this portfolio decreased $509 million while nonperforming loans decreased $54 million principally driven by pay down.

Finally credit reserve associated with the energy portfolio declined by $45 million, reflective of reduced loans which resulted in an 8.8% credit reserve for our energy portfolio compared to 9.1% in the previous quarter.

Given the underlying mix in quality of the overall portfolio we expect linked net charge-off and total provision expense to be relatively stable in the third quarter of 2016. Slide 10 gives you a view of our second quarter results versus comparable period.

Second quarter net income excluding notable items increased by $17 million or 1.1% on a year-over-year basis. Higher operating income was partially offset by higher provision expense.

On a linked quarter basis net income excluding notable items decreased by $114 million or 8.2% mainly due to the seasonality in certain fee businesses partially offset by higher non-interest expense related to expected increases in compliance cost and marketing expense. The marketing expense represents our brand advertising.

Turning to slide 11, net interest income increased by $126 million or 4.5% on a year-over-year basis. Strong average earning asset growth was slightly offset by the impact of a 1 basis point decline in net interest margin to 3.02%.

The modest year-over-year decline in net interest margin primarily reflected the impact of higher short-term rate offset by lower reinvestment rates in the security portfolio. Net interest income increased by $8 million or 0.3% on a linked quarter basis. Strong growth in average loans was offset by a 4 basis point reduction in net interest margin.

The decline in the margin was principally due to the loan portfolio mix as well as lower average rates on the investment securities portfolio, which is principally due to flatter yield curves. Slide 12 highlights non-interest income, which increase $100 million or 4.4% year-over-year excluding the Visa Europe sale.

The year-over-year increase in non-interest income was primarily due to increase in payments revenue, trust and investment management fees, mortgage banking fees and commercial product fees, which is mainly due to the increased capital market fee -- which was mainly due to increased capital market fees resulting from the recent market volatility.

Credit and debit card fees grew by $30 million or 11.3%, reflecting higher transaction volumes including acquired portfolios.

Corporate payment products revenue grew 1.7% reversing a negative growth trend recognized during the previous year and this was driven mostly by market share gains resulting from prior year investments made within our middle market, virtual payment and commercial freight platforms.

Merchant processing services increased 2.0% year-over-year or 3% excluding the impact of current foreign currency rate changes. Commercial products revenue increased $24 million or 11.2%, driven by higher bond underwriting fees and other capital market activities as our customers responded to the recent volatilities.

On a linked quarter basis non-interest excluding the Visa Europe sale increased $223 million or 10.4% principally due to seasonally higher fees within our payments mortgage banking and desposit service charge fee category.

Credit and debit card fees increased $30 million or 11.3% and merchant processing fees increased $30 million or 8.0% primarily due to seasonally higher transaction volumes. Commercial product fees increased $41 million or 21%, mortgage banking fees increased $51 million or 27%, which was inline with our previous guidance of 20% to 30%.

Growth in mortgage banking revenues primarily reflected seasonally higher production volumes. We currently expect linked quarter mortgage fees to increase 20% to 30% again in quarter three.

Moving to slide 13, non-interest expense excluding notable items increased $160 million or 6% on a year-over-year basis; higher compensation expense mostly due to the impact of merit increases and variable compensation.

Higher professional service expense principally related to compliance activity and higher marketing and business development expense related to the investment in our brand advertising were partially offset by lower employee benefit expense. On a linked quarter basis, non-interest expense excluding notable items increased by $93 million or 3.4%.

Linked quarter expense growth was driven by higher marketing and business development cost again reflective of the investment in brand advertising. Higher professional service fees -- expenses principally due to compliance and an increase in compensation expense mostly due to merit increases.

These increased costs were partially offset by seasonally lower employee benefit expense. As Richard mentioned, we expect expenses to grow in the second half of the year however at a lower rate of growth versus the 3.4% excluding notable items that we’ve reported for the second quarter.

Our current expectation is for linked expenses to increase 2.5% to 3% in the third quarter, but so let me provide some additional detail. We anticipate that the FDIC search charge assessment for larger banks will begin in the third quarter which will increase our expenses by approximately $20 million.

Additionally, expenses related to our tax credit business are seasonally higher as we move into third quarter. These two items account for more than half of the expected quarterly expense growth. In the second quarter, preferred dividend totaled $80 million, which compared with $51 million in the first quarter of 2016.

The linked quarter increase is reflected of recent preferred stock issuances with a semi-annual dividend payment that will repeat again in quarter four. Turning to slide 14, our capital position remains strong and in the second quarter we returned 77% of our earnings to shareholders through dividends and share buyback.

On June 29th, we announced that Federal Reserve did not object to our capital plan. As a result, we announced the $2.6 billion stock buyback program that commenced on July 1st and announced an expected increase in our third quarter common dividend of 9.8%. We would expect to remain in our targeted payout range of 60% to 80% going forward.

Our common equity Tier 1 capital ratio estimated using the Basel III standardized approach as if fully implemented at June 30 was 9.3% which is well above the 7% Basel III minimum requirements. Our tangible book value per share rose to $18.46 at June 30th, representing 10% increase over the same quarter of last year and 3% over the prior quarter.

I will now turn the call back to Richard..

Thanks, Kathy. I am proud of our record second quarter results. We maintained our industry leading performance measures and we reported an 18.7% return on tangible common equity in the quarter. Our industry continues to face challenges from the low interest rate environment.

However we remain confident that we’ll continue to grow revenue and prudently manage expenses while strategically investing in our business to create value for our shareholders. That concludes our formal remarks. Andy, Kathy, Terry, Bill and I will now be happy to answer your questions. .

[Operator Instructions] Your first question comes from John McDonald with Bernstein. .

Hi, John..

Hi, good morning guys. Richard I was hoping if you could provide a little bit color on loan growth. What’s gotten better and what’s keeping you the confidence the expected trend to continue? It sounds like you might expect more of the same maybe little bit more color there..

Sure happy to do it. And we’re expecting more of the same pretty much what we’ve seen for the last two quarters. I’ll have Andy to give a little color on the detail as he oversees all of those revenue businesses. But I will say it continues to be a theme of repetitive quarter-after-quarter.

Where on the wholesale side, you’re seeing increased capital markets activity that in fact move up and trigger loan repayments and lower line utilization and M&A related activity.

So on the wholesale side, we’re not still not seeing the kind of organic growth we’d like to see, but we are pleased as we said in our comments that we have a fully capable capital markets business in order to take the benefit of what would otherwise be some activities we didn’t use to have in the company when customers moved outside of the lending market and into the capital markets.

On the consumer side we’re seeing all areas moving slowly, but surely and nicely, favorably from autos to RVs to credit card to home equity. And then we particularly have good story to tell in the mortgage business as we continue to be a bigger player in that area.

So it’s a lot of the same John, but everything has got generally positive slightly positive bias, but a lot of the opportunity that wholesale market is yet to be the kind of organic growth that we all want to see that gets evidenced in a more healthy and robust economic environment.

Andy, do you want to add some color there?.

Richard, I’d add in that. So we did see record revenue in our commercial products groups and you saw that our credit fixed income, or FX or municipal products all were up at record levels, somewhere between 40% and 50% on a year-over-year basis, and again, that’s reflective of a tremendous bond issuance that was occurring here in the second quarter.

We did continue to see strength in auto lending as well as residential mortgages again principally due to the rise in the jump [Inaudible] and commercial real estate also grew a bit this quarter also, which is a little bit of a reversal of the trend..

And maybe Bill can follow-up.

You had good credit results this quarter, I think the outlook was for a relatively stable, I was just wondering, if you might need to build some reserves, if the loan growth remains healthy here?.

Well, I mean, we’ve started that. So we are adding, we’re done with the days of releasing and we are adding to our reserve. So we are mindful of that.

As I said for quite a period, there is still probably room in the existing portfolios, specifically residential, home equity, where we do have -- we continue to see improvements in home values, et cetera. So that could allow for releases out of those portfolios, which does help offset some of the loan growth.

But we are in a position, where we feel it’s prudent to be adding to our overall reserves..

And is this quarter a pretty good indicative pace for now Bill?.

For now..

Okay.

And in terms of the NPAs and charge-offs can you just repeat what your outlook is there?.

Yeah it’s pretty -- very stable really across the board. I mean, if you look at each of the asset classes C&I is surprisingly low in this quarter, we had -- we felt we were very got out ahead of the energy issues in the first quarter, and this quarter we had no material energy charge-offs, in fact we have nice recovery on one of our credits.

So we feel like we’ve got the energy with $50 a barrel anyway, that we have the energy issue behind us. And if you look at the other asset class, it’s all very stable..

Just add to that, Bill I would add, we marked our portfolio at $35 a barrel for the second quarter.

And we have no intention of releasing that reserve for some time and we see sustained higher levels of value on oil, but we do have at 8.8%, we think sufficient coverage and provision, and we’re quite pleased with how that portfolio is behaving at this point..

Okay, thanks..

Thanks, John..

Your next question is from Jon Arfstrom with RBC Capital..

Hey, Jon..

Hey, thanks. Good morning. Maybe Richard, a question for you, expenses. Maybe about a year ago, you gave the chin up bar analogy on rates remain low; you might have to be tougher on expenses.

I appreciate all the guidance, it looks like maybe professional services can start to moderate a bit maybe marketing to maybe there is some other offset, but maybe your latest thoughts long-term expense management, efficiency if the rate environment remains challenging..

Yeah, I appreciate that. So a picture of the bar fell up there, promising [ph] like crazy. Both knuckles are white, but we’re hanging in there. A couple of thoughts Jon, I want to start by saying, I’ll give you guys forward looking view that we intent at this point, at least for the second half of the year to stay in the 54% range.

54.0% to 54.9% kind of a range in our efficiency ratio. And I’m giving you that, because I don’t know exactly with no interest rates, flat -- very flat yield curve and that can move either than can move anytime and it seem to be very volatile. We’re not giving up on positive operating leverage, but it’s getting a lot harder.

And I’d rather just tell you guys that we’re going to stay at the same current level and we’ve been there for a couple of quarters now of efficiency. Because what I’m saying is we already are under a pretty steady and measured expense control program. We’ve got an FTE hold in the company that look for any growth items and areas of compliance.

We haven’t added those now since February of last year, and we continue to watch all the non-critical expenses, the discretionary expenses to a point that we think is it’s right up to the line, where it would start to impair our new growth.

And you guys invest in us not just for this quarter or next quarter, but for the long-term, and we’re going to be very careful not to over react. And we have been careful so far not to do that. So our expenses will go up as we said less than the 3.4% linked quarter, next quarter would be 2.5% to 3%.

And as Kathy mentioned, half of that will in the FDIC premium cost and in the CDC, which typically has higher expenses in the second half. So rest is just core part of adding people for portfolios, adding to compliance. And as you said, professional services starts it did peak this quarter starts to come down.

So I’ll tell you it comes down very slowly. So it’s not a big measured improvement. But it is at least a point in fact that this will be our highest quarter I hope on record.

So that gives you a little more color and I think the 54% range that gives us enough room to have surprises during the quarter, but also protect the knowledge for you that we’re not going to do something it get to 52 and I don’t see this thing moving into 55s or 56s..

Okay, that’s helpful.

And then maybe quickly just an update on the consent order and once lifted what really changes in your mind?.

Sure. So the consent order as you know is preclude us from whole bank transactions particularly things with branch banking and as we go through this consent order it takes quite some time not only to get things where they need to be, but to sustain and improve that they stay there and we are in those processes now.

So I have no idea what the exit time will be, but we are working closely with our regulators to make sure that we have permissions particularly to be released from any part of the consent order first if that’s helpful to us to get back into the traditional M&A business.

However, I remind you that our M&A in the area of merchant portfolios, credit card portfolios, mortgage business activities, trust activities none of those are precluded under that order and those have been exactly the things we have in the last five years consistently as part of our M&A.

So we haven’t been precluded from doing what we wanted to do and as I said before there hasn’t been a bank deal or a branch deal that we wanted since the Citizens Chicago deal that we’ve included from. So our goal is to get out of it as soon as possible so we don’t have any barriers on our options.

But for now it’s not impairing any of ability to run the company or find opportunities to acquire..

Okay, great. Thank you..

Thanks, Jon..

The next question is from Paul Miller with FBR and Company..

Good morning, Paul..

Hey, guys. This is actually Tim Hayes for Paul Miller.

What is your view for mortgage revenues in the second half of the year given where interest rates are today, are you guys seeing any pick up in resize yet and do you think that’s a tailwind to fee income from lower rates could offset the detriment to margin?.

This is Andrew replying. So our second quarter mix was about 65% new purchases and 35% refinancing. So I would expect that to go closer to 60-40 in the second quarter and given that coupled with the normal seasonality I would expect mortgage fees to continue to increase in that 20% to 30% range..

Okay, great. Thank you..

Sure..

The next question is from John Pancari with Evercore ISI..

Hi, John..

Good morning.

I wonder if you can give us a little bit more color on the merchant processing revenue it looks like a little bit light from where I was looking for this quarter, I just want to see if we can get some of your updated trends that you are seeing on the merchant side? And then separately for the payments business just overall revenue trends that you can expect here I know we’ve seen a pretty good rebound in that business, but wanted to get some color on your outlook.

Thanks..

Okay. This is Andy again. Let me start with merchant and you are right there are a few moving pieces in merchant I want to explain. So first one of the principal drivers of merchant fee revenue is same store sales. And same store sales in North America were up just under 2%, 1.8% and in Europe they were up about 5%.

So globally up about 2.6% and what you typically see from us is same store sales plus 1% to 2% is total merchant revenue growth. What happened this quarter is while we were up 2% on a year-over-year basis if you exclude FX that’s up 3% that is also now flattening now revenue related to equipment sales.

So we were up higher in prior quarters because equipment sales were going up, they are sort of leveled up, we’ve lapped that so to speak. The other things you will see are transaction volume is down and that was intentional.

We exited some low margin business, so it did have impact on transaction volume, but as you saw not a tremendous impact on fee income. So as we look forward to the next few quarter I would expect again same store sales plus 1% to 2% in terms of our fee growth in merchant volume. You asked about the other payments business so let me comment on that.

Credit card is very strong. Excluding fidelity we were up about 6% and that’s driven by card transaction volume growth of about 7% and I would expect that to continue in the future quarters. And then finally on corporate payment systems, very good story there is that we are seeing growth in the corporate side of the equation.

While government is continuing to be flat our corporate fee income is growing, transaction volume, sales volumes up about 6% and that’s a function of the investments we made in virtual pay and product activity, which is very positive. So T&E continues to be weak or level or down a bit, but payables and virtual pay is up strong..

I’ll add to that, this is Richard. Just if you are going to bring up proxy question I’ll help you out here. For Brexit, first of all it’s not material and it’s pretty neutral to the bank. But if it shows up anywhere it shows up in our European businesses, which is merchant acquiring.

You may recall those of you who followed us for a decade, we started our business merchant acquiring business in the UK that’s where it’s actually headquartered. So a disproportion amount of business is in the UK.

And actually if there is a lot of prognosis I believe there will be a lot of travel and visits and spending over the UK which is net positive for us.

And given our portfolio mix being heavy on hotels, retail, hoteliers and airlines that could be quite positive as well offsetting any variances that may occur in the rest of the European market through this disruption. So we’re seeing Brexit as fairly neutral to not material to maybe even little bit positive.

As it relates to our employees, we have a few hundred employees that are working in the UK and or in around Europe that would either have to have past reporting circumstances change for them because they’re either UK employees working in Europe or European employees working in the UK that’s something that will roll over the next couple of years.

There is no rush to it and there has been no reaction there we’re not changing any of our strategies as a result of that..

Okay great. Thanks for all that color, it’s helpful. And then just separately on the commercial real estate portfolio, pretty good growth this quarter and looking actually at the construction piece saw a pretty good jump there.

So wanted to see what you’re seeing on the commercial real estate side in terms of where the growth is coming from? And do you expect any moderation from regulatory scrutiny around CRE trends right now at all. And then lastly any credit concerns on that front because we’re hearing a little of that too? Thanks..

Yeah I will go first, I want to go first on that. CRE has got as you know for our company is one of the areas we want to be particularly conservative in much as we love it and we’re very big in it.

And so the scrutiny it’s high in the industry I’m quite comfortable that the scrutiny will not be placed here because we’ve been conservative for a decade and we continue to be underwriting. I’ll also remind you that commercial real estate has a CMBS market where there is a lot of activity.

And our guys are filling it with a lack of buyers coming particularly from the life insurers has affect the refinance and purchase activity, which only serves to say that there is a reduced pace to payoffs. So part of the increase is actually good news we’re keeping the customers we have.

But we’re not striving to get new customers at any kind of risk of underwriting or at pricing change. I think the portfolio will prove itself more overtime. Andy and Bill can add little color about where the growth is and where we see the pockets of strength. But we love this business; we’re very good at it.

But I promise you we’re just not going to get greedy at a time like this in the marketplace on terms or underwriting. Because it’s easy to do and it’s not going to happen here. So Andy you might go first..

Well to follow-up on Richard’s point. If you look at our construction loan activity, you see that that’s been increasing fairly consistently over the last five or more quarters. What’s changed is that commercial mortgage or standing loan permanent loan where the attrition has declined and actually reversed this quarter, very slight increase.

And that was what Richard was highlighting. I mean the strength has been it continues to be on the coast especially the West Coast for us and through a lot of our REIT clients they have been very active..

And that's what I was going to say. California, Pacific Northwest is where we’re seeing insurance activity. .

Great, all right. Thank you. .

You’re welcome. .

Your next question is from Scott Siefers with Sandler O'Neill. .

Hey, Scott..

Good morning, everybody. Richard I was hoping either you or Kathy could extend upon your comments on the margin from the beginning of the call. First I want to make sure I understood it correctly. I think when you characterize they’re down 3 to 4 basis points.

I think you were talking about the second half, but is that three to four basis points per quarter in the second half or in the aggregate for the second half.

And then I guess the broader question there is, at what point would you guess that margin compression would stop in this kind of pressure grade environment? Because I guess there are two big issues with the securities portfolio reinvestment risk and then there is still kind of wide gap between your loan and deposit growth.

But just curious to hear your thoughts on both of those phenomenon..

Yeah thanks, Scott. I think we got to question five before we got to NIM, that’s pretty good. I’ll be very clear, what we said it was in quarter three which is all we can see into. We have a 3 to 4 basis point prediction of NIM decrease. I have no idea what quarter four would be.

As we woke up this morning, you know that the call for interest rate increases is 21% for September, 36% for December. Better than zero worse than it was when we talked last time. So we’re not going to bet on any of that, but to the extent that any of it comes back would be terrific. Also the 10 years above 150 again thank god.

That is helpful to us as interest rate increases. And you know there is an equal impact on the income statement based on that. So if we can manage through these very worse time which is continued zero interest rate increases and very, very low tenure.

We can manage through just about anything which is how we’re building the lower for longer kind of term around the company. So for one quarter we can see that pressure. We can’t predict beyond that. I’ll have Kathy talk a bit more about the sequencing and the importance of the refinancing that occurs in the securities.

And the fact that we’re actually seeing stable performance in most margin areas for compression as it relates to competitors..

Yeah. So well he is exactly right. We’re looking at into the third quarter and we are down about -- we are projecting that we’re going to be down in that range of 3 to 4. But I’m going to say it’s going to be a lot more of what you’ve seen. So as the rate curve has kind of flattened although some signs of improvement here most recently.

That’s going to continue to have an impact on our securities portfolio. So we’ll continue to see a decline in that. And then the rest really you have to look to our loan growth to the extent that we continue to grow our wholesale loans little bit stronger than our retail loan that’s also going to put a little bit of compression going forward..

So Scott, let it be said at the end, we remind you that net interest income will increase in quarter three. So we can out [ph] on this in the outset growth, but it’s going to be continued more challenging until we get interest rate increases around that..

Okay, terrific. Thank you guys very much. .

Thanks. .

Your next question is from Ken Houston with Jefferies. .

Hi, Ken. .

Hey, good morning everyone. Just as a follow-up on just the balance sheet mix, with still have a really good loan-to-deposit ratio. You’re still growing deposits and I see you’re able to remix from the short-term borrowings this quarter.

Given that low rate scenario we’re dealing with, at what point do you decide to just try to remix just more into loans less into securities given and understanding that you need to keep LCR.

But does anything structural change with that thought process around just asset liability management?.

No it doesn’t Ken. And we’re nowhere near those lines. I mean we take what the market gives us and then make sure that we apply it appropriately to the balance sheet and therefore the income statement. But there is no -- we're not near any of the line where we’re evaluating the value of even deposits.

We're self-collecting deposits and happy to take them because they will be more necessary in the future. And we’re pricing loans at the right level to win the high quality and the securities portfolio is kind of a result of all of that. But it wouldn’t be a driver it would be a follower.

And there is nothing in our strategy that’s going to change at this stage. And there is nothing that’s getting us close to edge where we have to sit down and strategize on our balance sheet as it relates to a mix or an area of that appetite that we haven’t already demonstrated..

Understood. And then on the deposit side, I think a lot of banks are starting to still see a modest tick ups on the deposit pricing side.

What are you guys just seeing in terms of customer behavior in terms of product choice and any cost that you have to hand along even though we’re not really getting it on the left side of the balance sheet?.

Yeah, we really haven’t seen a whole lot of shift. Really the consumer has really no rate change whatsoever on the consumer. We talked previously that we did have some repricing on our wholesale side some of that was just contractual that happened to other if as we work with our customers.

But I’ll tell you it’s been relatively stable as we look into this quarter..

Okay.

Last one real quick one, the preferred dividend Kathy, does it go back to the first quarter 57 in the third quarter?.

Yeah. So it’s a quarterly payment. So first and third quarter will be at the lower rate, second and fourth quarter will be at the higher. Yeah about 60 I would say, 60 in the third quarter, about 80 in the fourth quarter. .

Okay, thank you. .

I am glad you asked that because that gotten just neither didn’t telegraph well or just gotten missed in a lot of the models. And it’s real money and it's also real value. So I’m glad to have that clarity. Thanks for asking it. .

You bet. .

Your next question is from Mike Mayo with CLSA. .

Good morning, Richard. So in the battle Richard Davis, first the tenure I think you’re kind of getting obliterated..

I think so. They are definitely winning, I’ll tell you that. .

On the other hand, you do have some accelerating loan growth. I know you talked about loan growth here. So originally you’ve mentioned economic growth couple of years ago accelerating, improving and then tenure goes down and that’s why I brought the comment initially.

So if you look at the tenure you’re really loosing, if you look at your accelerating loan growth maybe you’re winning a little bit more.

So I’m just trying to make sense of as the markets for you do business improving or not?.

Mike it’s a great question. They are improving slowly, but I’ll tell you what, I wish I’ll be here 10 years from now to prove that, but we are taking market share, swear to god honest Injun. We are taking market share. We have been for years.

Think of our home equity portfolio it’s still growing, albeit slightly, but that’s been shrinking across the industry.

Auto loans we’ve never got not of it, so we are selling it big, leasing or now one of the few players literally quite capable at it we’ve been doubling down on credit cards and you are seeing some of our recent portfolio and partnerships.

So it’s mostly in market share, there is not a market that’s actually weaker than it was a year ago, but for intents and purposes there is not a market much stronger than it was either. And what I think really turns on the dial for banks is when corporate America is more confident and I don’t mean the original old unconfident we’re always uncertain.

But things with a Presidential Election in the offering things like Brexit uncertainties we don’t need any of the things like that to continue to give corporate America a reason to just wait and but for M&A and for restructuring their balance sheet corporate America is not organically doing big things at least not needing banks in that process.

So that’s when the thing really starts to take-off. But in the meantime we are all getting it out in the trenches, trying to keep more customers and do more with the ones we have. And I just think the right answer as much as it’s hard to prove is that we are doing it in our case with market share growth..

And so the answer to my question -- that is helpful.

But if you strip all that away do you think things are improving generally or not or it’s just kind of the same old?.

I think I meant to say every market is a little stronger than it was last year. So yes, but not very much..

Okay. All right, great. Thanks a lot..

Thanks..

Your next question is from Erika Najarian with Bank of America..

Good morning, Erika..

Good morning. I was wondering if you could share a little bit of color on the CCAR results. I was a little bit surprised how the regional banks faired in terms of their stress ratios or PPNR assumptions relative to last year.

I am wondering if there is any color that you could share with your investor base on that? And also Richard I’m wondering if the CCAR results and how acquirers were treated in this year’s results at all impact your thinking about future acquisitions?.

Let me say first of all we were very pleased with our CCAR results. I always joke at the stress test and it’s effective because we are stressed the whole time. Also be reminded we haven’t had the final exit exams on all the details and you also know we’ll never know exactly how the model works.

But I’ll remind you that in this particular cycle the negative interest rate scenario was added and that’s hard for any of us to predict exactly how that fair for each bank. But I know that that had an impact on what was likely the PPNR for every bank.

As you know we continue to be at the top on the PPNR bearly in this case we are slightly below break even, but in the years past we’ve always been above and I think on a relative basis we even performed better.

So I’m not concerned about trying to predict that and I think that the test continues to be effective in helping us all understand whether or not on a most stressed scenario we would be okay. Acquirers had more limited capital distribution and so we don’t think that’s a factor to us because it’s not as relevant to us as it will be some others.

But I think as you look at the stress test results and you apply it across different kinds of companies it’s not unusual to see different distribution model based on both what we are starting from, what the stress test would do to us and where we would end..

So essentially it doesn’t impact how you are thinking about understanding that you have a consent order in place. But it doesn’t impact your thinking about how to manage capital for future acquisition..

No, I mean emphatically no, in fact it doesn’t have any impact on it at all. What we wanted to do is we want to continue to understand the best methodologies that they use in stress testing the loan portfolio. So we can better understand what mechanics are in there so we can predict those better than we have in the past.

But we also continue to outperform on the PPNR as it relates to their satisfaction in the model with how much money we’ll make.

So it works both ways but every year we get smarter every year we go back and do our best to evaluate it and as I said we are a little bit early on getting any formal feedback which we’ll be getting in the next couple of weeks between this and the next time we talk..

Got it. And just as a follow-up question. Really appreciate the color on how to think about payments revenues as we think about forecasting.

Could you give us a sense of how much of your payments revenues are generated in pounds so we can think about translation risk?.

The translation is rather limited. So if you think about every 1% change it’s about $1 million it’s not a big number, Erika..

Got it, thank you..

Thanks..

Your next question is from Vivek Juneja with JPMorgan..

Hi, Vivek..

Hi. Couple of follow-up.

Firstly on CCAR, your current cost are at the high end compared to last year, can you comment on your thoughts on the results that are showing up there?.

Yes. And I think really where you see that is particularly within our wholesale portfolio. And that’s been something we’ve been working on for quite a few years. I think we have tended to be on the higher side -- the Fed has been a little bit on the higher side.

We don’t have a whole lot of input into -- insight into what some of their modeling routines are, as you know it’s relatively a black pot.

But perhaps, we’re thinking perhaps that, if you think about where our utilization rates and so forth that could have a play we’re relatively low on a utilization side, but we are actually, as you notice, we project a lot lower risk in a downturn environment than the Fed and we’re just going to continue to share to work through that and try and figure out where the differences lie..

So Vivek, this is a point of frustration for me, because we in the first couple of years, I was really worried, if we were different than them how bigger deal could that be. I will say that history is probably now better dictate than testing itself.

And if you look in the last seven years, which is exact timeframe that we’ve got the stress test our commercial portfolios outperformed almost everybody and done very, very well. And so, I’m not challenging the test, I’m just challenging that we’re never going to figure out what they put in, Kathy gave you a hint.

We think our commitments have been growing faster than anybody, well in addition to our loan growth. And I think if they take a model where all the commitments go to 100%, and they go to charge-off, that could be it.

We have a big government portfolio in our corporate business, which if they take a 90 day late pay and take the whole portfolio to charge-off, maybe that could be it. And as simple as it sounds, we’ll never get the answer, even to those questions I just offered.

So what we will do is continue to watch our own performance as you should measure the dictate on how well we’ve actually done in charge-offs and non-performs over the course of time. So we’ll just do our best to get closer on that test. But we don’t understand exactly ourselves, how it test like it does, when the results themselves show that way..

Okay, thanks. One more, capital markets, you have grown very strongly Richard. As you continue to do that, does that shift what you’re thinking in terms of -- so that’s been one of the strongest fee growth driver this quarter, and you’re trying to grow underwriting.

Does that shift what you are thinking from a capital standpoint, where especially when you look at peers, et cetera?.

Vivek, I would say it doesn’t shift, it’s just -- it’s a reflection of what’s occurring in the market. We’ve had traditionally two strong growth areas in fees, trust and our payments group, and it’s great to have this third area come in and started taking what the market gives us.

And given this low rate environment and the volatility, things like credit fixed income FX are very strong as well as derivatives. So it’s great that we have these businesses, which in fact 10 years ago we didn’t have. So it’s a positive add to the fee businesses that we have. .

Right. But given that it’s a higher volatility business would that not mean that as you think about economic capital, but when you’ve talked about 8% or 8.5% in the past that that starts to migrate slightly upwards..

No. I wouldn’t expect that to have any impact on our capital ratio at all..

Okay, thanks..

Sure. .

Your next question is from Bill Carcache with Nomura..

Hi, Bill..

Thank you. Good morning. Richard, I had a question on your P2P money transfer product.

How are you thinking about the potential disintermediation risk that clear exchange could pose to the revenues that you generate on the card issuing side of your business? Or are there any restrictions that you could put in place to prevent potential disintermediation?.

Good question, Bill. First of all, we are clear exchanges [ph]. So we’re going to be on either side of that transaction.

But I’ll tell you it’s the same answer I gave three years ago with Square, when Square started coming out big with Starbucks, and at least for now not for long-term, but for now, most of these transactions are taking money out of this, cash out of the system not other card, debit or credit transactions.

There is still so much cash in our system, in our society, there is plenty of disintermediation of cash a long before it starts to tap up against the other card businesses and that’s what we are all planning for in the near-term and that could be a couple of years.

But short beyond that period of time, we all have to be very thoughtful and your question is right on the money, as it relates to what’s the evolving relationship between real time Pay-to-Pay, card, card not present, and the mobility of people moving money about in the different environment.

Remember we’re still under a Federal Reserve circumstance that settles overnight and not over the weekend. So there is still a big disconnect and we have those things to fix systemically, before we get to a real time payment.

But for now, disintermediation is mostly seen on cash and that’s a net positive for us in the other banks, because that we have no benefit in cash moving about for the most part, we do when it starts to monetize itself in the form of the payment. .

Right. But maybe just as a follow-up, I guess the nature of that product is really for clear exchange where P2P money transfer between individuals not necessary to conduct a payment transaction.

But I guess to the extent that you were and given your position as both acquirer and issuer you would be in a very good position to see to the extent to which people who are using the product to actually conduct payment transactions in lieu of USB credit card.

And if that were the case is that something that you would expect to be monitoring and rack to as appropriate to the extent that we’re having a revenue impact..

I think the principle -- this is Andy. I think the principal activity today is as Richard mentioned is cash and is also check individual-to-individual. I think the second category that will occur is for people to pay bills. And the bill payment again is going to be a replacement for check and or online checking. So it is in the bill pay so to speak.

So in the interim or in the immediate timeframe I don't think there is any negative at all and we’ll continue to monitor as Richard said over the long-term. I think the other thing to consider as how this migrates to the wholesale side of equation in the business. And that’s also something we’re very aware of. .

Yeah that’s right. So think about this is P2P right. Then there is P2B, people are paying their bills and there is a B2P where people are trying to business are reaching out to you and giving you reason to buy things and send money back. And then there is B2B which we’re all working on including block chain.

And then we’re working on all of those alternative most of those are so nascent. I think as a banking category those are just all upside for us, because there is so much opportunity and much less to see remediation. But you’re on to something, Bill and there will be a time. Right now babysitters you go home and you pay him cash, you write them check.

Now you’re going to start doing it in real time between you and the 17 year old and the money moves. We’re assuming remediating something that’s right now not a debit or credit card. But overtime this is something we have to put the whole universe together and figure it out.

And I’ve said this before I’ll say it again the banks as a collaborative are working better together than we ever have to make sure we work together and create a better circumstance for all of our clients. And I think that’s a big plus in the last couple of years if we see payments emerge as a real time issue. .

That’s great color. Thanks gentlemen. .

Thanks. .

Your next question is from Kevin Barker with Piper Jaffray..

Thank you very much. Good morning. In regards to your commentary around the Brexit and your real positive commentary around that.

Could you dig in a little bit on the impact of the Brexit in regards to your payments business in particular?.

Yeah that’s generally where it’s going to be. Because we’ve got the merchant acquiring activity, which we’ve talked about a little bit here before. So I think we’ll make -- we'll call it neutral for now based on what you can Kevin just because we have such a UK influence.

I think there is a positive in UK enter UK and there is probably side negative enter Continental Europe. But we’re going to say that to be net to favorably positive on the payment side. Terry you got the trust side, you got a lot of employees in the Brexit impact there, you might talk about that. .

Yeah in our corporate trust business which is that we have in Europe at least recently we’ve seen just a little bit of a tick down with respect to deals that are being done as people kind of pause during that timeframe.

But the impact that it had on the long rate of a curve so the tenure actually is probably going to stimulate the deal flow in terms of debt issuances. So the overall net impact of that over the next quarter or two, I would actually anticipate would probably be positive. .

Yeah deals aren’t getting allowed they’re just being come in the new ones... .

In Europe they’re be in deferred, but in the United States the yield curve impact is actually stimulating some growth..

Is that helpful Kevin?.

Yeah that’s very helpful. And then in regards to your marketing spend and professional services spend obviously that can be volatile quarter-to-quarter depending on the business conditions and what your planning for the future.

But given the uptick you’re seeing there, would you expect that to decline over the next few quarters just because of the spend we saw in the second quarter?.

Yeah good question. In my 54% range of efficiency we’re holding steady to finish what we start at this year on our marketing and branding campaign because there is a value and stability and sustainability in messaging. As you know people have to do things seven times to remember them once.

So we’re not going to give up on that and then the cost of third-party assistance on compliance as I said starts to tick down slowly. So those are both sustainable for the rest of this year. But trust me everything we can control continues to be in our gun sights.

And marketing is one of those things that if it has to go it has to go, but I’d love very much to not cut it off just a bit too soon if in fact we’re on the advent of some times here what we can afford to do what we want to do and grow the company greatly. .

Thank you for taking my questions. .

Yeah, thanks. .

Your next question is from Nancy Bush with NAB Research. .

Good morning, Nancy. .

Good morning, Richard, how are you?.

How are you?.

Nancy A. Bush:.

. :.

Yeah. Well, first of all, I’m going to join you more than because I agree with you. But I will tell you, we are what we see. And I’m going to say two things that Fed is it has a different lens on this. They are looking at different things and looking usually later than we are.

But on a real time basis, which we live in everyday, we are seeing a slow recovery. And it’s a small nuance on a word, but a recession as things are going backwards where people are starting to feel worse and not taking actions that they might otherwise have taken before. We are not seeing that.

On the other hand, because we’re balance sheet companies and because we're highly levered and because half of what we do is in the wholesale business, we’re all, I think, spending a lot of energy talking about how we’re waiting for the wholesale side of the balance sheet to pick up in a real organic, old-fashioned way, and we’re also not seeing that.

But they’re not going backwards, so just taking this long, long, long period of time to restructure, evaluate their best options when things do pick up. And there’s nothing wrong with that, but that’s why we have all these unused commitments and continue to grow the balance sheet.

About the business side, they’ve got reasons and they’re informed and they’re waiting. But on the consumer side, it’s a little bit better every quarter and it’s not a recession. And I would disagree it if someone is saying that at Fed level. And in fact, I think you can see consumers are starting to spend again.

They’re savings is at a level that they are comfortable. They’re using their credit cards and they’re paying it back on time and getting rewards for it. But I would say it actually make sense to me. But for the words recession being standard about lately by a lot of parties, we don't see it..

Okay. Secondly, I had a question related to the consent order. You mentioned that it prevents you from doing branch acquisitions. Basically, branch institutions.

Does it also prevent you from opening any new loan production offices? Is that something you're thinking about? And which markets do you -- are there any markets that you need to be in that you're not in right now?.

Good question. The answer is no. It doesn’t impair our ability to open loan production markets. And the answer is we don’t have any new markets to get into, but I’ve never had the chance to show you guys just how many markets we are in out of our footprint. So 25 state footprint where you see us on the street and you drive by us every day.

And the other 25 states, for the most part, for commercial real estate, corporate trusts, middle market and large corporate, we’re in all of those states. We just really have never taken the time to show you that.

So I’ll make this a note to do that at the Investor Day in September 15th to make sure we show you where all of our loan production offices are outside of what would be the footprint. Because when I show you, you’ll see wherever we want to be, and so the answer to the expansion is no, because we’re already there..

Okay, thank you..

Yes, thanks..

Your final question comes from Terry McEvoy with Stephens..

Hey, Terry..

Hi, thanks for taking my questions. Trust and investment management fees, looked to be up 6% or 7% if I just based off the trailing four quarter average. In the release, you talked about account growth.

Could you give a little bit more color about that business in 2Q as well as maybe the outlook for the back half of the year?.

Yes. So if you ended up looking at the second quarter or if you look at the first half, the first quarter was a little bit slower simply because of the market spend.

But in the second quarter where the market starting to recover, we’re starting to see nice growth again with respect to new accounts, both on the corporate institutional side as well as within wealth management itself. So we end up looking into the second half of the year.

We would anticipate that that sort of growth would continue just given the rebound, for example, in the markets where they are at today..

And then just a quick question for Kathy.

Could you run through your mortgage banking outlook for Q3? And then just so I am cleared, does that include your best guess on hedging, gains losses and MSR changes in fair value?.

Yes. So for mortgage fees, we are anticipating that that will have a linked quarter increase of about 20% to 30%. That does include all of our assumptions around hedging and so forth, so that’s all in.

And as Andy indicated earlier, I do think that we’re going to see a little bit of a shift between -- in our application base from purchase -- between the purchase and refi. As he indicated, we’re kind of 65-35 this quarter. I think that that’s likely to go more towards the 60% purchase, 40% refi as we move forward..

Perfect. Thanks so much..

Thanks, Terry..

I will now turn the call over for closing remarks..

Thank you for listening to the view of our second quarter 2016 results. Please contact us if you have any follow-up questions..

Thanks, everybody..

This concludes today’s conference call. You may now disconnect..