Apr 20, 2010
Executives
Judy Murphy – Director, IR Richard Davis – Chairman, President and CEO Andy Cecere – Vice Chairman and CFO Bill Parker – EVP and Chief Credit Officer
Analysts
Matthew O'Connor – Deutsche Bank John McDonald – Sanford Bernstein Jon Arfstrom – RBC Capital Markets Paul Miller – FBR Capital Markets Heather Wolf – UBS Ian Forsyth [ph] – Bank of America Chris Whalen – IRA Nancy Bush – NAB Research LLC Chris Kotowski – Oppenheimer Matt Burnell – Wells Fargo Moshe Orenbuch – Credit Suisse Chris Mutascio – Stifel Nicolaus Meredith Whitney – Meredith Whitney Advisory Group Betsy Graseck – Morgan Stanley Carole Burger – Soleil Securities
Operator
Welcome to US Bancorp’s first quarter 2010 earnings conference call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer; and Andy Cecere, US Bancorp’s Vice Chairman and Chief Financial Officer, there will be a formal question and answer session.
(Operator Instructions). This call will be recorded and available for replay beginning today at approximately noon Eastern Time through Tuesday, April 27 at 12 midnight Eastern Time.
I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.
Judy Murphy
Thank you, Ashley, and good morning to everyone who have joined our call today. Richard Davis, Andy Cecere, and Bill Parker are here with me today to review U.S.
Bancorp’s first quarter 2010 results and to answer your questions. Richard and Andy will be referencing a slide presentation during their prepared remarks.
A copy of the slide presentation, as well as our earnings release and supplemental analyst schedule 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 risks and uncertainties.
Factors that could materially change our current forward-looking assumptions are described on page two of today’s presentation, in our press release, and our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Richard.
Richard Davis
Thank you, Judy. Good morning, everyone, and thank you for joining us today.
I would like to begin on page three of the presentation and note some of the highlights of our first quarter 2010 results. U.S.
Bank reported a net income of $669 million for the first quarter of 2010 or $0.34 per diluted common share. Earnings were $0.10 or 42% higher than the same quarter of last year and $0.04 higher than the fourth quarter of 2009.
Total net revenue of $4.3 billion in the first quarter was 11.3% higher than the same quarter of 2009. With an industry leading efficiency ratio of 49% in the first quarter, we achieved positive operating leverage on a linked quarter basis.
We experienced strong year-over-year average deposit growth of 13.7%, while average loans grew by 3.9%. Growth in both categories benefited from recent acquisitions.
As expected, net charge-offs and non-performing assets, excluding covered assets, increased this quarter, but at a more moderate rate, with both categories rising by approximately 2%. Importantly, the provision for loan losses declined on both a year-over-year and a linked quarter basis, as the increase in net charge-offs was more than offset by a decline in reserve build.
We maintained our strong capital position, with the Tier-1 capital ratio and Tier-1 common ratio increasing to 9.9% and 7.1% respectively at March 31. On Slide Four, we show our performance metrics over the past five quarters.
Return on average assets in the current quarter was 0.96% and return on average common equity was 10.5%, above the returns posted in each of the past four quarters. The first quarter results included two significant items, which were net security losses of $34 million and provision expense in excess of net charge-offs of $175 million.
Excluding these significant items, which Andy will discuss in a few minutes, return on average assets and return on average common equity would have been approximately 1.19% and 13.1% respectively. The five quarter trends of our net interest margin and efficiency ratio are shown in the graph at the right hand of Slide Four.
Our net interest margin of 3.90% improved over the prior quarter by 7 basis points, primarily due to the lower funding cost. Our first quarter efficiency ratio of 49% was essentially flat to the prior quarter.
Turning to Slide Five, our capital positions remain strong. As previously noted, our Tier-1 capital and Tier-1 common equity ratios rose to 9.9% and 7.1% respectively at March 31.
Additionally, our tangible common equity to tangible assets ratio rose 3.8% from March 31, 2009 to 5.6% at March 31, 2010. Our company continues to generate significant capital each quarter, due to our diverse mix of businesses, a number of which are less capital intensive than our traditional balance sheet businesses, in addition to our superior efficiency ratio and ongoing profitability.
Given our ability to generate significant capital, even under adverse economic circumstances, we believe we have the capacity to return more of our capital to shareholders through an increase in our dividend rates. However, as I have indicated in the past, we must continue to defer a dividend action until we see clear evidence that the economy has recovered and is sustainable, and we receive clear regulatory capital guidelines and approval.
I am aware of how important the dividend is to our shareholders and I can assure you that we will continue to work closely with our regulators to help facilitate their decision-making process. Moving on to Slide Six, average total loans outstanding increased by $7.2 billion year-over-year.
As noted on the slide, excluding acquisitions, total average loans declined 2.9% year-over-year. On a linked quarter basis, total average loans increased by 0.6%, driven again by acquisitions.
The lack of growth in average total loans outstanding, excluding acquisitions, was largely due to the lower usage of revolving lines of credit by our commercial and corporate customers. Utilization of outstanding commitments by these borrowers declined from an average of about 30% in the fourth quarter of 2009 to approximately 28% in the first quarter of 2010.
Despite this reduction in the balance of average loans outstanding, we are continuing to see the benefits of flight to quality as we gain new customers, and believe that our balances are declining less than those of our peers. We continue to originate and renew lines and loans for our customers who want and need credit.
In fact, during the first quarter of 2010, U.S. Bank originated nearly $9 billion of residential mortgages.
We originated over $4 billion of consumer loans, including installment loans, student loans, lines of credit, and home equity lines and loans. We originated new prime based credit card accounts with lines totaling $2 billion, and we issued $6.6 billion of new commitments and renewed $14.6 billion of commitments to small businesses, commercial, and commercial real estate customers.
Overall, excluding mortgage production, new origination plus new and renewed commitments were over $27 billion, somewhat lower than the previous quarter’s total, again indicating that the demand for new loans remain subdued. We continue to be open for business, and eager to meet the credit needs of our current and new creditworthy customers.
Total average deposits increased by $22 billion over the same quarter of last year and $1.6 billion on a linked quarter basis. Excluding acquisitions, the growth rate was 4.5% on a year-over-year basis.
On a linked quarter basis, excluding acquisitions, average deposits declined by 1.7%, primarily due to lower average DDA balances in wholesale banking and in corporate trust. Importantly however, savings deposits, which include interest checking, regular savings, and money market savings, were higher than the fourth quarter by 3.4%, reflecting a number of our recent growth initiatives, including our new S.T.A.R.T.
program, Savings Today And Rewards Tomorrow, and our consumer and small business product packages. Turning to Slide Seven, the company reported total net revenue in the first quarter of $4.3 billion.
The growth in core revenue was driven by earning asset growth and expanding net interest margins, our fee-based businesses, growth initiatives, and acquisitions. Moving on to credit as we turn to Slide Eight, as we predicted for you last quarter, the rate of increase in net charge-offs moderated on a linked quarter basis.
First quarter net charge-offs of $1,135,000,000 were 2% higher than the fourth quarter of 2009. This percentage increase was lower than the 7% increase recorded between the third and fourth quarters of last year.
Non-performing assets, excluding covered assets, increased by $91 million or 2%. This percentage increase was also lower than the fourth quarter's linked quarter growth of 5%.
Notably, excluding covered loans, early and late stage delinquencies in all major loan categories improved during the first quarter. This first quarter's nominal increases in net charge-offs and non-performing assets, in addition to the favorable change in early and late stage delinquencies, indicates the linearity in inflection points in credit quality.
Accordingly, we expect the level of both net charge-offs and non-performing assets to be relatively stable in the second quarter. Turning to Slide Nine, you can see that as expected, given the moderating but still upward trend in both net charge-offs and non-performing assets, we increased the allowance for credit losses this quarter by recording a $175 million incremental provision for loan losses.
This represented approximately 15% of the current quarter’s total net charge-offs of approximately $1.1 billion. This compares with an incremental provision equal to 25% of net charge-offs in the fourth quarter of 2009 and to 67% of net charge-offs in the first quarter of 2009.
This incremental provision raised the company’s allowance for credit losses to period end loans at March 31, excluding covered assets, to 3.2%, up from 3.04% at December 31. The ratio of allowance to non-performing loans, excluding covered assets, ended the quarter at 136%.
With the expectation that the level of net charge-offs and non-performing assets will remain relatively stable during the second quarter, the amount of reserve build as a percentage of net charge-offs is also expected to decline. The following eight slides provide credit-related information about each of our major loan portfolios, and I will highlight just a few items on each.
Slide 10 provides more detail on the commercial loan portfolio, which has declined from an average of over $49 billion in the first quarter of 2009 to approximately $41 billion in the first quarter of 2010, primarily due to the lower line utilization and soft demand for new loans. The net charge-off ratio on the portfolio increased to 2.41% in the first quarter, but the early and late stage delinquencies as well as the non-performing loans to total loan ratio improved on a linked quarter basis.
Overall, asset quality measures are improving for the commercial loan portfolio. Slide 11 provides additional information on the commercial leasing portfolio.
Delinquencies and the level of non-performing loans have stabilized in this portfolio, primarily due to the improvement in BEFG, our Business Equipment Finance Group, where losses peaked in the first half of 2009. Moving on to Slide 12 and the company’s commercial real estate portfolio.
Average total commercial real estate loans have increased over the past year, primarily due to the growth in CRE mortgages, or a lack of permanent financing previously available in the CMBS market, has allowed us to extend financing. Net charge-offs on the CRE mortgage portfolio remain low at 73 basis points of average loans outstanding and key credit metrics reflect stable trends.
The net charge-off ratio on the commercial real estate construction portfolio, however, remains elevated. Delinquencies of that portfolio have however improved significantly year-over year, and property values are stabilizing.
Turning to the residential mortgage portfolio detailed on Slide 13, the net charge-off ratio edged lower than the first quarter to 2.23% of average loans outstanding. Importantly, early and late stage delinquencies for the residential mortgage portfolio improved significantly.
This improvement was seen in both the traditional branch originated portfolio and in our consumer finance group portfolio, where loans with higher LPVs and lower FICO scores reside. Our company has been actively working with mortgage customers to renegotiate loan terms since late 2007, beginning with our own modification programs and now including both the FDIC's modification program and HAMP.
Since 2007, including loans serviced for others, we have modified over 33,500 residential mortgage loans, totaling approximately $5.8 billion. Slide 14 summarizes the performance of our home equity portfolio.
The majority of this portfolio, 87%, was originated through our retail branch network. This traditional portfolio has performed well during this cycle, as demonstrated by the current quarter's net charge-off rate of just 1.25%.
The remaining 13% of the portfolio is primarily broker-originated and is managed by the consumer finance group. Both segments contributed to the improvements in delinquencies and net charge-offs this quarter.
Credit card loans are detailed on Slide 15. Average loans outstanding grew by over 20% year-over-year, but declined slightly from the fourth quarter of 2009.
The net charge-off ratio during the past three quarters has been impacted by portfolio purchases made in September of last year and we have adjusted for the transactions in the chart on the right side of the slide. Similar to the other major loan categories, early and late stage delinquencies improved, while net charge-offs increased over the prior quarter, reflecting loan growth trends over the past number of quarters.
Going forward, losses on the credit card portfolio are expected to stabilize, but remain elevated as long as unemployment remains high. Given the high quality of our portfolio, however, we expect to continue to perform significantly better than the industry average.
Slide 16 provides additional detail on the retail leasing portfolio. Net charge-offs and delinquencies have significantly improved since the first quarter of 2009, as better used car prices have significantly reduced end-of-term valuation and credit losses.
Finally, Slide 17 summarizes the credit information on the other retail loan portfolios, a breakdown by product of which is provided in the pie chart on the right. Early and late stage delinquencies improved in the first quarter, while net charge-offs remained stable.
Similar to retail leasing, the auto loan portfolio loss rate improved as used car prices rebounded from their lows. I will now turn the call over to Andy.
Andy Cecere
Thanks, Richard. I will take just a few minutes to provide you with more details about the results.
I turn your attention to Slide 18, which gives a full view of our first quarter 2010 results compared to those reported for the fourth and first quarters of 2009. Earnings per diluted common share were $0.34 for the first quarter of 2010, $0.04 higher than the prior quarter and $0.10 higher than the first quarter of 2009.
The key drivers for the company's first quarter results are detailed on Slide 19. The $140 million or 26.5% increase in net income year-over-year was the result of an 11.3% increase in net revenue, driven by a 14.7% increase in net interest income, and a 7.3% increase in non-interest income.
This favorable change in total revenue was partially offset by a 14.2% increase in non-interest expense. Provision for credit losses in the first quarter were slightly lower than prior year's quarter, as the $347 million increase in net charge-offs was more than offset by a decrease of $355 million in incremental provision, as the need for additional reserves declined.
Net income was $67 million or 11.1% higher on a linked quarter basis. Seasonally lower net revenue was offset by lower operating expenses and again, a favorable variance in the provision for credit losses.
A summary of the significant items that impact the comparison of our first quarter results to prior periods are detailed on Slide 20. The two significant items in the first quarter of 2010 were the net securities losses of $34 million, primarily representing impairment on our SIV exposure, and provision in excess of net charge-offs of $175 million.
Note that the first quarter of 2009 included a $92 million on a corporate real estate transaction, which impacts the year-over-year comparisons of the other income line. Turning to Slide 21, net interest income increased year-over-year by $308 million or 14.7%, primarily due to a $13.5 billion increase in average earning assets, $13.3 billion of which was acquisition related.
Net interest margin was 31 basis points higher than the first quarter of 2009, primarily due to our ability to replace wholesale funding with low cost deposits and achieve overall lower funding costs. On a linked quarter basis, net interest income was higher by $43 million, primarily due to a $3.4 billion increase in earnings assets, which was acquisition-related, and a seven basis point increase in net interest margin.
The net interest margin improved due to the change in mix between wholesale funding and low cost deposits, and overall lower funding costs. Assuming the current rate environment and yield curve, we expect the net interest margin to decrease modestly to the mid 380s in the second quarter of 2010, due to the impact of recent legislation on our credit card portfolio yield.
Slide 22 provides additional detail on our growth in average earning assets this quarter. Year-over-year, average total loans grew by 3.9%.
Excluding acquisitions, average loans declined by 2.9%. Average investment securities increased by $3.9 billion or 9.2%.
Linked quarter average total loans grew by approximately $1.3 billion, again, due to the acquisitions, while average investment securities rose by $2.1 billion or 4.7%. Slide 23 breaks down the growth in average total loans by category.
Looking at the chart on the left, you can see that the decrease in total average loans, excluding acquisitions, was essentially due to the 15.8% drop in average commercial loans, as retail residential mortgage and commercial real estate were all higher on a year-over-year basis. The majority of the loans related to the FBOP and Downey/PFF acquisitions were reported as covered loans and the $10 billion year-over-year increase was due to the acquisition of the banking operations of FBOP Corporation.
On a linked quarter basis, the decline in average loans, excluding acquisitions, was again driven by the decrease in commercial loans, partially offset by increases in commercial mortgages, residential mortgages, and other retail lending. Moving to Slide 24, you can see the very favorable growth in low cost deposits over the past five quarters.
Average total deposits grew by $22 billion or 13.7% year-over-year, partially due to acquisitions. Importantly, low cost core deposits, non-interest bearing interest checking, money market and savings, excluding acquisitions, grew by 23.5%.
This growth reduced the need for wholesale CD and foreign branch time funding, contributing to the net interest margin expansion. On a linked quarter basis, average deposits, excluding acquisitions, declined slightly, principally due to lower non-interest bearing account balances in the corporate trust and wholesale banking divisions.
Slide 25 presents in more detail the changes in non-interest income on a year-over-year and linked quarter basis. Non-interest income in the first quarter of 2010 was higher by $130 million or 7.3% for the first quarter of 2009.
Excluding the $72 million favorable change in significant items, non-interest income was higher by 3.1%. This positive variance was driven by a 7.5% growth of payment-related revenue, 24.8% growth in commercial product revenue, illustrating the success of recent investments and growth initiatives, and higher other revenues due to a lower end-of-term lease residual valuation losses.
These favorable variances were partially offset by a decline in mortgage banking revenue, which was $33 million lower than the first quarter of 2009, principally due to a 33% reduction in production volume, partially offset by higher servicing revenue and a favorable change in the MSR valuation and related cash. On a linked quarter basis, non-interest income was lower by $98 million, reflecting the fact that the first quarter of the year is the weakest revenue quarter for our company.
Excluding the $124 million favorable change in significant items, non-interest income was lower than the prior quarter by 10.2%, and was driven by seasonally-lower payment revenue, and deposit service charges, which declined by 4% and 13% respectively, an $18 million reduction in mortgage banking revenue, primarily due to a 19% reduction in production volume, partially offset by favorable variances in servicing revenue and MSR valuation-related hedge, lower commercial products revenue and trust and investor management fees, which declined by 13% and 5% respectively, and finally, a decline in other revenue due to the fourth quarter 2009 contract termination gain, and an unfavorable change in the term valuation losses. Our positions have a minimal impact in the variance in fee revenue on a year-over-year or linked quarter basis.
Finally, on Slide 26, we have provided highlights on non-interest expense, which was higher year-over-year by $265 million or 14%. The majority of the increase can be attributed to acquisitions, which accounted for $121 million of the increase; higher costs related to investments and tax advantage projects, which accounted for $42 million of the increase; FDIC insurance expense in the first quarter of 2009, we used the last of our four credits; and other loan expense primarily to costs associated with other real estate owned.
On a linked quarter basis, non-interest expense was lower by $92 million or 4.1%, the net result of lower costs related to investments and tax advantage projects, which accounted for $58 million of the decrease. A decrease in marketing and business development expense, which declined by $45 million, and seasonally-lower legal and professional services expense, partially offset by higher compensation and benefits related to incentive accruals, and the seasonally higher payroll taxes.
And finally, acquisitions, which increased by $53 million. Finally, the tax rate on a taxable equivalent basis was approximately 24% in the first quarter of 2010.
As you turn to Slide 28, I will turn the call back to Richard.
Richard Davis
Thank you, Andy. Our company's first quarter results once again demonstrated the strength of our franchise and the advantages of our diversified business mix.
We posted strong year-over-year revenue growth, maintained our industry leading efficiency, and we achieved linked quarter operating leverage, and we saw a reduction in credit costs for the second consecutive quarter. We continue to lend, gather core deposits and expand our banking franchise.
We remain profitable, generating significant capital and strengthening our already solid capital and liquidity position. We are well positioned to capitalize on the economic recovery, as we continue to enjoy the benefits of the flight to quality, and we continue to invest in organic initiatives, M&A, and joint ventures and those investments including hiring the best employees and developing and empowering our leaders.
We will continue to optimistically acquire and we benefit from core businesses that are scalable and can leverage as the economy recovers. We are more than just a traditional bank, dependent on loans, deposits, and a favorable interest environment to grow.
We also bring so much more to the table with our breadth and scope of our franchise and product offerings, including global payment capabilities for our wholesale and retail customers, corporate trust offices and more. It is this diversification of products and services, in addition to our prudent risk management, that has allowed us to continue to grow profitably during the past very challenging two years.
The financial services industry continues to face an uncertain economy, regulatory and legislative environment. The world has changed, and there is much more to come.
We are actively participating in the dialog to ensure that the financial services industry and U.S. Bancorp play a vital role in the economic reform and the recovery.
Our company is confident and focused on the future. We know that the momentum we have created has positioned U.S.
Bancorp well to grow and prosper for the benefit of our customers, our employees, our communities, and importantly, our shareholders. That concludes our formal remarks.
Andy, Bill Parker, and I will now be happy to answer questions from our audience.
Operator
(Operator Instructions). And our first question comes from the line of Matthew O'Connor with Deutsche Bank.
Please go ahead with your question.
Richard Davis
Good morning.
Matthew O'Connor – Deutsche Bank
Hey, guys. Could you just talk a little bit about the revenue outlook and ability to capitalize on banks pulling out or cutting back on a number of product areas?
We are seeing card home equity, CRE, a number of the big banks pulling back there. And you guys, you know, generally been gaining share, I guess, you know, we are always looking for more and wondering how much we will see in the near term here.
Richard Davis
Thanks, Matt. This is Richard.
I think we are actually continuing to see robust forecast in that area. We are benefiting from flight to quality, and at the same time we know we have taken the measures to improve our corporate bank capability to be fully capable of not outsourcing any activities from anything from syndications to high quality bond businesses to eventually municipal bonds and things like that.
So I think our timing is perfect to step into places where some of the companies have either backed down or actually exited. As a result, we are also getting more non-lending business that comes with it, because as you come into a deal, or a client says I need you to now be part of my syndication and if you are willing to be the last in, they are more often than not willing to let you have other business along with that.
So we are enjoying the benefits of the payments and the trust along with this classic balance sheet banking and I think our timing is actually quite good. And to answer your question specifically, it is actually building momentum.
So I think we will continue to see our books strengthen with new customers as well as the ones we have continuing to deal with this downturn pretty successfully.
Matthew O'Connor – Deutsche Bank
And on the lending side specifically, obviously there is two factors going on here, there is the market share gains and just the weak demand. But when do you think we will actually start to see some net loan growth for you guys?
Richard Davis
Yes, I don't think it is for a little while longer. You know, I might be a little less robust in my forecasting for the current economic situation, but lastly, housing prices are at record lows and they are staying there.
And unemployment is at record highs and it is staying there. And our customers are a reflection of that world, and until we see either or both of those starting to move in positive directions, which eventually they both will, we are going to be likely to see our customers continue to withhold using the lines of credit they have already been extended and certainly new customers are not jumping in for large capital expenditures or big hiring activities.
At the very early part of the cycle, we are starting to see more M&A, more IPOs, more interest as the early stream of companies starting to get healthier, but those are not the systemically core activities that cause long-term organic growth and we are not seeing that kind of activity yet in the actions of our customers. So I must say a couple of quarters till you see a real strengthening of core earnings up based on loan growth and not just from line usage, but from people coming back into the game.
Matthew O'Connor – Deutsche Bank
Okay, thank you very much.
Richard Davis
Thanks.
Operator
And our next question comes from the line of John McDonald with Sanford Bernstein. Please go ahead with your question.
Richard Davis
Hi, John.
John McDonald – Sanford Bernstein
Yes, hi, good morning. I wonder if you could comment a little bit on credit.
Other banks are showing declines in their charge-offs and NPAs and are starting to draw down reserves. Obviously, every bank is different.
Just wondering what is your sense of why you are a little different there, maybe a function of how bad things got for other banks or a loan mix, comment on that?
Richard Davis
Sure. Thanks, John.
I will go first. I will have Bill follow-up.
I have got to say I am actually quite surprised by the number of banks that have chosen to go from adding to reserves to not even meeting them but going to a recovery of reserves. So, I can't speak to their modeling, but I am surprised.
I think we are all in the same environment and for me, until you get to a place where you are really sure that things are getting better, I think it is prudent to continue to have strong reserves for loan losses that you have yet to happen. So in our case, and I will speak just to us, we feel that while we are getting very close to that flattening point where loan losses, charge-offs, and NPAs are flat, which then portends that we can bring down reserve builds and eventually maybe bring them to equal, I don't see a time when reserve recovery is part of our future.
I have said before, this management team is doing its best to make its estimates on where the loans will end up, where the losses will be, and where we want to have the cushion to go into the next cycle. I want this to be a fortressed balance sheet and the way we see it is we are continuing to appropriately do the math and the prediction to say we need to continue to strengthen our reserves for the future.
Now, if there is an amazing recovery with both a speed and a slope that I don't expect, then perhaps we will get to that point, where one day we will be able to recapture some reserves, but we are not intending to do that. We think we are putting in our best dollar, hoping that it is the right amount, and giving us at least a prudent position to start the next cycle with a very strong balance sheet.
So, speaking less for them and more for us, but I must say I am surprised as to how many people went back quickly to equal and then recovery is a surprise to me. And Bill, you want to speak to our details.
Bill Parker
Hi, John, it is Bill. Just one – I mean you mentioned the fact that you know our loss rates are significantly lower than most of our peers and I think that is part of it.
I mean, we have gone up last – you know, looks now we are stabilizing. So we will start hopefully to be coming down soon, but we are not coming off of those very high peaks that some of our peers are.
John McDonald – Sanford Bernstein
Okay. And then, a question on regulatory reform.
Richard, what are the biggest issues for you guys in your business model, where do you have the strongest views? And then also, Andy mentioned the impact to the margin for the card legislation.
If you could just remind us the totality of the impact of card legislation and Reg E as best you guys can tell?
Richard Davis
Okay. I will go first.
I am actually very concerned about the pending reforms that are about, I think they are imminent in the next probably few weeks and I concern myself for a couple of reasons. One is, we are building these solutions at a time when everyone is very stressed and concerned and these will be, you know, decades kind of decision, so we better be careful and make sure that we get it right.
I am all for consumer protections being strengthened, I am all for line down authority and the systemic importance of companies that we cannot have the taxpayer's bill at anybody again. I am all for all of that.
If I had one thing to put at the very top of the list, it is to protect preemption. And let me just say very clearly, this is not a help the banks to protect themselves, it has nothing to do with that.
Preemption is a situation that allows banks to provide products to our customers and they don't have to worry about whether they work in different states in different ways. It is a chance to say that if there is something in the state that they don’t like, the current rules allow them to challenge that and protect their state customers or their state citizens.
But right now to change the preemption, to allow the states to have a providing overriding view of whether or not things are safe for their customers, will create an amazing amount of confusion for both us and for them and I have to say, John, it will reduce the number of products that are available. So we are substantially aligned, most of us are with virtually all of the things that you are seeing in Reg reform, but there are some nuances, not the least of which is the concern for loss of national uniform standards of preemption and the concern that we don't have a circumstance where the pre-funding of losses or the slush fund or whatever you want to call it is burdened by some of those many of us who actually would never intend to use it and perhaps are being taxed some form of a levy, that isn't really fair.
So we will limit our issues on those couple of points, because I think otherwise, why wouldn't we want the stronger protections, why wouldn't we want the non-banks to finally have the same oversight we have all enjoyed and why wouldn't we want to be assured that our industry is stronger going into this next time, where the taxpayers will feel a sense of confidence and the shareholders will feel a better sense of confirmation in the stability of our industry and so I welcome the majority of them, but I do worry about preemption and I do think that a back paying tax of any sort is unfair.
Andy Cecere
And John, from a dollars perspective, the card act legislation will cost us about $100 million in 2010. It started in the middle of the first quarter and will continue throughout the remainder of the year.
The overdraft legislation in addition to some of the changes that we made, will cost us $200 million to $300 million in 2010, impacting us most specifically in the second through fourth quarters and that is principally in fee income.
John McDonald – Sanford Bernstein
And the card legislation is a mix, Andy, of the NIM and the fee?
Andy Cecere
It is a mix, John, but it is more heavily weighted towards the margin component.
Richard Davis
And John, let me remind you as well as the audience, in the beginning of this month, we started our migration towards new overdraft and NSF fees. We actually made some changes in the first quarter, we made more on April 1, where we started to limit the number and dollar amount of overdraft, and then, at the end of June or July 1 and August 15 with the new fed rules, we will be prepared to move into the final stage.
So you will see some disruption in run rate or linked quarter impacts in quarter two versus quarter one. You saw a little bit in quarter one versus quarter four and then when we get to the run rate in the second half, we will have a better sense of how those customer behaviors will play out.
I will repeat what I said 90 days ago and that is, we have, I think the luxury and I think the prudence to not force customers into a decision. We are going to watch and check their behavior, we are doing a fairly good job of serving their interest now, and we will create an outcome that allows them to pick how they want to deal with their banking relationships and we will be very smart to watch what the other actions in the community of banks do, and then responds to the best and most favored treatment.
We are lucky enough that we have that luxury of time and I believe waiting to see what the right answer will be. But you will see negative biases kind of linked quarter for the next couple, as it relates to overdraft and in NSF fees.
John McDonald – Sanford Bernstein
(inaudible) either of those pieces of legislation or regulation affecting your payments businesses in either a positive or a negative way?
Richard Davis
You know, that is a great question. We are, actually, that is part of our study of customers and merchants to find out how they feel about if customers are going to be, let's say they don’t opt in, and there is a significant higher level denial at point of sale, how do the merchants want to step in?
Will they step in for their best customers or will they suffer a certain level of breakage that they haven't experienced before? I think as Andy discussed, slight negative bias because less things will be transacted until people figure out how they want to operate their checking account, but I don't think it’s a very significant one and we haven't placed any dollar financial detriment to it at all in the future.
And as we learn more, we will telegraph that. We don't see that as a problem yet.
John McDonald – Sanford Bernstein
Okay, thanks guys.
Andy Cecere
Thanks, john.
Operator
And our next question comes from the line of Jon Arfstrom with RBC Capital Markets.
Richard Davis
Hi, Jon.
Jon Arfstrom – RBC Capital Markets
Good morning. A couple of questions for Bill.
You talked a little bit about how the modification for residential and card customers, you expect that growth trend to continue and can you talk a little bit about which part of the business is driving it, and if you are seeing any light at the end of the tunnel?
Bill Parker
You are talking about residential modifications?
Jon Arfstrom – RBC Capital Markets
Yes.
Bill Parker
Yes, I mean, that is both in our finance company and our home mortgage company that originates more of the Freddie-Fannie products. And we did about $1 billion dollars total HAMP in the first quarter.
About 250 of that was on balance sheet, mostly in our finance company. We expect that number to be about the same in the second quarter, but there’s already some of it and so we are working through the pipeline and that number should start to decline.
Jon Arfstrom – RBC Capital Markets
And then the other question, provision was up in the wholesale business a bit.
Bill Parker
Yes.
Jon Arfstrom – RBC Capital Markets
Can you talk a little bit about what drove that?
Bill Parker
Well, there is a little bit of lumpiness in some of our more leveraged portfolios, but other aspects of the overall portfolio of the middle market corporate book and we are actually showing improving quality trends, but we did have a couple of larger charge-offs in the quarter.
Jon Arfstrom – RBC Capital Markets
No real trends to speak of?
Bill Parker
No.
Jon Arfstrom – RBC Capital Markets
Okay, thank you.
Operator
And our next question comes from the line of Paul Miller with FBR Capital Markets. Please go ahead with your question.
Paul Miller – FBR Capital Markets
Well, thank you very much. Can you talk about the loan pricing out there?
I mean, some banks are out there saying utilization rates are increasing and you say they are relatively flat. But are you seeing an overheating and pricing cap rates dropping?
Richard Davis
Well, I will tell you what, we still do see the demand coming down. So I am surprised you are seeing that otherwise.
Well, I will tell you what, we are saying is, there is the market has become more balanced, and I think, first and foremost, while the banks are getting paid for risk premiums, the people expect us to charge for that. Customers want a traditional bank, the alternatives are lesser than they used to be.
So the margins are stronger than they were and I think there will be moments in time when depending on who is in the market, if you are in a community market or if you are in a large market depending on who might be a more aggressive player, you can see unrealistic prices like we saw a few years ago. So for all intents and purposes, we are seeing a nice kind of a firming up of reasonable and rational pricing in most of the banks that we compete with seem to be taking that at the same measured approach that I would expect, and you might mention that on the margin side.
Andy Cecere
Right, so Paul, you know, we continue to see that the loans that are renewing and new bookings are at a bit of a better margin than what is rolling off. So that phenomenon has been occurring for the last four or five quarters.
You know, I don't think it is going to continue to be at the same levels, but firming up of loan pricing, I think is one of the factors in our improvement in our net interest margin in addition to our lower cost funding. The other thing I would highlight is that we are seeing utilization down a bit.
You know, there is 30% on average for the fourth quarter. There was 28% on average for the first quarter of this year and when you compare that to a year ago, that was 37%.
So, it continues to fall, albeit at a slower level.
Paul Miller – FBR Capital Markets
Is there any other – is there some regions doing better than others in their loan pricing and utilization, or are they pretty much across your footprint?
Andy Cecere
I don't think there is a significant geographic difference.
Richard Davis
No.
Paul Miller – FBR Capital Markets
Okay. Thank you very much, gentlemen.
Andy Cecere
Thank you.
Operator
And our next question comes from the line of Heather Wolf with UBS. Please go ahead with your question.
Heather Wolf – UBS
Hi, good morning. Just a couple of more follow-ups on the modifications.
First, can you talk a little bit about the sort of inflows and outflows to that $1.6 billion that you are showing on Slide 13, and can you also talk about re-default rates and where you see those going?
Bill Parker
Let me talk about re-default rates first. I mean, there is a couple of different ways to measure it.
There is industry data, which looks at 12 months out and so few payment delinquencies 12 months out, that is we are at 30% and industry is at about 40%. And then we also look at, you know, those that ultimately go to foreclosure, and for that, our rate is about 20% for the overall residential mortgage portfolio.
So those are a couple of statistics on the restructured loans. And again what I talked about on residential mortgages is that the on balance sheet we did about $250 million of HAMP in the first quarter.
We expect a similar amount in the second quarter, but there are signs that that dollar amount is already declining, it may have already peaked.
Heather Wolf – UBS
And were there any outflows or do you follow the once a TDR, always a TDR accounting?
Bill Parker
Yes, once it is a TDR, it is always a TDR.
Heather Wolf – UBS
Okay. And one last question.
Of this $1.6 billion, is any of this covered by your loss sharing? Are any of the potential re-defaults covered by loss sharing?
Bill Parker
Not in these statistics here. No, that would the Downey portfolio, which is under the covered asset section.
Heather Wolf – UBS
Okay. So this is just modifications on your book?
Bill Parker
Yes.
Heather Wolf – UBS
Richard Davis
Thanks, Heather.
Operator
And our next question comes from the line of Ken Usdin with Bank of America. Please go ahead with your question.
Ian Forsyth – Bank of America
Hey, guys, it is actually Ian Forsyth [ph] for Ken. How is it going?
Richard Davis
Good morning.
Ian Forsyth – Bank of America
Quick question. I wanted to dive into the fee items a little bit and kind of just talk to outside of some of the seasonality, what kind of areas came in stronger or weaker than you would have expected?
Andy Cecere
This is Andy. So, the particular area of strength was our payments group.
We saw our payments in total go up 7.5% versus a year ago. Categories like merchant processing versus a year ago was up over 13%.
We saw same-store sales increase 3.3%. So I think that is a reflection of us continuing to gain share and strength across all those categories.
Commercial products year-over-year was up. That is again a function of us building the businesses that we have been talking about in the wholesale and corporate banking group, and those are areas of strength.
You know, seasonally the first quarter versus the fourth quarter is lower, really across almost every category, probably $75 million to $100 million. So we would expect the decline in the first quarter that we saw.
In addition, mortgage production is down a bit. You know, last year, we had a production level of about $13 billion in the first quarter, this year it was just about $9 billion.
So that is another key factor in the year-over-year results.
Ian Forsyth – Bank of America
Thanks, guys.
Richard Davis
Thanks.
Operator
And our next question comes from the line of Chris Whalen with IRA. Please go ahead with your question.
Chris Whalen – IRA
Good morning, guys. Nice quarter.
Richard Davis
Thank you.
Chris Whalen – IRA
Richard, how much of your growth is coming from taking share as opposed to the economy recovering? I mean, I am not so much looking for statistics as just as gut.
Richard Davis
My guess is 50-50. We have worked really hard when basically no one was really paying attention in the last two years, re-crafting this whole company's ability to work with customers at a deeper level, build a full-on first class corporate bank across the nation not across the footprint, reconstruct our wealth management.
Chris, all the things that I will be able to talk about in a couple of years and describe to you all why we came out of this so much stronger, but at this early stage, for all of them, they are demonstrating a high performance and we are still really lucky. I mean, this company has benefited from the relative outcome of a negative environment, we could have changed on our own anyway.
And so we are taking advantage of it. We have got a lot of higher quality people that we have brought into these new business lines.
We have changed the culture to deal more with relationships than individual transactions. And I will tell you, those are the things that are probably 50% of our strength right now and what I like about that the most is when I got to bed tonight, I am going to know that it is the reason we are going to be so much stronger in the future, it is not a one quarter event.
It is a momentum toward an entirely new kind of a run rate. And then the last piece that I said in my prepared comments but I want to put it in my own words again, this is a big deal to be a company that doesn't rely just on the balance sheet.
I think in the near term, at least probably in the next few years, lending overall will be slightly depressed. The deposit gathering will be probably slightly more positive and margins overall will probably firm up, but they will move around as well with rates moving up and down.
I love the fact that we have got this other diversified earnings stream in the trust and the payments businesses that they are not countercyclical, but they are definitely not aligned exactly with the behaviors of balance sheets, and I think that is going to portend as the recovery gets kind of an extra cylinder that give this company a stronger future going out.
Chris Whalen – IRA
Just to follow up on that, in terms of interest rates, if we are at the peak or we hope we were at the peak in terms of credit loss, what do you see in terms of the evolution of NIM going forward? And particularly, you know, a lot of institutions, as I think we are all aware, are wide open right now, trying to maximize net interest margin.
How would you guys look at the interest rate risk environment in terms of re-pricing your liabilities and the attitude of customers in terms of yield, because they have all been starved to death by the Fed and as soon as the funds are able to offer them another quarter of a point, how do you think that is going to affect your stability in terms of both core and more volatile liabilities?
Andy Cecere
Chris, this is Andy. You know, we have been positioning our balance sheet.
We never really positioned it significantly, assuming rates will go a certain way. We are always fairly neutral, but we have moved to the asset sensitive and we continue to position that way.
So what that means is, for example, the securities portfolio, our purchases are more floaters than fixed, give up a little bit of yield in the short term, but I think we position ourselves appropriately for the long-term and that is the way we are thinking about it.
Chris Whalen – IRA
Thank you, guys.
Richard Davis
This is Richard. As you recall, a few years ago, we were starved on interest margin and protecting (inaudible) our deposit rates were at the very low, probably the low decile, and in the past couple of years, we have found ourselves now above the median and competing, not just – we are not losing on price, we are not competing on quality, and we have got price as a non-issue.
That is a pretty big deal and this company is constructed the way we run it now, to be able to move lock steps with great changes and not need to withhold those benefits when they come along. We are going to get the benefit on the lending side, we will give it on the deposit side.
We have come to learn that you don't build a bank without getting new customers. You start most often with the deposit and then you have a fighting chance to work with them with a relationship and that is another one of those underlying benefits that we have built over the last couple of years that I think will show themselves in the next couple of years.
Chris Whalen – IRA
Excellent. Thank you, guys.
Andy Cecere
Thank you.
Operator
And our next question comes from the line of Nancy Bush with NAB Research LLC. Please go ahead with your question.
Nancy Bush – NAB Research LLC
Good morning. Quick question on commercial real estate and your outlook on credit quality there, and I am talking about non-residential development CRE.
Because there have been many predictions of disaster, you know, this is a lagging indicator, et cetera, et cetera. Could you just talk about that?
We haven't really had a disaster in non-residential CRE and can you just talk about why not, why the predictions have been so wrong?
Bill Parker
I will go ahead. This is Bill.
You know, if you go back to the early nineties cycle, that was one where there was really massive overbuilding and in this cycle, it is really more of a demand issue. You know, and I do think in general, underwriting was better than it was in the early nineties cycle.
In our particular portfolio, you know, we have seen stress on some of the construction portfolio as it came online, you know some of the certain office retail and some of the really soft southwest market, but the permanent, the mortgage portfolio, the diversified – you know, our biggest asset class is affordable housing, you know, that has been less impacted by some of this downturn. You know, I think there is enough, we have already seen value starting to stabilize and we have recourse on our facility.
So I don't view this as being that Armageddon scenario that some have predicted. And, you know, I think we will just – it is going to be soft for, probably 18 months, but I think it is fairly stable.
Nancy Bush – NAB Research LLC
Richard, a question for you. There has been a great deal of speculation about USB's possible entry into the southeast and you know, is that a geographic region that where you absolutely have to be, could you do that through an FDIC-assisted deal, you know, which didn’t give you huge presence in the region, and then build upon that?
Could you just talk about your appetite for sort of doing a non-contiguous acquisition?
Richard Davis
Right, thank you. The question was asked perfectly.
Very low appetite for a non-transformational deal out of market, or the opposite of that is, I would only go out of market for transformational deal. We really aren't blaming our customers uninterested in banking with us because we are not in the 26 states that we don't currently have a retail presence.
As you know, Nancy, we have made a commitment to get stronger and deeper in the 24 states we are and FDIC transactions are built perfectly for that and we will look forward to having more opportunities. If we were to go on a state, contiguous or jumping state, there would have to be a substantial transaction limit, number one.
Everybody would say, wow, that makes so much sense. Number two, it would be a price point that has to make sense and good for our shareholders and we both know it would have to be a capital rate activity that we would only do if it was so reasonable and so useful to the company's future that it made sense.
So we have to hit all those hurdles, and if it isn't going to be transformational, we don't see a need to do out of market in order to be successful in the next decade, we just, it will be an opportunity missed that we didn't pursue it, but I don't know if that is ever going to come across. So we are more than happy to be focused on organic growth and old fashioned quarter-by-quarter business that I think we are starting to demonstrate.
Nancy Bush – NAB Research LLC
Thank you.
Richard Davis
Thanks.
Operator
And our next question comes from the line of Chris Kotowski with Oppenheimer. Please go ahead with your question.
Chris Kotowski – Oppenheimer
I just want to go back to the slide on page 10 about the utilization rate and how it keeps going down. I would have thought, or one would have hypothesized that normally that line utilization should be tied to retail sales, inventory, receivables, and so on.
Or I would say inventories and receivables and those should in theory be going up with an economic rebound and can you explain the disconnect?
Bill Parker
Yes, this is Bill. I mean, what we have seen really starting late last quarter is corporate America middle market companies are – they have downsized very effectively in reducing their costs, primarily through job layoffs, but they are generating a lot of cash.
So the fact that there was inventory build-up occurring here in the first quarter, they had not needed traditional bank sources of funding. So the companies that we deal with, they are very flush and they are waiting for clear signs of that economic recovery.
Richard Davis
I will tell you what, I mean, you think about it, these businesses in America have figured out an entirely new level of productivity and efficiency, and I think we all surprised ourselves. This bank is one of those.
I mean, we took a 5% expense reduction last February across the board to protect jobs and to protect our future and we did that because the world was different and we all surprised ourselves. Our customers are saying I did this for a couple of quarters and I’ll be darned, I can actually be more efficient I can get along a little further than I thought.
So they are very hesitant to turn back on the spigot and start spending money unless they are absolutely sure they see it. And in many recoveries past, I believe that businesses went first and followed by customers and consumers who followed them because the products were there and all of a sudden, the world got better.
I think it is reverse this time, they are waiting for the consumers to move to consume their products, after which point it is undeniable because they are ready and waiting and then the inventories are too low and then and only then they will pop. So I am believing that we are in a new paradigm, where the recovery will be in part a bit different than it has in the past and probably slower based on the prudence of businesses that have learnt to be very efficient, and efficiently, they will just say, look I have got to spend money, but boy, our utilization rate is the best proxy for that, because they have got the loans, they have got it probably preferred rates, they are our best customers, and they are still paying it down until which time they don't need it.
Secondly, we will be the best first to see it, because our cash balances, as they are rich with cash, we are holding it. And so we will be able to see them move from cash balances down first.
Second is the actual use of our credit. So there are actually two steps to occur and we haven't seen the cash balances starting to fall either.
So I think that is why I answered the question earlier that it is a few quarters out until we see it show up on the bank's balance sheet as a loan.
Chris Kotowski – Oppenheimer
Okay. And then, you know, I guess my second sort of big picture question is that I have seen the interest rate disclosure in your 10-K, but I guess I still think, you know, when I look at a company like yours with so much in core deposits on the right hand side and so much in what should theoretically be variable rate loans on the left hand side, you know, one would think that you would really be fairly dramatically asset-sensitive.
And, you know, yours is a company that used to have a 425 to 450 basis point margin. And is there something structurally different in the world now that in a higher rate environment, generally would prevent you from getting back to that kind of level, a few years down the line, and say in a environment where rates are 200, 300, 400 basis points higher over time?
Andy Cecere
This is Andy. We try to manage the balance sheet, so we are not dramatically anything and we try to keep it fairly neutral.
We are asset sensitive a little bit as we talked about. There are a lot of mechanisms that you can use to manage the balance sheet rate sensitivity and I am very comfortable with the disclosures we have in terms of our positioning should rates rise.
Analyst
Okay. All right.
Thank you.
Operator
And our next question comes from the line of Matt Burnell with Wells Fargo. Please go ahead with your question.
Andy Cecere
Good morning.
Matt Burnell – Wells Fargo
Good morning. Thanks for taking my question.
Just to confirm – just a administrative question on the net interest margin, the increase in the net interest margin and forgive me if you've already covered this, was up about seven basis points over the quarter. That seem to be largely due to the consolidation of assets on the balance sheet and that's one of the reasons why you are targeting somewhat lower net interest margin in the second quarter?
Andy Cecere
Matt. That didn’t really have a large impact.
The principal reason for the improvement was a little bit on the wholesale – on the funding cost, a little bit of mixed funding, move towards core deposits and a little bit on the loan re-pricing that we talked about. Those are the key factors.
The principal reason that we are expecting little bit of a decline in net interest margin really relates to card debt and some of the legislative changes around that and that's the reason for the low-to-mid 380s.
Matt Burnell – Wells Fargo
Okay. Can you give us the amount of the reps and warranties expense in the quarter?
Andy Cecere
The reps and warranties expense?
Matt Burnell – Wells Fargo
In terms of mortgages that have been put back to you by the GSES or other parties?
Andy Cecere
Thank you, Matt. That's insignificant for us.
We've had a very good origination process. We are very good at dotting the Is and crossing the Ts and that is just not been a significant issue for us.
Thanks.
Matt Burnell – Wells Fargo
Okay. And then one last question, I guess related to Nancy's question on acquisitions, but at a somewhat different take.
Given the landscape has, really, for, in consumer finance rather than traditional mortgage landing. I've got to think the events over the past couple of years have made that market much more wide open for competitors such as U.S.
Bank. Is there any appetite in here for you to purchase, perhaps some consumer-oriented finance franchise rather than bank, at this point given the somewhat lower competitive pressures in that business?
Andy Cecere
No. The answer is no.
Couple of reasons, Matt, we have our wholly owned finance company in the bank that we started in 1993. Actually I was part of that, it’s the old Star Bank and we have a very broad network of correspondence and brokers that we've worked with now for almost 20 years.
We could turn that volume up in a second if we want to and as you know our credit in that portfolio is less quality than the bank that was much better, I said, is more like a near prime kind of business. So we don't have any interest in playing another avenue.
I certainly wouldn't do a branch network. We actually had one years ago and closed down because it's not conducive for those kinds of customers.
Your branch is really your best place for deposit gathering. So, I think if we wanted to turn on the spigot for consumer finance, you wouldn't believe how much we could do.
So what little we are doing is a reflection of our fact that we only want to do is with the really finest people, we need to do -- a lot of it originated through our customers and be very prudent about how we deal with that side. And what you see will probably grow over time, but we are not going to take advantage.
And I do think, by the way you are on to something, and that is that as the world starts to evaluate these consumers and small businesses that have failed, who is going to be the first to say, I will look the other way and bring back to a credit, and it isn't going be up. So if someone’s going to do that, they are going to say, I will waive the bankruptcy, I won't make you go years, remember our parents used to tell, watch your credit history, it’s your whole reputation.
I am sad to say, I think one of the first things we see is people jumping back in and allowing failed clients to get back in and to meet us, that's a mistake. But we will be very careful and you won't see that move much more than increments over quarters.
Matt Burnell – Wells Fargo
Thank you very much.
Andy Cecere
Yes.
Operator
And our next question comes from the line of Moshe Orenbuch, Credit Suisse.
Andy Cecere
Good morning, Moshe.
Moshe Orenbuch – Credit Suisse
Good morning.
Operator
Okay. I'm showing that he has withdrawn his question.
And our next question comes from the line of Chris Mutascio with Stifel Nicolaus. Please go ahead with your question.
Andy Cecere
Good morning, Chris.
Chris Mutascio - Stifel Nicolaus
Hello.
Andy Cecere
Hi Chris.
Chris Mutascio – Stifel Nicolaus
Okay. Andy, most of my question have been asked and answered.
But I've done a remarkably poor job in forecasting your other fee income line item, it bounces around a lot. I know in the release you talked about three things.
One was the payments related gain in the fourth quarter. I think you talked about the low equity investment income and impact of retail lease residual valuation losses that have changed between fourth quarter and first quarter.
Can you go over those swings with me on those three individual line items?
Andy Cecere
Sure. Chris, so in the fourth quarter of 2009, we had payments related gain about $30 million that was – more about one-time event, not repeated in the first quarter.
The equity gains – we have an equity investment portfolio, BMB [ph]. That was down a little bit quarter-over-quarter, under 10 or $15 million.
And finally in the lease residual category, we continue to see improvement. The improvement in the fourth quarter was more dramatic in terms of auto prices and so we had a little bit more positive fourth quarter than the first quarter and that was the other factor.
You could take those things out, it was fairly stable, but those are three, sort of unique events that impact other revenue.
Chris Mutascio – Stifel Nicolaus
The 135 or so, in terms of $135 million in the quarter. For the other, kind of the income line items, is that a decent -- I know it's lumpy but is that kind of a decent run rate to look forward going in subsequent quarters?
Andy Cecere
There is nothing unusual. Let me say it this way, there is nothing usual.
Chris Mutascio – Stifel Nicolaus
Okay. All right, thank you very much.
Andy Cecere
Yeah.
Operator
And our next question comes from the line of Meredith Whitney with Meredith Whitney Advisory Group. Please go ahead with your question.
Andy Cecere
Good morning, Meredith.
Meredith Whitney – Meredith Whitney Advisory Group
Good morning. How are you?
Andy Cecere
Good morning.
Meredith Whitney – Meredith Whitney Advisory Group
I wanted to take the opportunity, because lot of good questions has been asked. But to get more of a landscape type feel, because you see so much the consumer and the consumer activities and small business activity.
There have been some mixed messages so far from the companies that have reported, in terms of where spending has come from and some retail sales numbers, it looks like, all but Wal-Mart, spending is coming from everywhere. If you take out gas, can you bifurcate the consumer because it seems as if the lower end still has less access to credit and shouldn't be spending that much.
It's all driven by the high end or could you just add some color to that, and I have a follow-up, please?
Richard Davis
Yeah. I'll start and then let Andy pick it up.
We do have a great view of the world at least to retail consumer world. Our merchant acquiring portfolio is like a third airlines, a third hoteliers and a third retail and our credit card business is pretty robust.
So what we are seeing is a lot more activity in the debit card, not credit. It makes sense, right.
They are using money that have and you’ve all seen how consumers have gotten more prudent. And we have seen on a year-over-year basis in our merchant acquiring areas, a 13% increase, quarter one last year to quarter one this year.
That’s a nice spread between travels and retail activities but those are primarily the first large signs of quarter – year-over-year quarter-to-quarter growth we have seen and it’s primarily found and demonstrated in the debit side. So we are also seeing consistency in people not using their credit card.
Andy you might want to pick up on corporate cards, are also very strong. The government have now reported spending their budget and the money is being spent as we predicted but the credit activities are still going to be slow and I think you will see NSFOD [ph] reflect some of that lesser buying as well.
Andy Cecere
Right. That’s right, Richard.
We had our corporate card activity increase principally due to government spend. Same store sales again 3% up year-over-year.
That compares to 3% down in the fourth quarter. So we are seeing some improvement there and I would say that improvement, Meredith, it was rather broad based.
It was both domestic and international in our merchant acquiring portfolio in Europe and across most categories. So not a significant upward tick but across the board, everything was a little bit more positive.
Meredith Whitney – Meredith Whitney Advisory Group
Theoretically, those that have less in their savings account or checking accounts can spend less. So there should be a natural divide towards the higher end in spending.
I guess I am trying to drill down in terms of where spending is really coming from if you take out gasoline?
Andy Cecere
I am taking out gasoline every time I answer. I would say that we get paid a great deal more on the actual transaction and the size of it.
So everyone still go to the grocery store, they still go to the gas station, they still swipe the card and that’s one of the benefit of the merchant acquiring portfolios, we get paid as much for the transaction as we do the size. So I am probably less clear on the impacts of smaller ticket size and debit than I would be in credit because it’s the outstanding that it creates.
But I mean, you are right, the people have less money, they are being more careful but I would say they are actually spending it more often. So they are going to the ATM machine to keep it simple for me.
They will go there and pull out $20 five times in a week and they will pull out a 100 on Monday because they are just not sure what it would look like by the time payroll comes around. So we are seeing activities actually start to pick up.
We’re not necessary seeing average balances. And on the credit side, we are obviously seeing it slowing down and be careful spending money that they don’t have.
Meredith Whitney – Meredith Whitney Advisory Group
Okay. When I do checks in terms of different regions, you’re still real populous rates amongst small business centers and consumers vitriol against Wall Street, how Canadian banks are closing and what not?
How are you addressing those needs? Is that where you are picking up market share?
Is there – what does the small business lending environment look like as they fund themselves primarily through credit card going forward? And then I am done.
Andy Cecere
So the small business used to fund sales in great part sole proprietors with their home equity which is their ATM. And they typically would use their credit card.
So I will say what, we are getting a flight to quality at some customer’s small business that are looking for a place that they feel safer at. But we are not seeing a great deal of growth in small business qualified customers.
So I mean they are a perfect reflection of this economy and either those who are looking for loans, who need it the most are probably the least qualified and we are simply not making that loan. We want to help them out.
We are giving a lot of guidance. We are not making that loan.
And I will say, if they don’t have the access to the credit card and they don’t have the home equity, that’s what you are hearing from Main Street and that is we need loans, we want loans, and I will say what, we want to make them. But it would be imprudent for us to make them at a time of the cycle where they are least qualified.
The best we can do is give them guidance on how to become more attractive as a future lending candidate but we typically will say no unless they are qualified and we are not changing our underwriting. So we are seeing a relative flight to quality but an absolute shrinkage in qualified people who are looking for a loan if they can actually pay back.
Meredith Whitney – Meredith Whitney Advisory Group
Okay. So in another words, you see a growing percentage of sort of a de-bank factor?
Andy Cecere
Yes. I did.
Meredith Whitney – Meredith Whitney Advisory Group
All right. Thank you.
Andy Cecere
Thanks, Meredith.
Operator
And our next question comes from of Betsy Graseck with Morgan Stanley. Please go ahead for question.
Andy Cecere
Good morning, Betsy Graseck.
Betsy Graseck – Morgan Stanley
Good morning. Thanks.
Two questions. One is on the administration's proposal recently for HAMP to have another way of restructuring loans to include principal forgiveness if the borrower qualifies and could you just give us a sense as to how you are thinking about that program and how that could potentially impact your portfolio?
Richard Davis
Yes. Bill, why don’t you do that?
Bill Parker
Yeah. Are you talking about the 2MP one [ph] or the (inaudible)
Betsy Graseck – Morgan Stanley
Both.
Andy Cecere
Well, so they are different.
Richard Davis
Yeah. They are, yeah.
Betsy Graseck – Morgan Stanley
Correct. Well, my question was specifically on the first but what’s the overlap to the 2MP would be helpful too.
Andy Cecere
Yeah. Well, on the 2MP for our portfolio, we have very few purchase money; second, and I think that is more of what that portfolio or what that program was buying for, or the first and second are done together and really act like one mortgage.
So for us it was almost 90% of our portfolio coming out of the branches where it’s just traditional home equity. We don’t feel that program is really appropriate or designed for our type of portfolio.
One the other program, I mean there is the home affordable foreclosure alternative. That’s the one just to encourage short sales or to make short sales don’t get in the way of a transaction that’s beneficial to the homeowner.
That’s something we are already working on. We have already been doing short sales.
We will continue to do that. The other one is the enhanced – what I’ll call the enhanced half.
That’s the one that they say that might get in place by August or September. Well, they have temporarily relief for the job, et cetera, et cetera.
That thing has got – there’s a lot of details to be worked out on that. So it’s not clear to us exactly how all that would work at this point.
So that…
Betsy Graseck – Morgan Stanley
I guess, you still have…
Andy Cecere
To summarize that. The 2MP or what’s the HAMP for the seconds, we are not opting that.
We are not because our portfolio doesn’t really lend itself to that but I also just want to say when you opt into a program and the rules keep hanging you regret having opted in because you just can’t predict and we are in the business of giving you guys a fairly good predictable company. And so I am telling you what, this company would do everything that’s right for all the people that deserve it but in some cases we are not doing it because it’s right now because we're mandated and the rules change.
And I am very strong on that because we don’t deserve to be told how to run the company. We are trying to do what’s right and sometimes the rules are actually prohibitive of letting us work around some other constructs if the customers have unique circumstances.
And I do think to Bill’s point the enhanced HAMP is coming along. We will – we are in HAMP and we will provide support for everything we are asked to do.
But we are going to continue to be vocal making sure that the rules aren’t creating outcomes that make it harder for consumers to get what they want and/or that they don’t create incentives for healthy consumers to find themselves in harms way to play into the game of the new rule. That’s a really unintended consequences we have got to watch for.
Betsy Graseck – Morgan Stanley
Okay. That is very clear, thank you.
And then the second question, I had is just on the dividend and the dividend outlook, could you just give us some updated views there?
Andy Cecere
Sure, I can. This is sadly not an update of new information, it is a repeat of what I said before.
We believe a couple of key paradigms and one is that we are able to increase our dividend based on our forecast of our earnings. And based on the stress test upon which we know there are a number of variations and versions that we are using, we can substantially increase our dividend and be fine with the earnings.
But we understand the government’s needs, number one, to be absolute positive. This recovery is the same and on its way.
And therefore, we understand that they don’t want to be giving anybody permission to do that in case things would turn around and I think we need to follow that logic. And secondly, I understand that there is so waiting I think at these levels that you and I, both know, both of the domestic and global levels to decide what the final definition of the capital will be and what the final number will be.
In fact, which final ratio will be? So we are soon to find out, what’s the ratio will be used whether it will be core or new definition that they are now out for comment, whether they will be domestic or global and I understand that’s going to be a little longer than I'd like to wait but I understand we're in queue with that knowledge that has to be understood as well.
So I’m waiting for permission. I’m waiting for guidelines, if it was my own.
Information that I have in hand and I can do it by myself, I will raise the dividend now. But I – we are prudent [ph] to do so and I’m not going to challenge the regulators we are working well at them.
We understand that they are giving us all information along the way and we're not going either sit back and wait around without making it known that we're out here and we're eager to do it.
Betsy Graseck – Morgan Stanley
Okay. All right.
Thank you.
Andy Cecere
Yes.
Operator
And our next question comes from the line of Carol Burger with Soleil Securities. Please go ahead with your questions.
Andy Cecere
Hi, Carole.
Richard Davis
Hi, Carole.
Carol Burger - Soleil Securities
Hi, how are you? Just to clarify on your last statement, it certainly sound like the regulators at this point don’t want you or telling you not to raise dividend, is that what you mean to say?
Andy Cecere
Sure. I did.
I think people didn’t realize probably in all the years we’ve all been together, I’ve known you for many of those, we always needed to get permission to raise the dividend. It’s just that everyone was making money all the time, the dividends were always probably 40% or 50% of total earnings.
And nobody ever needed to see it work. When the world turned down and company started to lose money and some were not able to cover the dividend, it became clear that the rules that we were all talking about, were present again and that is the federal reserve has the right to decide and approve on any divided action on at any time.
And that’s what we were dealing with. And so the fed has been very clear in telling us that whether you are ready in your own mind, we need to be sure that this economy is ready for you and anyone else that we might permit and we are ready to give you that answer.
And so…
Carol Burger - Soleil Securities
And have they given you the indication of what metrics they are looking at to decide that?
Andy Cecere
No. And that’s my point earlier to Betsy's question.
I feel like – I think they would agree that there are a number of uncertainties in terms of which ratio will use, whether it will be a national or global construct, how long we‘ll have to get there. And now as you know with Basel III or whatever you want to call it, now there is even a question of what will be the definition of core capital before we even decide what the number is.
So all the moving parts are obvious to all of us and so it’s not -- I’m not surprise that we can get an answer because I understand the prudence of making sure that we don’t do something as an industry that we will regret. On my hand, I have to be a vocal advocate from my company and make sure that we are collateral damage in the waiting game.
And so we are good partners with the regulators and making a very clear. We are anxious we want to move on.
We’ll give them more numbers, we’ll show them our stress test and we continue to argue the merits of let us move forward and at this point they think not yet and we are waiting for better guidelines.
Carol Burger - Soleil Securities
Okay. My other question was both on deposit pricing and loan pricing, do you think that the consolidation that we have seen is going to make a difference going forward and the fact that we probably have more rational pricers in the marketplace.
And if you wanted to, could you comments on taking WAMU out of the game and replacing that with JP in your marketplace?
Andy Cecere
Carol, This is Andy. And I’m not talking to specifically but your statement is absolutely correct.
I think if you look at the last eight quarters or so, deposit pricing has become much more rational. At the same time, we’ve moved up sort of from the lower quartile to the median in our peer group.
And I think the combination of lower rates and the fact that deposit pricing has become more rationale allowed us to do that with very little impact to margin.
Richard Davis
I will say, Carol, the world is uneven. So the community banking markets, where we have a 1000 of our 3000 branches are later in the cycle and I will say it wouldn’t surprise you that some of the banks were starting to stress kind of their ditch stage effort is to be very aggressive on deposit pricing or to be very unrealistic in loans.
And so until -- I will say, until things have cleared up as probably a year or two from now when a majority of FDIC transactions have been recognized and reckoned with. I think we will see in different markets unreasonable pricing but it’s a big market and the banks you are talking about we are seeing a much more solid rational performance in pricing and give us all a better sense of dealing with that community of banks that are looking together to not coalesce or to price together.
But to working where we can pay for the risk and we do the right job of giving people the discriminate value for relationships and more business with better pricing.
Carol Burger - Soleil Securities
Okay. And just for my own edification, when you said, you moved up the rankings in terms of deposit pricing, have you moved up or has everybody else moved down?
Richard Davis
It’s definitely both. We’ve definitely -- we made a very discriminate move in the last eight quarters to pay up on deposits and many have come down and I think probably in the earlier conversation, there is a title range we can be in the top half and not need to be over priced or taking kind of risk that we might have had a couple of years ago.
Carol Burger - Soleil Securities
Thank you.
Andy Cecere
Yes. Thank you.
Operator
And there are no further questions in queue at this time.
Richard Davis
Well, let me just close. I want to thank you all for your interest in our company and your support.
I want to characterize that it’s not very sexy and that’s present company excluded of course. But this is a company that simple and straight forward and I think predictable and I hope that has value to all of you and therefore to our shareholders.
And there is so much volatility and so much noise. We are very proud of what we have been able to accomplish in last couple of years.
And let it be said what each quarter will continue to be predictable and hopefully repeatable and simple. I do think from the earliest questions this morning, if we are building a company that I know we are, you will see the real benefits in years forward when you will appreciate the kind of investments we made at a time when so many others were working on other things.
And I am excited about, I think today was a very good demonstration of our core simple bank but I think it portends we’ve got real good future based on things that are starting to emerge and I’m looking forward to sharing them in the future years. So Judy, you want to close.
Judy Murphy
Yes. Thanks everyone for listening and as always if you have questions please feel free to call.
Andy Cecere
Thank you.
Judy Murphy
Thanks.
Richard Davis
Thank you.
Operator
And that does concludes today’s conference call. You may now disconnect.