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When I first started in the financial business, I was your prototypical, cold-calling retail stock broker. I made the phone calls… pitched the stocks… and tried to give people some decent picks along with good market advice. Most of my clients were small businessmen, working-class retail investors, and housewives (they tended to be the ones at home during the day when you called).
One of my most unorthodox set of clients involved a number of aspiring models, actresses, and dancers who were fortunate enough - and good-looking enough - to be featured in magazines like Playboy and Penthouse. Back then, being Playmate of the Month or Penthouse Pet of the Year was a big deal, unlike in today's society where the magazines are basically also-rans compared to what is available on the internet.
Modeling, dancing, and part-time acting paid pretty good money - when they could get the work - and the girls would make some nice money at certain times (though their income was super-volatile, as one would expect). When they were in the black, they'd save and invest the money. I had the chance via referrals to manage money for some of these women, and they tended to be good clients: no pestering about daily price moves, willing to let positions work out over time, and every now and then with some good ideas about what would make a good investment.
Early practitioners of Peter Lynch's 'invest in what you know' strategy, a lot of the women were into buying the stocks of companies whose products they purchased or stores they shopped at. Clothing, physical appearance, or leisure stocks were the ticket. The girls knew what the companies were about and didn't care about P/E ratios, debt-to-EBITDA levels, or foreign currency translations. If they liked and knew the product, it was a Buy - with some important exceptions, of course. McDonald's, despite its well-known brand, was a no-no: not too many of the girls trying to stay at 105-107 pounds were fans of 1,500 calorie menu items.
What kind of stocks do the glamorous fashion set like to invest in? For a few old favorites and some new ones, read on below:
Allergan (NYSE:AGN): If there is one company that would appeal to young women and those hopeful of turning back the clock, Allergan is that company. Allergan is a specialty pharmaceuticals company with products for eye care, facial and breast aesthetics, and skin care. Its signature product is Botox, which is still showing strong growth. Botox has created a market synonymous with its name (shades of Xerox (NYSE:XRX)) for use as an anti-aging, anti-wrinkle application. Botox is now branching out to therapeutic applications beyond the cosmetic. Allergan also markets a portfolio of products used to treat optical problems including dry eye, inflammation, infection, allergy, and glaucoma.
Total sales were $5.8 billion in 2012, growth of almost 10% in 2012. Botox sales totaled $1.8 billion in 2012, an increase of 12.7% year over year on a constant currency basis. The product represented approximately 31% of total product revenues and nearly half of total revenue growth in 2012. Other products include Restasis (for dry eye), Alphagen and Limgan (glaucoma), and various dermal fillers.
Eye care pharmaceuticals, with treatment options for conditions such as glaucoma and dry eye, represent nearly half of total sales. But Botox has been and will likely continue to be a significant growth driver for Allergan. Allergan is also a player in the facial filler, breast aesthetics, and skin care markets and recently acquired Skin Medica for its physician-dispensed non-prescription skin care.
AGN sells at a rich valuation of 21x 2013 consensus earnings, which is down from recent years' rich P/E multiple. The stock came down a few weeks ago when 2013 did not start off well ,with three new drugs encountering delays. This is the kind of misstep that allows one to buy a high-growth, premium P/E company at a bit of a discount and this makes the stock a BUY at current prices, more so in the low-90's.
Phase II drug DARPin for wet acute macular degeneration (AMD) is largely being discounted by analysts. They believe ultimate approval is in doubt, or they believe that because of delays, the ultimate market share is now significantly smaller. So anything from this new eye treatment should be positive since the stock is currently discounting little to nothing. The reduced injection frequency for DARPin for treatment of AMD still holds out the potential for significant market share gains. Juvederm Voluma (a dermal filler), Levadex (migraines) and Botox (crow's feet lines) are all potential 2nd-half 2013 approvals that can boost the stock.
Botox has both cosmetic and medicinal usages (including migraines, and bladder irritation) and is in a strong competitive position given its reputation, safety profile, and name-brand popularity. The company has net cash on the balance sheet and earnings cover interest payments on the modest debt with an interest cover of 25x.
The breast aesthetics segment markets silicone gel and saline breast implants for cosmetic and reconstructive purposes. The Natrelle 410 natural slope-shaped silicone implants were recently approved by the FDA in Q1 2013. This business competes with J&J's Mentor division, which is the market leader. Allergan expects sales for breast implants to grow by 3%-11% in 2013 to $390-$420 million. Allergan has little patent expiration exposure and if it can get its DARPin treatment for AMD approved, this would give considerable upside. Latisse for scalp hair loss would also be a plus in the 2014-16 time frame.
Q1 2013 revenue and earnings narrowly beat the consensus. Revenue and earnings guidance for 2013 were both raised. The stock has gotten hit, down about 15% from the April highs on the new product slowdowns. It is still a richly-valued stock after the drop. However, unless the Botox competitors make significant market share or margin gains at AGN's expense, you want to buy AGN weakness because you rarely get a chance to buy premier growth companies and market leaders at market multiples.
Estee Lauder (NYSE:EL): What could be more natural for beautiful women to utilize - and invest in -- than cosmetics and makeup? Founded in 1946, Estee Lauder sells prestige cosmetics products in more than 130 countries. Brands include Estee Lauder, Clinique, Bobbi Brown, Aramis, Origins, M.A.C., Aveda, La Mer, Jo Malone and Bumble & Bumble. In addition, Estee Lauder is the global licensor for Tommy Hilfiger, Donna Karan, DKNY, and Michael Kors. Through its brands, the company markets over 9,000 products in more than 140 countries worldwide.
Unlike Allergan, Estee Lauder's stock has had a strong Q1 2013 and has moved to a premium to its peer group. Estee Lauder is still a premium growth and ROE company but no longer sells at a discount versus consumer product and household product peers. Estee Lauder has been able to show long-term organic revenue growth at about 6%. EL's diversified product line, growing market share in emerging markets, and high growth in the travel retail channel all bode well for an ability to grow the top line without price increases or margin expansion. However, margin expansion from cost-cutting and favorable purchase mix should add another 300-400 bp. of growth over the next 5 years.
Over 60% of EL's revenue is derived from international markets. A stronger dollar is something to watch for should it shoot up too far, too fast. A 5% move in the U.S. dollar would move EL's earnings about 4%. Estee Lauder's products - because of their reputation and their higher-end clientele among women - tend to have higher pricing power. The travel retail channel would thus negatively impact the upper-income patrons in this niche market, which is almost 11% of EL's sales and 20% of its profit. Global slowdowns to GDP or any threat to air travel (Avian bird flu, terrorism) would severely crimp this segment. EL also has 30% revenue exposure to the Western European region, so any recovery or downturn there will also impact sales and earnings growth.
Estée Lauder is strategically positioning itself for long-term growth by expanding into emerging markets (especially in Asia), faster growing channels (away from department stores and towards specialty/travel retail), and improving the positions of its core brands in the U.S. (e.g., Clinique and Estée Lauder). Aspirational consumption in formerly impoverished areas of South America and Asia, especially among women, is a world-wide trend. Cosmetics purchases tend to be more recession-resistant than big-ticket items like electronics, cars, homes, jewelry, etc.
Organic growth and market share gains will be low-single digits the next few years, but margin and international expansion are the tickets for EL shareholders.
Lululemon Athletica (NASDAQ:LULU): Lululemon Athletica is a yoga-inspired athletic apparel company for women, men, and female youth primarily in Canada, the United States, and Australia. The company was founded in 1998 and went public in 2007. The company has grown from $40 million in sales in 2004 to $1.4 billion in 2012, increasing at a CAGR of 55%. The company has cultivated a loyal and dedicated consumer base, a strong demand for its premium brand and recognizable products, and a 211 store retail chain.
Comp store sales gains have been persistent since 2009, and LULU's stores are among the five most productive in retail (also including Apple (NASDAQ:AAPL), Tiffany (NYSE:TIF), Coach (NYSE:COH) and Michael Kors (NYSE:KORS)) at over $2,000 per square foot. A recent recall on black luon stretch pants was caused by an embarrassing 'peek-a-boo' problem (the stretch-ability of the fabric probably caused many women to buy smaller sizes than they should -- vanity, no doubt!). Replacement product has been slow to get to stores- though it should be resolved by Q3 2013. Although Lululemon is associated with yoga and exercise, one sell-side firm's survey showed that the product had wide cross-appeal: approximately 57% of buyers wear LULU for general fitness, 52% for casual/lounge/weekend attire, 40% for yoga and 32% buy LULU for running.
Lululemon faces many risks to upside growth - large companies like Gap's (NYSE:GPS) Athleta, VFC's Lucy, the ever-present Nike (NYSE:NKE) and Under Armour (NYSE:UA) - and changing consumer tastes. But aside from the pants recall earlier this year, LULU has created a unique women-centric niche and seems to have the wind at its back. Upside comes from increased store openings in the United States, improving comp store sales footage (Canada is running well-ahead of the U.S.), international expansion, new product lines, and improved margin expansion as cost of goods falls relative to total sales thanks to purchasing scale.
LULU's e-commerce growth continues to grow; while the in-store experience is a major selling point, once women know what they want, they are more comfortable buying on-line and just having to know the color or size as opposed to trying on various styles. The company continues to generate free cash flow, despite the need to invest at this stage in its growth, as operating cash flow has consistently outpaced the annual increase in CAPX.
LULU is not a cheap stock, with an average P/E multiple of 40x since it went public. However, Lululemon's rapid growth over recent years has been largely self-funded as the company has no debt on its balance sheet and has built a solid net cash position that continues to expand. Bringing U.S. stores up to the sales per foot average of the Canadian stores would be an incremental $500 million in revenue. That would help justify the premium P/E for current investors nicely.
L-Brands (LTD): L Brands, Inc. sells intimate apparel, beauty and personal care products through its retail stores and direct channel businesses (catalog and e-commerce). The company's portfolio of brands are anchored by Victoria's Secret and Bath & Body Works.
Victoria's Secret segment sells women's intimate and other apparel, as well as personal care and beauty products under the Victoria's Secret and Victoria's Secret PINK brand names. The Victoria's Secret brand recently developed the new VSX sports apparel brand. The Bath & Body Works segment sells personal care, beauty and home fragrance products under the Bath & Body Works, C.O. Bigelow, White Barn Candle Company and other brand names.
At the beginning of 2012, LTD's U.S. store totals included 1,002 Victoria's Secret stores, 15 PINK stores, 1,587 Bath and Body Works stores, and 19 Henri Bendel stores yielding 2,623 in total. Growth should materialize from international growth overseas, and domestic up-trading into higher margin programs and products.
The opportunity for L-Stores is not so much domestic store expansion, which is pretty much saturated, but rising margins as consumers upgrade to more pricey brands offered by Victoria's Secret and Bath & Body Works. For instance, the Victoria's Secret brand recently developed the new VSX sports apparel brand which can compete with Nike, Under Armour, and other sports apparel manufacturers. LTD also targets college-age women with the Victoria's Secret PINK line and then will seek to transition the women into the more mature Victoria's Secret at higher prices. Another opportunity is international expansion, where a growing middle class now is more likely to purchase from the aforementioned named stores rather than cheaper local generic mock-ups.
The dividend yield on L-Brands is now 2.4% but it pays out under 30% of earnings. There is an expectation that Leslie Wexner, founder and controlling shareholder, could substantially boost that going forward. Citigroup analysts believe the dividend could be more than doubled to over 5% by 2016 on a 70% payout ratio once CAPX has peaked in 2014 and begun to fall. The trajectory is not known but sizable increases should materialize over the next few years. LTD could be both a growth and dividend story for the next 3-5 years.
Lorillard (NYSE:LO): Smoking and models, actresses, and centerfolds? Yup. Many of the women in those professions smoke largely because smoking appears to be an appetite suppressant. The girls were concerned with keeping off the pounds and staying thin. Many of the women preferred menthol cigarettes (milder?) and the cigarette of choice for many of the girls I saw smoking was Newport, made by Lorillard.
Lorillard is the smallest of The Big 3 U.S. cigarette manufacturers, with a heavy emphasis on its menthol flagship. The LO cigarette line includes Newport, Kent, True, Maverick, Old Gold, and 34 other smaller niche brands and line extensions. Newport accounts for 88% of LO's annual sales and LO has about a 14% share of the U.S. domestic cigarette market. LO has 38% of the menthol market in the U.S. where it is the dominant brand.
Only LO has made a meaningful entry into the e-cigarette category through its Blu eCig acquisition. Given its smaller size and early lead into e-cigs, Lorillard could see meaningful market gains from this niche going forward. Estimates are that growth is accelerating off a tiny base, perhaps 600 million total sold in Q1 2013 (not even 1% market share against quarterly sales of 75 billion sticks). Though small in the aggregate, for Lorillard they are incremental revenue and profit boosts. E-cigs provided $57 million of revenue in Q1 2013 for LO, compared to about $1.2 billion of cigarette net revenue. FDA regulation of menthol and slow acceptance of 'substantial equivalence' products continue to hamper LO's relative valuation to Altria Group (NYSE:MO) and Reynolds American (NYSE:RAI).
While an outright FDA ban on menthol is unlikely, just the continued review and threat of prohibition of line extensions has depressed the valuation of LO relative to Altria and Reynolds. Closure on that should help with a re-valuation upward. Another positive is that LO just announced an additional $500 million share buyback on top of the earlier one from a few months ago, which already saw $149 million in stock purchased in Q1 2013. The combined $1 billion in buybacks may be finished close to year end, which should boost the share price and EPS going forward. Q1 results for LO were improved from earlier quarters, as the pricing environment has improved (less coupon activity and discounting by Altria) and Newport took share sequentially and YoY.
Other good news in Q1's results were a series of 1-time events have begun to recede in their impact, as I had expected in an earlier article. So margin expansion in 2013-14 is likely and Q1 2013 saw per-pack costs down 2.7% while operating profit per pack was up 10.9%. Newport took share in both menthol and non-menthol.
Lorillard is paying out about 70-75% of cash flow as dividends, using its strong balance sheet to take up leverage via the buybacks that should continue through 2015. LO also increased its quarterly dividend by 6.5% last quarter and the shares now yield 5.0%. While valuation is not cheap, if anything negative materializes from the FDA with menthol, the kicker could be if Lorillard were to be acquired by a buyer for its Newport brand.
So there you have it: Five stocks from five different sectors that should appeal to the Lauren Hutton crowd. In terms of which to pounce on today, AGN has fallen on the product delays and should probably lead your entry points with LO right behind given its defensive characteristics and dividend yield. LULU, LTD, and EL have all been strong performers in recent weeks and months so scale in gradually. Of course, the overall market has been strong, so falling stock prices during the next correction (assuming we ever have one) should cheapen up the entire group. But with the exception of LO, don't expect to buy any of these stocks at discount prices or cheap multiples relative to the S&P 500.
After all, as any woman can tell you, beauty doesn't come cheap.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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This Week at the Movies... Cinderella
April 10, 2015 Showing this weekend at the Traer Theatre is the new Disney movie Cinderella. The story follows the fortunes of young Ella, whose merchant father remarries following the tragic death of her mother. more »»
Lassens to celebrate 60th anniversary April 12
April 3, 2015 Merlin and Gerene (Chizek) Lassen will be celebrating their 60th anniversary with a card shower and family dinner. They were married April 12, 1955, at Sacred Heart Catholic Church in Waterloo, Iow. more »»
Hayek turns 90 April 14
April 3, 2015 Dorothy Haack Hayek, formerly of Elberon, will be celebrating her 90th birthday on April 14th. more »»
This Week at the Movies... American Sniper
April 3, 2015 Showing this weekend at the Traer Theatre is the true story of US soldier Chris Kyle in American Sniper. U.. more »»
Jerald John McMurray Currens
April 3, 2015 Ryan and Meghan Currens are proud to announce the birth of their third son, Jerald John McMurray Currens, born March 17, 2013 at Fairview Ridges Hospital in Burnsville, Minnesot. more »»
This Week at the Movies... The DUFF
March 27, 2015 Showing this weekend at the Traer Theatre is the new comedy movie The DUFF. more »»
Caslavkas set to celebrate 60th anniversary
March 20, 2015 Bob and Marcella Caslavka will be celebrating their 60th wedding anniversary on April 3 and Marcella's 80th birthday March 26 with a card shower and a family dinner at the Amanas. more »»
McKinley to mark 90th birthday
March 20, 2015 Pearl McKinley celebrates her 90th birthday on March 25 with a card shower. Cards may be sent to: 2459 180th St., Traer, IA 50675. more »»
This Week at the Movies... McFarland, USA
March 20, 2015 Showing this weekend at the Traer Theatre is the new Disney movie McFarland, USA. more »»
Mitchell celebrates 90th birthday
March 13, 2015 Elsie Mitchell will celebrate her 90th birthday on March 18 with love from her family. more »»
This Week at the Movies... Black or White
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Four generations of the Staker family
February 20, 2015 Brent Staker and Danielle Roose proudly announce the birth of their baby daughter, Alexis Rae Staker. She was born December 21, 2014 at 3:04 PM. She weighed 5 lbs. 15 oz and was 20" long. more »»
Winkelplecks celebrate 50th anniversary
February 20, 2015 Larry and Ruth Winkelpleck will be celebrating their 50th wedding anniversary on Friday, February 20. The couple were married February 20, 1965 in the E.U.B. Church in Dysart. more »»
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Kopriva-Parr wedding
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News, Blogs & Events Web

subset: commoncrawl


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nbn on track to meet its financial year plan: Bill Morrow
nbn has revealed its third quarter results, showing a total revenue $111 million, an increase of more than 158 per cent versus the previous corresponding period in fiscal year 2015.
nbn has revealed its third quarter results, showing a total revenue $111 million, an increase of more than 158 per cent versus the previous corresponding period in fiscal year 2015.
Australian Communications Consumer Action Network (ACCAN) is ready to work on changes required to improve telecommunications in regional Australia. The organisation came forth in the support of the Regional Telecommunications Independent Review Commi...
At 6.30am (AEST) the nbn's first broadband satellite, Sky Muster, successfully lifted into orbit, blasting 36,000kms into space from Guiana Space Centre in South America.
Internet service provider (ISP), TPG Telecom, has launched a set of six new NBN plans.
Locally-owned startup, Australian Broadband Services (AuSBBS), is targeting small businesses with new National Broadband Network (NBN) plans priced at $100 and $155 per month.
Optus will push for NBN Co to be given the power to offer volume discounts to service providers on the National Broadband Network (NBN) under legislation currently in Senate Committees hearing.
The Prime Minister, Julia Gillard, has confirmed the National Broadband Network will not be cut or slowed down to help fund rebuilding after the devastating Queensland floods. The Government estimates the recovery will cost $5.6 billion.
The Opposition leader, Tony Abbott, has used a visit to flood-afflicted Queensland to push for a change in Government spending priorities in what is most likely an attack on the National Broadband Network.
NBN Co CEO, Mike Quigley, used a press conference in Sydney to reject allegations he should've known about cases of bribery that took place in Alcatel-Lucent when he was a senior executive there.
Australia's peak technology industry representative body has told Australian businesses to start preparing for the onset of the National Broadband Network or risk being left behind, in the wake of the release yesterday of NBN Co's business plan outli...
Simon Hackett on Sunday published a strident critique of the large number of Points of Interconnect (PoIs) model being promulgated by Australia's larger telcos, instead backing NBN Co's own minimalist vision. But what does the Internode chief think o...
National broadband provider Internode has published a strongly worded argument in favour of NBN Co's existing model for connecting internet service providers to its future fibre network, backing the incumbent minimalist structure which would see just...
Communications Minister, Senator Stephen Conroy, has used Australia's falling OECD broadband penetration ratings as evidence that the National Broadband Network is needed.
The CSIRO is moving to attract millions of dollars worth of commercial investment from networking vendors ahead of the first field trial of its in-house broadband wireless over analogue television spectrum technology.
The National Broadband Network (NBN) could get the Opposition's approval if a Productivity Commission study into the $43 billion project came back with a positive report, shadow communications minister, Malcolm Turnbull has said.
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First impression on unpacking the Q702 test unit was the solid feel and clean, minimalist styling.
For work use, Microsoft Word and Excel programs pre-installed on the device are adequate for preparing short documents.
The Fujitsu LifeBook UH574 allowed for great mobility without being obnoxiously heavy or clunky. Its twelve hours of battery life did not disappoint.
The screen was particularly good. It is bright and visible from most angles, however heat is an issue, particularly around the Windows button on the front, and on the back where the battery housing is located.
My first impression after unboxing the Q702 is that it is a nice looking unit. Styling is somewhat minimalist but very effective. The tablet part, once detached, has a nice weight, and no buttons or switches are located in awkward or intrusive positions.


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Two articles in recent weeks described consolidated year to date results from the top 10 high yield stocks comprising (Dog) stocks in each of seven and eight indices. The second of those articles concluded by ranking eight indexes by risk from low to high:
- JPMorgan New Sovereigns Dogs
- S&P 500 Aristocrats Dogs
- Dow Industrial Index Dogs
- NASDAQ 100 Index Dogs
- NYSE International Index Dogs
- S&P 500 Index Dogs
- Top Dog Stocks by Sectors
- Russell 2000 Index Dogs
This is the seventh article in an eight part series launched as another step toward Yale economist Robert Shiller's admonishment to "make conservative preparations for possible bad outcomes". Part 1 reviewed the underlying top thirty component stocks of the Russell 2000 Index. Part 2 discussed the 3x9 Sectors 27 Dogs. Part 3 examined the underlying top thirty component dividend stocks of the S&P 500 Index. Part 4 investigated the underlying top thirty component dividend stocks of the NYSE International 100 Index. Part 5 reported the underlying top thirty highest yielding component dividend stocks of the NASDAQ 100 Index. Part 6 surveyed the components of the Dow Industrials, the current "Dogs of the Dow." Future articles in this eight part series will describe the complete component listings for all eight indices.
This article (part 7) describes thirty highest yielding component dividend stocks of the S&P 500 Aristocrats, treating them as an index. These are the top yielding stocks from companies paying and increasing dividends each year for 25 years or more on the S&P 500 Index. This is the second lowest yielding with presumed second lowest risk of the eight indices listed above.
The "Dogs of the Index" Strategy Employed for Trading
Investopedia explains the strategic concept as:
An investing strategy that consists of buying the 10 dogs of the dow [dogs of the index] stocks with the highest dividend yield at the beginning of the year. The portfolio should be adjusted at the beginning of each year to include the 10 highest yielding stocks.
This strategy is so simple you don't need more than 15 minutes per year to decide which stocks to buy. Just two key metrics determine the yields that rank the index dog stocks:
- Stock Price.
- Annual Dividend.
Dividing the annual dividend by the price of the stock reveals the percentage amount by which each stock is ranked. After selecting a pool of twenty to thirty stocks that throw the highest dividend yields in any index, the investor follows, trades, and awaits the results of an investment in the lowest priced, highest yielding one-half (if 20) to one-third (if 30) of the pool. A third variable of broker commission of $10 per trade is deducted from every transaction to reveal net income each year.
Top Yielding Stocks in the S&P 500 Aristotrats Index Dog Pound
Data from Yahoo Finance reveals the following thirty stock portfolio as of September 23, 2011:
This Dividend Aristocrats Index of 30 stocks is a subset of the S&P 500. It consists of forty stocks in the index paying and increasing dividends every year for 25 years or more.
Four of the top ten stocks in the above list are consumer goods companies, two are financial firms, two are health care pharmaceutical firms, one is a utility, and the top one (NYSE:CTL) is a technology sector telecom. At the top, this index includes five of nine business sectors.
The full list of 30 represents all nine sectors but gets thick in the middle to bottom with ten consumer goods firms and five service sector stocks. Here is the breakdown of the 30 September component stocks by business sector: Technology: 2; Consumer Goods: 10; Services 5; Financial: 3; Basic Materials: 3; Healthcare: 2; Utilities: 1; Industrial Goods: 3; Conglomerates: 1.
S&P 500 Aristocrats Top 30 Component Profiles for September
Below are links to short summary business profiles of the thirty top yielding S&P 500 Aristocrats for September 2011 from Yahoo Finance.
1. CenturyLink, Inc. (CTL) [Sector: Technology; Industry: Telecom Services - Domestic]
2. Pitney Bowes Inc. (NYSE:PBI) [Sector: Consumer Goods; Industry: Business Equipment]
3. Cincinnati Financial Corporation (NASDAQ:CINF) [Sector: Financial; Industry: Property & Casualty Insurance]
4. Leggett & Platt Incorporated (NYSE:LEG) [Sector: Consumer Goods; Industry: Home Furnishings & Fixtures]
5. Consolidated Edison, Inc. (NYSE:ED) [Sector: Utilities; Industry: Diversified Utilities]
6. Kimberly-Clark Corporation (NYSE:KMB) [Sector: Consumer Goods; Industry: Personal Products]
7. AFLAC Incorporated (NYSE:AFL) [Sector: Financial; Industry: Accident & Health Insurance]
8. Abbott Laboratories (NYSE:ABT) [Sector: Healthcare; Industry: Drug Manufacturers - Major]
9. Johnson & Johnson (NYSE:JNJ) [Sector: Healthcare; Industry: Drug Manufacturers - Major]
10. Clorox Company (NYSE:CLX) [Sector: Consumer Goods; Industry: Housewares & Accessories]
11. Procter & Gamble Company (NYSE:PG) [Sector: Consumer Goods; Industry: Personal Products]
12. Pepsico, Inc. (NYSE:PEP) [Sector: Consumer Goods; Industry: Beverages - Soft Drinks]
13. PPG Industries, Inc. (NYSE:PPG) [Sector: Basic Materials; Industry: Specialty Chemicals]
14. Bemis Company, Inc. (NYSE:BMS) [Sector: Consumer Goods; Industry: Packaging & Containers]
15. Emerson Electric Company (NYSE:EMR) [Sector: Industrial Goods; Industry: Industrial Equipment & Components]
16. Stanley Black & Decker, Inc. (NYSE:SWK) [Sector: Industrial Goods; Industry: Machine Tools & Accessories]
17. Automatic Data Processing Inc. (NASDAQ:ADP) [Sector: Technology; Industry: Business Software & Services]
18. Air Products and Chemicals, Inc. (NYSE:APD) [Sector: Basic Materials; Industry: Chemicals - Major Diversified]
19. 3M Company (NYSE:MMM) [Sector: Conglomerates; Industry: Conglomerates]
20. Wal-Mart Stores, Inc. (NYSE:WMT) [Sector: Services; Industry: Discount Variety Stores]
21. Lowe's Companies Inc. (NYSE:LOW) [Sector: Services; Industry: Home Improvement Stores]
22. McDonald's Corporation (NYSE:MCD) [Sector: Services; Industry: Restaurants]
23. The Coca-Cola Company (NYSE:KO) [Sector: Consumer Goods; Industry: Beverages - Soft Drinks]
24. Dover Corporation (NYSE:DOV) [Sector: Industrial Goods; Industry: Diversified Machinery]
25. Exxon Mobil Corporation (NYSE:XOM) [Sector: Basic Materials; Industry: Major Integrated Oil & Gas]
26. The Chubb Corporation (NYSE:CB) [Sector: Financial; Industry: Property & Casualty Insurance]
27. Walgreen Company (WAG) [Sector: Services; Industry: Drug Stores]
28. Archer-Daniels-Midland Company (NYSE:ADM) [Sector: Consumer Goods; Industry: Farm Products]
29. Target Corporation (NYSE:TGT) [Sector: Services; Industry: Discount Variety Stores]
30. McCormick & Co. Inc. (NYSE:MKC) [Sector: Consumer Goods; Industry: Processed & Packaged Goods]
Charting Movement of the S&P 500 Aristocrat Dogs
Over the past nine months CenturyLink (CTL) has retained the top slot on this dividend yield based list. Color code shows: (Yellow) (1) firm listed in first position at least once between January and September 2011; (Cyan Blue) (4) firms listed in tenth position at least once between January and September 2011; (Magenta) (6) firms listed in twentieth position at least once between January and September 2011; (Green) (4) firms listed in thirtieth position at least once between January and September 2011. Duplicates are depicted in color for highest attained rank. Four firms dropped off the list of 30 between January and September: BF-B; BDX; VFC; MHP. They were replaced by WAG; DOV; ADM; TGT. Others dropped off and rejoined including DOV & ADM.
Click to enlarge
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September Dividend vs Price Results for Aristocrat Index Highest Yielding 10
CenturyLink (CTL) has topped this list all year. CTLs September 23 yield was at 8.69%. Year to date annual projected dividend totals for $1000 invested in each of the top ten stocks showed maximum divergence of $93.44 over aggregate single share price in August. September sees the gap narrowing to $78.13. This gap in August signaled stock prices of the top ten dividend yielders dropping as lower priced stocks rose to occupy the top ten slots boosting dividend yields and the number of shares buyable with a fixed investment amount. In September yields dropped slightly as share prices rose.
Maybe annual projected dividend totals for $1000 invested in the top ten Aristocrat Index stocks will continue to converge with the aggregate single share price. This remains a very tame and harmonious list showing low risk. In October another review of the Dogs of the S&P 500 Aristocrat Index will be reported. Stay tuned
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.


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U.S. Bancorp (NYSE:USB)
Q2 2008 Earnings Call
July 15, 2008 200 pm ET
Judith T. Murphy – Director of Investor Relations
Richard K. Davis - Chairman, President and Chief Executive Officer
Andrew Cecere - Vice Chairman and Chief Financial Officer
P.W. (Bill) Parker - Executive Vice President and Chief Credit Officer
Todd Hagerman - Credit Suisse
Matthew O'Connor - UBS
Nancy Bush - MAB Research, LLC
Ed Najarian – Merrill Lynch
Vivek Juneja - JP Morgan
Cory Gilchrist - Marsico Capital
Betsy Graseck - Morgan Stanley
Jon Arfstrom - RBC Capital Markets
John Mattesich - Groesbeck Investment Management
[Ceshu Morrow - Stargen]
Greg Guenther - Garden State Securities
Welcome to U.S. Bancorp second quarter 2008 earnings conference call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer and Andrew Cecere, U.S. Bancorp Vice Chairman and Chief Financial Officer, there will be a formal question and answer session. (Operator Instructions) I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U. S. Bancorp.
Judy Murphy
Richard Davis and Andy Cecere and Bill Parker are here with me to review U.S. Bancorp's second quarter 2008 results and to answer your questions. If you have not received a copy of our earnings release and supplemental analyst schedule, they are available on our web site at usbanc.com.
I would like to remind you that any forward making statements made during today's call are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are detailed in our press release and in our Form 10-K report on file with the SEC.
I will now turn the call the call over to Richard.
Richard Davis
Andy and I would like to start the call today with a short review of our second quarter results. After we have completed our formal remarks, we will open the line to questions from the audience.
Our company reported net income of $950 million for the second quarter of 2008. Reported earnings per diluted common share are $0.53 or $0.12 lower than the diluted common share in he same period of 2007 and $0.09 lower than the same period in prior quarter.
While the company had very positive operating growth in operating income reported decline in earnings from a year ago and the prior quarter was, simply put, the result of an increase in credit costs and the impact of a few significant items recognized in the first quarter of 2008.
In our view, this quarter's results reflected our company's core strengths and building momentum. The results demonstrated to us, and we hope to all of you, that a diversified business mix, our approach to risk management, our strong balance sheet and our strong capital positions have prepared this company for the challenges of the current economic environment. Further, we are very satisfied that our current investments and the revenue goals for the company are on track and now beginning to show results.
Let me review a few highlights. The second quarter results included two significant items which combined reduced earnings per diluted common share by $0.11. They included a $66 million impairment of certain structured investment security and a $200 million incremental provision for credit losses.
We achieved a return on average assets of 1.58% and a return on average common equity of 17.9% in the second quarter. Both returns, although lower than prior quarters, remain well above the median returns for our peer groups.
Our second quarter's net interest margin of 3.61% was higher than the first quarter of 2008 by 6 basis points and 17 basis points higher than the same quarter of last year. The improvement in our margin, in addition to the quarter's strong growth and average earning assets, resulted in an increase in net interest income of 15.6% year-over-year and 4.3% un-annualized on a linked quarter basis.
The growth in net interest income was a significant driver in the positive variance in second quarter core revenue growth and operating earnings. This growth takes on more significance, however, when you look at the past. The last full year our company enjoyed an increase in net income was 2003. This directional change provides significant momentum for revenue growth going forward.
Our fee-based businesses also continue to show excellent growth year-over-year with payment related categories, mortgage making revenue, commercial products revenue, and treasure management fees posting the strongest results. Trust and investment management fees grew, but at a lower rate, as positive growth in transactions and new customers were partially offset by the impact of adverse equity market conditions.
Consistent with past years, linked quarter non-interest income growth was easily very strong for the majority of our fee categories. Significant items in both the current and prior quarters, however, somewhat masked the linked quarter trends that totaled non-interest income.
On an un-annualized basis, payment related fees increased by 9.8%, treasure management increased by 10.5%, deposit service charges by 8.2% and both trust and investment management fees and commercial product revenue grew at 4.5%. All of these categories represent ongoing revenue streams that will continue to benefit us in the future as we are challenged by a stressed economy and the credit issues that have ensued.
The growth in total revenue net interest income plus fees was 7.5% year-over-year. Maybe more importantly, revenue growth, excluding the net impact of asset valuation losses was more than 9% year-over-year. This is significantly higher than our company has experienced in the past number of years, again providing a solid and growing revenue base to off set some of the increasing costs associated with the current economic cycle.
Non-interest expense in the current quarter was $165 million higher than the second quarter of last year and $39 million higher than the previous quarter. A large portion of the increase in expense year-over-year can be attributed to continued investments in both our fee based businesses and the Banking franchise. In addition, the other expense category has grown as a result of the higher credit related costs for other real estate owned and loan collection activity in addition to fraud losses in investment and tax advantage projects.
On a linked quarter basis certain categories such as legal and professional were seasonally higher and business expansion and the timing of merit increases were responsible for a higher compensation cost. Credit related costs for other real estate and loan workout also contributed to the link quarter increase.
Our efficiency ratio, as reported for the second quarter of 2008 was 47.5%, comparable to the 47.3% efficiency ratio in the second quarter of 2007. A more favorable 43.5% efficiency ratio recorded in the first quarter of 2008 affected several significant items, the largest impact of which came from the Visa Inc gain.
We continue to be one of the most efficient financial institutions in the industry. We have always operated with a disciplined approach to expense control and our ability to maintain our efficiency is particularly important in this environment. As a low cost provider we can and we will remain a very competitive player in the markets that we serve.
Turning to the balance sheet, total average loans grew by 12% year-over-year, followed by solid growth in all the major categories. On a linked quarter basis, total average loans increased by $7.8 billion or 5% on an un-annualized basis. A portion of the increase both year-over-year and quarter-over-quarter was due to the reclassification of a number of federally insured student loans from loans held for sale to the portfolio as well as the purchase of a student loan portfolio. In addition, growth, specifically in commercial real estate, was impacted by the acquisition of Mellon 1st Business Banc.
On average, these items added $3.3 billion to average loan outstanding for the second quarter. Extracting these items, our core average loan growth was 9.7% year-over-year and 2.9% un-annualized on a linked quarter basis.
We continue to find that our company is benefiting from uncertainty and the volatility in the financial market. As customers seek stability in their financial service provider as well as they find the other providers are pulling back from the market. Our Banc is a benefactor of the flight to quality aspect of this challenging economic environment. We have a strong capital structure and we are in the position to lend and to provide our customers with a high quality Banking product and services.
That said, be assured that we will continue to concentrate on originating only high quality credit. We can and we will compete for the best customers nationwide.
We also saw a very favorable deposit trend this quarter. Average total deposits increased by 14.1% over the same quarter of last year and 3.8% un-annualized over the prior quarter. This deposit growth was in part driven by higher broker dealer, government, and institutional trust balances, the acquisition of Mellon 1st Business Banc as well as the company's ability to attract low-cost, full sale lending in this volatile market.
In addition, the growth in deposits reflected our continued focus on our revenue initiatives, particularly in the corporate Banking business line. Extracting Mellon 1st Business Banc, average deposit growth was 13.5% year-over-year and 3.2% on a linked quarter basis.
Finally and moving on to credit, as expected, credit costs were higher again this quarter. Net charge offs were 98 basis points of average loans for the second quarter of 2008 above the 76 basis points of average loans in the first quarter of 2008. The increase in net charge offs was the result of continued stress in the residential home and mortgage related industries, declining home prices in most geographic regions and the impact of the worsening economy on our commercial and consumer customers.
Within the consumer loan portfolio, credit card loan net charge offs accounted for the majority of the linked quarter and year-over-year increase. The credit card charge off ratio of 4.84% this quarter, although still below the industry average, was higher than our company had seen in the past five years and is indicative of the economic stress facing many consumers.
Note that there is some seasonality in credit card net charge offs; consequently, we expect a rate of increases in credit card net charge offs to moderate somewhat in the third quarter. Given the high quality of this prime portfolio, we still expect that our credit card net charge off ratio will continue to be lower than the industry average.
As we indicated at a recent investor conference, the net charge off ratio on residential real estate related loans, including consumer first and second liens, was expected to increase this quarter to approximately 1% of average loans outstanding. First, residential mortgages were slightly lower than predicted with a net charge off ratio of 91 basis points while the net charge off ratio on home equity and second mortgages reached 1.13% for this quarter. Combined the net charge off ratio on the first and second mortgages this quarter was 1.01%. A majority of the increase in both first and second mortgages can be attributed to loans originated through our consumer finance division as our branch-originated portfolio continues to perform very well.
A worsening economy, falling home prices, and rising gas prices, have more recently, heightened concerns in the industry about auto loans and leases. We offer auto loans through our branch network, in addition to originating loans and leases through dealers across the country in our indirect auto business.
Our auto loan portfolio, which totaled $9.5 billion at June 30, is a very high quality portfolio and we have been in this business, uninterrupted, since 1953. The net charge off ratio in the second quarter on that portfolio was 72 basis points, just slightly lower than the 79 basis points we recorded in the first quarter of this year. The portfolio is current and performing well and at June 30, our retail auto lease portfolio totaled $5.4 billion. Again, this is a high quality portfolio; the net charge off ratio was 58 basis points in the second quarter, compared with a net charge off ratio of 49 basis points in the first quarter of this year.
As many of you have heard me say in the past, we can generally see credit trends 90 days out, but not much beyond and as we look 90 days ahead, taking into account the higher level of delinquencies in residential real estate and other consumer portfolios, taking into account the decline in home values and other collateral, accounting for the continued stress in the home building and related industry, adding the impact of higher gas and commodity prices on consumers and businesses and finally the general stress in the economy.
As a result we do expect net charge offs to increase in the third quarter at a rate somewhat comparable or lower to the amount that we experienced between the first and second quarters of this year. Given that expectation the net charge off ratio will rise above 1% in the third quarter.
Also, as expected, non-performing assets climbed higher this quarter. At June 30, total non-performing assets were 1 billion, $135 million, or 34.3% higher than at March 31. Although the majority of the increase was driven by residential real estate, home building and related industries, the economic slow down and rising commodity prices has had an impact on some of our commercial customers.
Given these conditions we anticipate that our non-performing assets will continue to rise. As a result of the upward trend in both net charge off and non-performing assets, in addition to the economic concerns already mentioned, our second quarter results included an incremental provision for credit losses of $200 million. With this addition to the allowance for credit losses management believes that the company's allowance was adequate at June 30, with the ratio of allowances to period in loans at 1.60%l. compared to 1.54% at March 31 and the ratio of allowance to non-performing loans of 273%.
Going forward we will of course continue to assess the adequacy of our reserves for loan losses and provide for credit losses to reflect portfolio and economic conditions.
I will now turn the call over to Andy who will make a few more comments about the quarter.
Andrew Cecere
I would like to begin with a quick summary of the significant items that have impacted the comparison of our second quarter results to prior periods. First, during the second quarter and impairment charge of $66 million was recognized on the structured investment securities purchased in the fourth quarter of 2007 from an affiliate and as these assets are now part of our company's investment portfolio, the impairment charge was recorded as a securities loss.
The impairment charge was driven this quarter by wider market spreads for these types of securities caused by the continuing decline in housing prices and an increase in foreclosure activity.
During the first quarter of 2008 the company booked $253 million in impairment charge on the same portfolio structured investment securities.
The provision for credit losses reported this quarter was $200 million in excess of net charge offs. The first quarter of 2008 also included an incremental provision for credit losses of a similar amount $192 million. As you probably recall, the first quarter of 2008 also included several additional significant items that impacted the comparison of linked quarter results.
The other income line in the first quarter included a $492 million gain related to the Visa initial public offering and a $62 million reduction in revenue related the adoption of a new accounting standard.
Total expense in the first quarter included a $25 million contribution to the U.S. Bancorp foundation and a $22 million accrual for certain litigation. These significant items reduced our first quarter diluted earnings per common share by $0.02, while the impairment charge and an incremental provision taken in the current quarter reduced diluted earnings per common share by $0.11.
Net interest income in the second quarter was higher on a year-over-year and on a quarter basis due to both strong earning acid growth and an expanding margin. The improvement in margin on both the year-over-year and link quarter basis was the result of growth in higher spread assets and the benefit of being liability sensitive in a declining rate environment. We continue to benefit as well from our company's ability to secure favorable, short-term funding rates in this volatile market. Our margin of 3.61% was slightly higher than we anticipated a few months ago, primarily because of our success in funding the balance sheet at favorable rates.
Going forward, assuming the current rate environment and yield curve, we expect to maintain a fairly stable net interest margin, with a slight bias to the downside, for the third quarter. This assumption is based on steady to slightly improving credit spreads, continuing growth in higher spread products, including credit card and other retail loans and a normalization of funding and liquidity in the over night markets.
With the follow launch of our earlier discussion on the credit quality of our retail auto lease portfolio I wanted to spend a moment on the lease residual values and the impact they have on non-interest income; particularly now that there is a growing concern surrounding the current value of used cars.
Although the incidence of loss has been fairly on track and predictable over the past number of quarters, the severity of loss has grown. As you may know, these residual losses result in charges to other non-interest income; in fact, non-interest income decreased year-over-year by $42 million, as net gains in the second quarter of 2007 transitioned to net losses in the second quarter of this year.
We continually and carefully manage the residual risk on this portfolio by maintaining conservative, upfront, residual valuations, originating leases with longer lease terms, and managing concentrations within the portfolio by type, make and model of car, recognizing impairment when necessary and finally, carrying catastrophic residual loss insurance to limit our overall loss exposure. Given the current market for used cars we continue to expect adverse market pressure on all of these residual values, but feel that they will be very manageable for our company.
Our capital position remains strong, our 201, and total capital ratios were 8.5% and 12.5% respectively at June 30, both right on target levels. Although we have capacity and return authorization to buy back additional shares we do not anticipate to repurchase shares between now and the end of the year.
In summary, we are pleased with our second quarter operating results. The company posted solid loan and deposit growth on both a year-over-year and link quarter basis, strong growth in net interest income of 15.6% year-over-year and 4.3% un-annualized over the prior quarter. Excluding significant items discussed total revenue growth of over 9% year-over-year, a manageable increase in credit costs and finally, we ended the quarter as we began with a strong capital base and liquidity position.
Before turning the call back to Richard I want to take a moment to update you on the company's investment and perpetual preferred stock issued by Fannie Mae and Freddie Mac.
The investment is held in the available for sale securities portfolio with a book value of $97 million. At June 30 the value of this investment was $79 million. As we do for all of our investments the company will continue to monitor the performance of the entities to determine if any impairment is necessary at a future date.
Richard Davis
Before we take questions, I'd like to spend a moment talking about a few business line high lights for the quarter.
First the second quarter marks the end of the bidding process for the governments GSA SmartPay 2 program. U.S. Banc through its corporate payments business line is one of four card issuers qualified to contract with the government agencies to provide travel, purchasing, fleet and integrated products as well as other payment management technologies.
The results are in and U.S. Banc increased its share of the GSA transaction volume from 37% under SmartPay 1 to 48% under SmartPay 2. This is great news for our company and adds to the momentum already present while increasing the overall market share for this unique corporate payment business line.
Another high light comes from our institutional trust in custody and corporate trust groups. Over the past two months both have been enjoying the benefit of a flight to quality as new customers specifically sign U.S. Bancs superior credit quality and service levels as they leave their current provider and bring their business to us.
Finally for the third year in a row U.S. Banc was rated number one in the nation in the 2008 Privacy Trust study for retail Banking conducted by the Ponemon Institute. Customer privacy is a very important priority for our company and we are proud to be recognized with this level of recognition once again.
In conclusion, during this call we have described the economic environment in which we are all operating as challenging and stressful. I would add that it is also easy to describe it as unprecedented and even historic.
We are a Banc. Accordingly we are and will be affected by the challenges confronting the financial service industry today. As such, we will continue to carefully manage the risks for the more important message we want to deliver to our investors, our customers, and our employees is that we remain focused on the opportunity to grow our business, to deepen our customer relationship and to acquire new customers.
As you have heard me say before, we are open for business and very mindful of the fact that this environment, although stressful, has presented our company with a window of opportunity to solidify and grow our position in the markets we serve. We are prepared to manage this company through the cycle. Our prudent approach to risk management has not changed, our business model is intact and we are in the position to utilize this company's strong capital generation to invest in growth opportunities as well as in our community and in our employees.
We will rely on our earnings capacity to sustain our dividends and maintain our well-capitalized position, all the while focusing on our responsibility to produce consistent, predictable, and repeatable results for our shareholders.
Question-and-Answer Session
(Operator Instructions) Your first question comes from Todd Hagerman - Credit Suisse.
Todd Hagerman - Credit Suisse
Richard, just following those comments and talking about your outlook, particularly describing it as such in terms as challenging and stressful. In terms of the business you talked earlier in the year about the new revenue opportunities and the build out as opposed to rationalizing the business. Given the outlook and the updated credit outlook, how were you thinking about the business now going forward, given the change, particularly as it relates to credit?
Richard Davis
I think one of the parts of that question is if we're going to change any of our current plans for the investments in the company, I'm not. The current credit environment, while, as I said challenging and stressful and all those other things is certainly diminishing our bottom line impact, if you look above the line, before losses and before loan loss provision adds, the core company is operating at levels as good as it has in the past two years, in fact that better in some cases.
Part of that is because we've continued to stay on the offense and stick to the basic business of Banking and not been worried about any of the issues that have been focusing some of our peers, but we've also been investing in these initiatives, many of which we've mentioned over the prior quarters and those are really coming through.
In a normal environment I would spend this whole conference call telling you about power Banc and talking about wealth management and talking about corporate trust and payments and I would get into those details and I'm happy to do that at any time, but given that the byline right now is credit quality, liquidity, capital and protection of the dividend, I don't want to lose the sight that this company is still working in the old fashioned scenario where losses are higher, but we're operating just like we did a couple years ago on trying to grow the future of the company through these revenue initiatives and 54,000 employees in the company, 52,000 spend every day working on moving forward while maybe 2,000 of us worry about making sure that we're protecting where we got up to this point in the cycle.
I'm actually quite optimistic about the benefits and you'll see them come through when the loan loss provision adds stops and when loan losses start to moderate, I think you'll see some really quality revenue benefits coming from this company that you haven't seen in a generation past.
Todd Hagerman - Credit Suisse
I appreciate that. Secondarily, just in terms of the payments business, again were resilient in the quarter and again given your outlook can you give us a little bit better feel in terms of the pricing versus volume in the quarter and again what the outlook would be there? Again, as you talked about rising energy prices and the like it seems like the payments business continues to deliver. How were you thinking about that business in the second half and again how should we think about it in terms of volume business versus the pricing changes that may have come through?
Richard Davis
I'm going to tell you that it has a slight negative bias to it, the bottom line because volume is probably going to come down a little bit more in the payment businesses than the margin will go up simply because of the consumer recession that I think we're in and I do believe we're in one. Having said that, you're going to find average ticket prices are higher.
Our volume will still moderate in some cases where people still need to buy their more necessity based items on their debit cards or their credit cards. The corporate space is primarily government and business related and those businesses are still spending it pretty much unfettered from the current environment.
I think you you'll see that we don't have much different second half than we had first half. The thing that I might add though, that I'm not sure that understand the impacts is the financial stimulus. I happen to be a believer that the stimulus actually did show itself in this economy, but it didn't show itself at the Bancs as much as it showed itself at the gas pump or at the cash register.
Having said all that, I think that perhaps a more negative view of the stimulus checks is that they were perfectly timed. They came in the last 90 days when people needed them the most to get through their daily living activities and now in a short month they'll be gone. Whether that translates to people need to spend more on their debit or credit card, whether that creates additional stress in consumers ability to repay their debt, I think that's a question mark we're going to watch for the next 60 to 90 days because I think there's a slight negative bias toward that outcome as well, because quarter three and quarter four don't have any of those benefits in them that will undoubtedly affect us somehow.
Your next question comes from Matt O'Connor - UBS.
Matthew O'Connor – UBS
You guys have a decent amount of exposure to the consumer auto loans as well as the auto leases that you addressed earlier. Could you just give us some more color on what are the loss rates right now? Where do you think they go in the second half of the year which, if I recall correctly, tend to be a little seasonal higher and I think you might have some insurance in residuals, if you could remind us of that as well.
Richard Davis
We do and we're prepared for that, because we know that's an area of concern for the market, so Bill why don't you start with the performance and Andy why don't you run with the insurance.
P.W. (Bill) Parker
Again, we have about $5.5 billion of leasing portfolio. We've been in the business for a long time; it's an all time portfolio that ended the quarter at about a 58 basis point loss rate. The balance of it is about $9.5 billion of loans that originated both indirect and through our branches; the loss rate on that's about 74 basis points. On the first half of the year if you add those two together at about $15 billion the first half of the year, they had combined $25 million of loss first quarter at $25 million of loss at the second quarter.
As you mentioned, the latter half of the year there will be a seasonal up tick. There also is the issue of severity on some of the SUVs and trucks that are obviously going to be going to auction and those that are a higher loss rate, but right now we're in the 70s on this portfolio, all prime portfolio, we don't expect a material deterioration in it.
Andrew Cecere
On the leasing side of the equation we have about a $5.4 billion lease portfolio and about a $3.4 billion lease residual ports booked. What we are experiencing is a normal rate of incidence, but a higher loss per incidence and that loss is principally focused in the SUV category which represents about 41% of our total book. Not unlike the total US SUV population. We do expect this to continue, but it is certainly manageable within the overall income statement.
We do have catastrophic insurance. The catastrophic insurance has not come into play yet because some of the positives are off setting some of the negatives and it's a net insurance number, but if things get very, very bad we will have insurance for that, but to date that has not taken place.
Richard Davis
When we talk about seeing 90 days out and we see that in term of incidence of loss, what's harder to predict is the amount per loss. As cars come off we have some go to auction or we fin other ways to dispose of them. So, that's why there's a bit of an uncertainty even within the 90 day window, but if you had 25 and $25 million per quarter that combined portfolio, it's undoubtedly going to move up, but not material enough to even really, I wouldn't even probably rank it in the worry spot of things that we're concerned about, because it's a prime portfolio and it's performing quite well. The incidence of loss is very predictable. The announced first car coming off lease is already substantially higher than it was in the past and I don't think it has a lot more to go.
Matthew O'Connor – UBS
The loss rate that we saw this quarter, my guess is it will be among the lower of a lot of your peers as they come out with results. Do you think the big difference is simply that you are all prime while some had some other stuff in there, or is there another thing that we should be focusing on here in terms of why the qualities will look better?
P.W. (Bill) Parker
I think we've been very prudent in our underwriting. I do think it's a higher quality portfolio. In terms of lease side, we've never enhanced residuals', that's not something we do. We have extended lease terms, so I think overall the book is very conservative from an underwriting standpoint.
Richard Davis
I think that's it.
Matthew O'Connor – UBS
Your net interest margin ticked up a few bits this quarter and you're expecting it to be stable to down for the rest of the year. Can you just give us a little more color on what's driving that?
Andrew Cecere
You bet. We are liability sensitive. Rates have come down, that's helped us a bit. We expect it to be relatively stable, down just a little bit if anything, but relatively stable. We are benefiting from the flight to quality that Richard talked about. We're able to grow our loans at every good spreads, we're able to gather deposits because of the flight to quality and we're able to gather wholesale funding at a favorable rate right now, so all t hose things are contributing to our net interest margin at the 360 or so and I think we'll see that going forward.
Richard Davis
I agree with that. We are not, rest assured everybody, we are not growing our loans at twice the amount we did a year ago, because we're reaching down on the quality spectrum. This is absolutely what flight to quality looks like and we are getting prime customers at higher levels, at better spreads and better margins and we're being very selective.
As I said on the last call, our precious capital, the first goes to our very best customers, the next goes to everybody else's very best customers, and there's none left over. So, we're really quite advantaged right now and if the flight to quality got stronger continued then that margin continues to be closer to where it is now with much less slight negative bias. We just want to be realistic in case that were to stop.
Your next question comes from Nancy Bush - MAB Research, LLC.
Nancy Bush - MAB Research, LLC
About the trajectory of credit quality deterioration, is it continuing to accelerate, was it accelerating at the end of the quarter and any intrepid prediction or guess about when things start to level out?
Richard Davis
The best way to position it is back in the middle of May, we saw that we would be in the mid-90s in our charge offs and here we came in at 98 basis points which I struggle with, because I really wanted to be exactly at the mid-90s. But, the fact is, is that it didn't change a lot since the last 60 days. We're getting better at learning how to predict these outcomes and read the slopes or the curves, but it's definitely continuing to get worse. The world doesn't get better.
The best way for me to portray it to you is non-performing assets and net charge offs, if you look at the slope of the curves that we just experienced between data points quarter two and quarter one the slope going forward from quarter three as in comparison to quarter two will be up, but at a lesser slope. I know it sounds a little odd to say that way, but it's not a straight line. Actually it's a good thing it started to temper down a bit. Our confidence in our ability to project is getting higher and so on one hand I don't want you guys to run out there and model a 1 and ½ basis point, 150 basis point net charge offs, because that would be far in excess of anything we see, but I also don't want you to model 1.00 because we're going to grow more than 0.02.
So for us, you can model that as you wish, but if you look at the slope in both categories from quarter two to quarter one it's going to be a decreasing slope for the next quarter, so we're starting to feel a little bit more sanguine about it and that's why we're back to intrepid.
Nancy Bush - MAB Research, LLC
About the deposit pricing, we've seen one major national player, although I think you don't compete with them so much, who is out there with a 4 ¼% 12-month CD and I'm wondering if you're seeing similar things, particularly in your mid western markets, how deposit pricing is shaping up.
Andrew Cecere
What we are seeing, I'm going to do retail and wholesale separately. On the wholesale side of the equation what we are seeing is a flight to quality. I think given our rating and our strong capital position on our balance sheet we are seeing depositors on the wholesale treasury management side, the treasurers, municipalities and the like growing less and that has certainly contributed to the growth and deposits we see in the second quarter.
On the retail side of the equation we are being a bit more aggressive in certain markets both on the savings accounts, checking accounts and certainly on the CD accounts we're starting to experience growth. We are not in certain markets at levels that some of our competitors are at that are well above us, because of reasons they need to be. We're not at that level, but we're able to grow at levels that are still profitable to us and make sense, both growth on deposits and core accounts.
Nancy Bush - MAB Research, LLC
Do you also have the impact, the downward impact on the net interest margin and that the increase in non-performers had?
Andrew Cecere
Yes we do.
Nancy Bush - MAB Research, LLC
Do you know how much that was?
Andrew Cecere
I don't. The amount for the second quarter was not a significant amount.
Your next question comes from Ed Najarian - Merrill Lynch.
Ed Najarian – Merrill Lynch
Richard, a question with respect to M&A: in the current environment it looks like there could be a number of things attempting to raise capital by selling non-core businesses, various types of fee businesses, what have you. Importantly, a number of those businesses might require somewhat of a material purchase price, but wouldn't use particularly a lot of capital. What would be your appetite in the current environment to be a buyer of various types of fee businesses?
Richard Davis
I would say the up sides pretty high actually, because of what you just said. First of all it's a buyers market. In this case we're going to be very deliberate in our reviews, our due diligence. We will be opportunistic, but there's also a lot of value to keeping your powder dry at a time like this, and protecting our capital.
When you mentioned M&A, I was going to pick up on one of your first comments that one of the reasons we're going to be very careful about traditional M&A activity is because it requires us to raise capital in the markets like this, while we would put ourselves in that position, we work so very hard to not be one of the companies that needs to raise capital. So, on a wholesale basis we're not going to be very interested in those transactions, but where opportunity presents itself and where a seller has a need to get a fast cash, all cash, or strong deal where they can get a fast decision, we are completely mobilized and ready to take advantage of that and I will seek those opportunities.
Today's market share moves at times like this for those who have the benefit and it doesn't show up just in organic growth, it shows up in, sometimes, opportunities to buy pieces and parts and we'll be available to do that.
Ed Najarian – Merrill Lynch
As a follow up on that, could you maybe give us some sense of what of your fee business' you're most interested in potentially growing in that fashion, asset management, or what have you and then a little sense of what amount of "dry powder" you feel like you might have in terms of excess room in some of your capital ratios?
Richard Davis
The business lines we like the most continue to be payment businesses. We like corporate payments a lot because they have a continued high cost of entry to those who aren't in it. There's a lot of non-Banc and mono lines that are starting to stress and need new forms of capital or just need a new partner; so we're finding an attraction in corporate payments.
You may recall that we buy dozens of small Banc credit card portfolios through out the year, here to fore, based on our ability to do the business for them in turnkey business, in any case, and was private label. Now we're starting to see more Bancs give us their credit card portfolios, something that they might sell away in order to raise some capital and there's an advantaged opportunity there.
Based on our prime only credit card portfolio, we continue to find that to be an attractive space.
Finally, I would always be attracted to any small traditional branch opportunities or small Banc activities where they make sense, but we haven't seen a Banc or a branch activity for sale that didn't have a lot of commercial real estate or high paying deposits around it that causes us to just step away and continue to look and walk in the other direction. In that case we are attracted by the same things you're going to see in our last five-year history.
As regards to dry powder I'll let Andy be technical, but we did mention and noted that we indicated no stock buy backs for the rest of the year. We had our Board meeting today, in fact and one of the questions was how do you think the market will react to that? In the old days they tried to be negative about that, especially when the price was so unbelievably low. Did I mention unbelievably low? But at the same point, I do think that if we don't say that then you might have a reason to worry that we're not going to protect the dividend and U.S. Banc is going to protect the dividend. We understand how important that is.
Having said that, the dry powder becomes the difference in being able to protect the dividend, not needing to raise capital and being able to take advantage of some of the smaller deals that come along and let's just say there's plenty of room for all those to take place, but we're very careful and prudent not to put ourselves into a corner that we can't back out of.
P.W. (Bill) Parker
Just following on that, what we see is our biggest, largest benefit is our tremendous internal capital generation. We are able to take on no interest business bank and still achieve our 8.5 ratio here in quarter too. If you think about the future, the fact that we're protecting the dividend and done it to stay raising capital, it is because of that internal capital generation and as we look forward that will really be what enables us to continue to do small deals when the opportunity arises.
Your next question comes from Vivek Juneja - JP Morgan.
Vivek Juneja - JP Morgan
On commercial leases, your losses are rising; can you talk a little bit about what's driving that?
Richard Davis
Yes, we have a large small ticket lease portfolio, the biggest asset class in there is actually copiers, so these are leases that range anywhere from hundreds of dollars to a few thousand dollars; so it's heavy in the small business area. There has been some disruption to that where we had exposure into mom and pop mortgage broker industry, but we have worked through that exposure on the small business side.
The balance of the portfolio is performing very well and then there's also the large ticket leasing company that we have that's performing in line the CNI portfolio and it's had very low losses right now.
Vivek Juneja - JP Morgan
So that $6.4 billion commercial leasing, what percentage would you say is the small business piece?
Richard Davis
About half of it.
Vivek Juneja - JP Morgan
Can you talk a little bit about national corporate lending, that was up a lot this link quarter. Any color on what you're adding in that area since there was some —.
P.W. (Bill) Parker
Yes, there we're seeing very good demand, as people have been unable to access the capital markets. I would say that in the last nine months we've probably added the highest credit quality that we've seen over the last several years into that portfolio. There is that flight to quality. The initiative there is investment grade credits that have good opportunity for building deeper relationships, whether it's in a corporate payments area or merchant processing area or a trust area, those are the type of clients that we focus on.
Richard Davis
You'll recall that probably a year ago on this call we talked about the corporate banking initiative where we opened our New York office and started bringing over a number of talented people from banks across the country and this is part of that. What comes along is the corporate payments and the treasury management activities that I highlighted as two of our strongest growth categories for the quarter.
I think some of our initiatives that weren't present even a year ago are starting to bear fruit. It's those kinds of things and is shows up perhaps in loans relative and it also has other benefits that accrue in other places.
Vivek Juneja - JP Morgan
You mentioned processing volume growth slowed to only about 6 ½% year-on-year. Any color on why it slowed that much given that you've been running at double digits for a long time?
P.W. (Bill) Parker
What we're seeing on the merchant portfolio is a combination of two things. We're seeing good strong internal customer growth, but same store sales essentially flat on a year-over-year basis, so the same store sales slowing is offsetting the growth in customers.
Vivek Juneja - JP Morgan
Okay, so transaction volume.
P.W. (Bill) Parker
Vivek Juneja - JP Morgan
Lastly, reserves for commitments were down quite a bit link quarter given that you're seeing such good loan growth. Any color on what's driving that down?
Andrew Cecere
Part of it is just the, we are seeing higher utilizations out of most of our markets, so that's in part what drove that down.
Your next question comes from Cory Gilchrist - Marsico Capital.
Cory Gilchrist - Marsico Capital
We were watching aggregated industry servicing data; looking at sub 30-day delinquencies in the residential mortgage portfolios by vintage. We're seeing peaking in those sub 30-day delinquencies. We're also seeing the later vintages the '06s and '07s dropping below the '05 and '04, so a faster than normal seasoning of that book. Any comment on if you're seeing the same things in your residential mortgages?
Richard Davis
We're not. Our mortgage portfolio is, for the most part, either prime based or it's near prime and the origination fees which would put them on the books from '04, '05, '06, and '07 didn't change much. We weren't growing a lot, we weren't shrinking, and we weren't acquiring or adding any volume, so ours is a very predictable, steady routine. I think being mostly near end prime you would find it to be a little bit different than some of those vintages you may look at that ear winds [ph] share type market or in the public space.
For us, consider it very predictable, very traditional, and acting the old-fashioned way, just a little bit at a higher level.
Your next question comes from Betsy Graseck - Morgan Stanley.
Betsy Graseck - Morgan Stanley
I just had a question on the reserve allowance for just the last four months reserves against regular loans. How are you thinking about the historical and probably others [inaudible] puts into that analysis? Has the way you're looking at the historical analysis across the asset classes changed at all?
P.W. (Bill) Parker
No not really, we have not changed our methodology. What's driving it right now is the outlook on the retail side, specifically on the mortgage side where the declining home value's, so we've had to factor that in on our outlook and that's been the major cause for the increase in this last quarter.
Richard Davis
We build it from the bottom up every time. In other words we don't just take in the duration of the prior week or the prior month, the prior quarter. We look at each loan category, we look at their geography, we look at the loan type and we build it back up so that it's a calculated number that we confirm every time we launch it as opposed to a number that we just iterate based on change itself. As you might guess, it 's got to be one of the most provocative and competent analytics that we have in the company both for ourselves and for our regulators and it's an area that I would say we have definitely perfected in the last, probably, 12 months.
Betsy Graseck - Morgan Stanley
How are you thinking about that collateral value of the house? Is it a point in time or do you have a forward look that's embedded in your reserve analysis?
P.W. (Bill) Parker
We have a forward look and right now it's showing probably about an additional 5% decline in values between now and the end of the year and that's on top of the roughly 15% that many markets have already experienced.
Richard Davis
And that's that variance for the mix of markets we have, so the five would be across the average.
P.W. (Bill) Parker
Yeah and then we also do run sensitivity analysis at higher levels and look at that as well.
Betsy Graseck - Morgan Stanley
Do you ever think about hedging the book at all, there's obviously some industries out there now like the RPX that do provide potential for hedging the risk that you have?
Andrew Cecere
I think the cost of that and the basis risk on that would be offsetting the benefit of doing it, so we do not plan on doing that.
Betsy Graseck - Morgan Stanley
Lastly, on the restructured loans that you high lighted in the asset quality chart. Could you just speak to what the compositions of those are and if it's changed at all, the Q on Q, obviously there was a significant up tick quarter.
P.W. (Bill) Parker
Yes, the composition is roughly, there's about half of it that is residential mortgages and that's the area where, we talked about that at the end of the year where we were offering programs which we're continuing to offer, where we take adjustable rate mortgage and either freeze the rate prior to a reset or we'll cap their rate and in either case those loans remain performing. These are paying customers, but we have to report them as restructured and in some cases we also have to calculate an additional reserve on those which is part of the overall allowance.
Then there's another piece quarter-over-quarter, which was we did add about $100 million in restructuring on commercial real estate and there is a case where we have developers that we are continuing to work with. They are current, they've made all their payments, but we've locked their rate at a rate that the accountants would say was less than the current market rate for a new loan. In a particular case this was a rate that was actually prime.
Richard Davis
I'd like to highlight that. This is another point in time when a company's reputation gets permanently affected. There are a number of customers both in the consumer and the commercial space where a number of banks have just gone in and pulled the plug, pulled out the rug and said I don't have my capital, I don't have an interest, I'm not sticking with you.
We do have an advantage of not having to be one of those companies that we're either protecting our current customers and believe me the bank with a lot of other banks so they know the difference and we're attractive to a lot of other customers that over the cycle will give us their business and stay with us for another generation because you forever remember who stuck with you in the rainy day and who didn't.
So we're having the advantage right now of having to walk away from no one, actually extending ourselves to more customers, I think, than our peers are to try to make it work and by the way for you all, as investors, that's a very smart move on our part, because I'd rather keep the deal alive and keep people in their homes or in their properties than to have a foreclosure or have a loss.
Finally it accrues very strong reputation benefits in the coming years.
Betsy Graseck - Morgan Stanley
So how do you see loans curing out of this category?
P.W. (Bill) Parker
Well either they continue to pay; a vast majority of them continue to pay. Some of them refinance; we've seen about a 15% refinance rate on our adjustable rate mortgages, so it's either one of those two things, they either —.
Richard Davis
Or they fail and they're going to fail anyway, but we did our very best to keep that from happening and our best efforts are proving right now that the failure rate is substantially lower than it would have been without having taken that inert step.
Your next question comes from Jon Arfstrom - RBC Capital Markets.
Jon Arfstrom - RBC Capital Markets
I have a question for you on reserves. In your prepared comments you said that after the incremental $200 million provision you felt your reserve was adequate at June 30. The question is does that include your outlook for higher non-performers and net charge offs? What I'm getting at is the $200 million part of the near term provision run rate or do you feel like it's adequate based on what you see out the next 90 days?
Richard Davis
That's a good question and that now would be our verse of a client, so we feel it's very adequate right now as of June 30 and not being able to see much further into the future I have no reason to speculate whether or not it's going to be in the run rate. I will tell you that given the environment we're in and expecting charge offs to move up; I would expect us to be in lock step with that. In other words, I want to start this cycle as one of the best balance sheets, most fortress protected balance sheets in banking and I intend that we will end this cycle in the same way.
That interpretation means that if we continue to see this str5ess in the market place, we're going to meet it on the dollar for dollar charge offs and we're going to reserve for the future to make sure that we don't corrupt what is otherwise a very, very high quality company based on your reputation as a company that's got a very high strong balance sheet.
I think we are adequate now and that's as far as I should project, because it actually would be imprudent for me to project, but given the rule around here has been we're going to start it and end it as one of the most strongly capitalized and reserve banks in the country. You can count on that transaction to repeat itself as the loans continue to stress.
Jon Arfstrom - RBC Capital Markets
I noticed that the incremental provision runs through the treasury piece of your business. Do they get allocated out to the balance sheet somewhere or are they considered unallocated?
P.W. (Bill) Parker
In the income statement the business line results are reflective of charge offs and then the excess goes to the treasury group. We allocate a reserve that's actually allocated loan by loan, category by category.
Jon Arfstrom -RBC Capital Markets
The construction and development loan balances were up about 1% I realize that perhaps the slowest growing of your categories and up about 4% year-over-year and I'm curious, why you're growing that business and what opportunities, if any, you're seeing in that business?
P.W. (Bill) Parker
We do have good opportunities, we're fundamentally a relationship lender in commercial real estate states, so again there is a number of transactions out there that we will do and look at until retail malls or multi family projects were active in that space. These are with clients that we've been doing business with for years and years.
If you look at our residential construction book that is declining and that's the area that we're experiencing stress.
Jon Arfstrom -RBC Capital Markets
Bill, can you talk a bit about the commercial non-performing increase and what category you saw that in and tell us more about the [interposing].
P.W. (Bill) Parker
On the commercial piece, that was really two areas: one was building suppliers, in other words in this case some lumberyards and the other category was, of all things, Ag related. There are certain feed, the feed costs, with corn at $7.00 a bushel just did not work for a certain number of clients.
Your next question comes from John Mattesich - Groesbeck Investment Management.
John Mattesich - Groesbeck Investment Management
I want to circle back to the dividend again. I appreciate your comments on wanting to protect a dividend. Can I take that to mean that you're committed to extending the company's record of 36 years of annual dividend increases this year?
Richard Davis
Well first off that's a Board decision, they have to make that decision, but based on the current performance of the company and based on the bias of myself, the management committee and the Board, yes that is our intent.
Now I would have told you that U.S. Banc stock could never drop 9% yesterday either and so how that happened I have no idea and why it didn't bounce back I have no idea, but given the fact that the fundamental core operating company is as sound as it's been in the last decade, absent the over hang of credit, which I know is a real deal, but it's not sustainable at this point. I feel very comfortable that the dividend is something you will see. No bank will protect it harder and hang onto it more than this one.
John Mattesich - Groesbeck Investment Management
Is there an upper limit that you guys have in mind in terms of the pay out ratio?
Andrew Cecere
We have not decided upper limit. What we really look at is the earnings or the projections, the credit costs, and our capital ratio in addition to the growth on the balance sheet. Those are all factors we take into consideration when we make our recommendation to the Board in December.
Richard Davis
There is really three components: it is what you retain for yourself, it's what you put in stock buy backs and what you put in the dividend. I think with stock buy backs out of the picture for the rest of the year, that was code to tell you guys, in other words we took one variable away and given what I expect we will continue to have plenty of retained earnings and core capital generation, that's why we will continue to build the story around the logic of why we think we can be so assured that the dividend is safe.
Your next question comes from [Ceshu Morrow – Stargen].
[Ceshu Morrow - Stargen]
On the restructured loans, you mentioned that some of it comes back. Other banks have told us that they've seen increased people getting back into trouble, if you could talk about that on the residential side. Then also you guys have a very diverse stock in different markets, I was must wondering if you could give us a heat map of any markets that you are more or less concerned about.
Andrew Cecere
I'll go to the last part first. For us this really began in the Michigan and Ohio region and that's still an extremely stressed area for us. Then you look to California, Nevada, Arizona, very stressed markets, especially as you move out from the major metropolitan areas; also Florida. We don't have a lot of exposure in Florida, but that's obviously an extremely stressed market.
With regard to the residential mortgages, when we do those we focus on customers that are current, so we have other programs for those that aren't chronic, but the majority of the programs that we have are focused on those that have successfully made their payments for the past two to three years.
We contact them well in advance of any payment change and offer them where they can keep the payment at the same level and none of these are negative amortizing or anything like that, these are amortizing loans and with that, we have a substantial reduction in types of loans that would go delinquent, so our 90 days on that portfolio is a very small number, it's tens of millions of dollars on almost ½ billion of restructured residential mortgages.
Your last question comes from Greg Guenther - Garden State Securities.
Greg Guenther - Garden State Securities
Given the fact that your second quarter results had higher than expected non performing assets, which are forecasted to climb higher moving forward, your strong stance on protecting the dividend and reluctance to put yourself in a position to raise capital at this point, you did mention your willingness to invest in growth opportunities.
That being said, could you give me a little better feel for the current mentality of management with regard to the prospects of shopping for a potentially accretive acquisition over the next quarter or two?
Richard Davis
We are not shopping, but we're listening and we're open to anybodies overtures where they come to us and say, we have a special deal, if you'd like. Especially a non-auction deal, a private deal where somebody wants a quick decision and it looks like a really good deal, we'll look at all of those. If you look at that and remember we made $950 million this quarter, we're making a lot of money. We're retaining a lot of capital and earning a lot of retained earnings so, it's that combination of things that allows us to say that we're open to look for opportunity, but searching, nope. We're not going out being an aggressor; there is no reason to mess with really what has gotten us to this point, which is good prudent and steady banking.
So, we're just going to be opportunistic and I'll bet a lot of the deals that come by might be great, but we still may pass on because they just either are too rich or we simply don't see enough upside. What I don't want to do, the message I want to leave is we don't want to introduce any risks into the company that we would at this point in the cycle. We've worked very hard to keep it as risk free as possible and introducing someone else's problem is not good for our shareholders and sometimes catch a falling paring knife, they cut either way. We're just not going to put ourselves in that position.
Judy, before we close I want to first of all thank you all for your continued interest in our company. I do want to say that Andy, Bill, and I want to be well regarded by you as being transparent, clear, logical, and I really want you to feel a sense of confidence from us. We're not actors; we're bankers, so this is what we are.
I am very, very comfortable with how this company is managing through this difficult environment. I am very, very, confident about our ability to be on the other side of this as a stronger company and I'm unabashed about telling you that while all this is going on we'll continue to invest in the core operating infrastructure of this company and we are moving forward on every single direction that we can to build a stronger company, because this is a cycle, we'll come out of it; I want to come out of it stronger and I want you to know us as not only the great defensive stock that you've known us for a long time, but a great offensive stock because of what we can do in the future.
I'm quite robust about this environment. I'm discouraged that we continue to be brought down with a contagion of the industry. I understand it, but I'm frustrated by it. I appreciate the fact that we're not immune, but we are doing quite well and if you look a the numbers and you look at really what's core and recurring and operating income in results, I don't think in the seven years the U.S. Bancs been together, I don't know of a quarter I've been more proud of.
Over the course of time that will tell itself in the story, but I want you to know how confident we are and how much we want to be known by you as transparent and clear and open. If there is anything you don't have, or you don't have a good answer for, call me, call Andy, call Bill, or call Judy, because we want to make sure you have all the answers you need. In my mind the better you understand us, the better you'll like us and that's important to me.
Judith Murphy
Thank you for listening to our review of the second quarter results. If you do have any questions, feel free to call me directly at 612-303-0783. Thank you.
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