U.S. Bancorp. (USB) — Q4 2015 Earnings Call Transcript

Thank you, Maria, and good morning to everyone who has joined our call. Richard Davis, Kathy Rogers, Andy Cecere, and Bill Parker are joining me today to review U.S. Bancorp’s fourth quarter and full year 2015 results and to answer your questions. Richard and Kathy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules, are available on our website at usbank.com. I would like to remind you that any forward-looking statements made during today’s call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today’s presentation, in our press release, and in our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Richard.

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

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

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

Maria, we can go ahead now and open for questions.

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

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

And then is Bill Parker there?

Bill is here; here you go.

Yes hi John.

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

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

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

Yes, exactly, yes.

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

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

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

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

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

Understood, thank you.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yes.

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

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

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

That’s right.

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

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

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

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

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

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

Could you talk a little bit about credit quality at a high level? You guys are, you know, remain very well-positioned in this environment. Can you give me a sense of what you're eyeing for potential risks as economic growth slows?

Yes, certainly. Overall we’ve seen the earnings continue to remain strong and credit performance remain stable. We are monitoring certain sectors of the economy more closely, particularly energy, which remains a focus given the macro environment. As Richard mentioned, we’ve built our reserves accordingly and continue to see strong performance in most of our other lending areas. We're closely watching the effects of the economy on consumer credit as it relates to employment trends and housing but so far, we are comfortable with the portfolio quality across the board.

While the environment provides opportunities as you mentioned Richard, there are still macro concerns. How are you balancing risk with your growth initiatives?

As we expand, we always maintain a conservative risk posture. We ensure robust underwriting processes and regular stress tests to assess potential impacts. Maintaining strong capital ratios allows us to take on opportunities without compromising our overall risk profile. We continue to believe that we can grow while staying within a prudent risk framework.

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

Thank you.