美國合眾銀行 (USB) 2007 Q4 法說會逐字稿

Good afternoon, and welcome to the U.S.

Bancorp's fourth quarter 2007 earnings conference call.

Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer, and Andy Cecere, U.S.

Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question and answer session.

(OPERATOR INSTRUCTIONS) This call will be recorded and available for replay beginning today at approximately 3:00 PM eastern time through Tuesday, January 22nd at 12:00 AM midnight, eastern time.

I will now turn the conference call over to Ms.

Judy Murphy, Senior Vice President.

Please go ahead.

Thank you for joining us today.

This is Judy Murphy, Director of Investor Relations at U.S.

Bancorp.

Richard Davis, Andy Cecere, and Bill Parker, our Chief Credit Officer, are here with me to review U.S.

Bancorp's fourth quarter 2007 results and answer your questions.

If you have not received a copy of our earnings release and supplemental analyst schedules, they are available on our website at usbank.com.

I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty.

Factors that could materially change our forward-looking assumptions are detailed in our press release and in our Form 10K report on file with the SEC.

I will now turn the call over to Richard.

Thank you, Judy, and good afternoon to all of you joining us today.

I'd like to begin today's call with an overview of our fourth quarter results and a review of some of the highlights, and I'll then turn the call over to Andy who will provide you with additional comments about the earnings.

After we've completed our brief formal remarks we'll open the line to questions from our audience.

U.S.

Banc recorded net income of $942 million for the fourth quarter of 2007.

Earnings per diluted common share for the fourth quarter of $0.53 were $0.13 lower than the earnings per share in the same period of 2006, and $0.09 lower than the third quarter of 2007.

As we announced in December, the fourth quarter results included two items that in total reduced the earnings per common diluted share by $0.13.

The first was a pre-tax charge of $215 million or $0.09 per diluted common share, representing our proportionate share of certain litigation involving Visa in a number of Visa Banks.

The second item was a pre-tax market valuation loss of $107 million or $0.04 per common diluted share, related to the purchase of certain asset-backed commercial paper holdings from certain money-market funds managed by a subsidiary, FAF Advisors.

Excluding these two one-time items, our earnings per share for the fourth quarter of 2007 would have approximated $0.66 per diluted common share.

We achieved a return on average assets of 1.63% and a return on average common equity of 18.3% in the fourth quarter.

Excluding the Visa charge, and the market valuation loss, our return on average assets and return on average common equity would have been 2.01% and 22.6% respectively.

Our fourth quarter net interest margin improved from 3.44% in the third quarter to 3.51% in the fourth quarter, a seven basis point increase.

This improvement in our margin, in addition to good quality growth in average earning assets, resulted in an increase in net interest income on a linked-quarter basis as well as on a year-over-year basis.

As we have said in the past, a stable margin is a key component of our long-term revenue growth assumptions.

Our assumption going forward is that given the current rate environment, yield curve, and our balance sheet mix, the margin in 2008 should settle in the mid 3.40%'s range, comparable to that of 2007.

Andy will discuss our rationale for these expectations in greater detail in a moment.

Once again, our fee-based businesses exhibited excellent momentum.

Payments-related fees were very strong this quarter, recording year-over-year core growth in the high teens.

Trust and Investment management fees increased by almost 8% while treasury management fees, commercial product revenue, and mortgage banking revenue also improved over the prior year.

As we discussed at our September investor conference, treasury management and commercial product sales have been specifically targeted for improvement via several revenue growth initiatives.

This quarter's results demonstrate that these initiatives have begun to gain traction.

Although revenue growth in the fourth quarter is seasonally not as robust as in the second or third quarters for our Company, payments, trust, and investment management fees along with commercial revenue all posted solid core growth over the prior quarter.

Mortgage banking revenue was lower on a linked basis by quarter by $28 million, as an unfavorable change in the valuation of mortgage servicing rights and related economic hedging activity was partially offset by higher servicing revenue and production gains.

Our mortgage banking division continues to benefit from the recent market conditions with what we would call a flight to quality.

Our mortgage products and service are first rate and our customers and business partners know that we are committed to originating and servicing high quality credits.

The growth in total revenue, net interest income and fees , was 3.4% year-over-year; however revenue growth, excluding the $107 million money-market related asset valuation loss in the current quarter, and a previously reported $52 million gain from the sale of the 401K business posted in the fourth quarter of last year, would yield more than 80% year-over-year increase in total revenue.

The growth in total revenue on a linked quarter basis was approximately 1% annualized.

Excluding the money-market related asset valuation loss, total revenue grew by over 13% on an annualized basis, demonstrating the powerful impact that a stable margin coupled with our strong fee-based business can have on our overall revenue growth.

Noninterest expense in the current quarter was $322 million higher than the fourth quarter of last year, and $191 million higher than the previous quarter.

Although certain expense categories tend to be seasonally higher in the fourth quarter, the majority of the dollar variance from both time periods was due to the $215 million Visa litigation charge taken in fourth quarter.

A large portion of the remaining increase in expense year-over-year and on a linked quarter basis can be attributed to core growth and continued investment in both our fee-based businesses and our banking franchise.

Our efficiency ratio as reported for the fourth quarter was 54.7%, but declines to a more comparable 47.2% when adjusted for the fourth quarter Visa litigation charge and market valuation loss.

We are one of the most efficient financial institutions in the industry.

As a Company, we will continue to have a disciplined approach to expense control.

It is our efficiency after all that allows us to continue to invest and maintain our industry leading profitability metrics.

Turning to the balance sheet, total average loans grew by 5.4% year-over-year, lead by solid growth in average total retail loans of 7.5% and commercial loans of 6.4%.

As we indicated last quarter, commercial loan growth began to pick up during the latter half of the third quarter.

Our fourth quarter results reflect that activity as average commercial loans grew by almost $3 billion or 6.4% year-over-year and over 18% on an annualized linked quarter basis.

A significant portion of this growth came from the corporate banking and business equipment leasing groups and represented growth in both current and new relationships, again demonstrating that our growth initiatives are beginning to have an impact on our overall results.

Going forward, we expect that our company's growth in both commercial and commercial real estate loans will be slightly lower than the industry average, as we continue to concentrate on originating principally high quality credit and compete on price for the best customers.

We saw a favorable -- very favorable change in our deposit trends this quarter.

Average total deposits increased by 3.7% in the fourth quarter over the same quarter of last year and by more than 5% on an unannualized basis over the prior quarter.

This deposit growth is in part the result of our company's continued focus on and execution of our revenue initiatives.

Our credit quality metrics remain very manageable.

As predicted, net charge-offs and nonperforming assets rose moderately this quarter.

Net charge-offs were 59 basis points of average loans for the fourth quarter of 2007.

Above the 54 basis points in the third quarter of last year and higher than 47 basis points of average loans in the fourth quarter of 2006.

These ratios represented a $26 million increase in net charge-offs on a linked quarter basis and a $56 million increase year-over-year.

The increases over both the prior quarter and the fourth quarter of 2006 were expected.

On the commercial side, stress in the homebuilding and mortgage industry lead to an increase in net charge-offs albeit small, at just $8 million.

The most significant increase year-over-year on the consumer side was in the credit card loan net charge-offs as growth in outstandings and a return to normalized net charge off ratios lead to this increase.

The credit card net charge off ratio of 3.29% this quarter remains below our expected rate for this loan category, as we anticipate this ratio to climb over time to its pre-bankruptcy reform rate of slightly over 4%, which will be still very low by industry standards.

Residential real estate-related charge-offs including consumer first and second liens, grew modestly over the same period of last year and over the prior quarter.

We anticipate the growth in total net charge-offs to accelerate as we move into 2008, as stress in the commercial mortgage and homebuilding industries continue, and the upward trends and delinquencies and the consumer residential real estate-related categories migrate to charge-off status.

The increase in net charge-offs is expected to be manageable and within the expected through the cycle range.

As expected nonperforming assets also increased during the quarter to $690 million at December 31st, from $641 million at September 30th, a 7.6% increase.

Given the current economic environment we anticipate that our nonperforming assets will continue to move higher, but the increase will be very manageable.

I will now turn the call over to Andy who will make a few more comments about the

Thanks, Richard.

I would like to begin by summarizing the significant items that have impacted the comparison of our fourth quarter results to prior periods.

As Richard discussed the current quarter included two significant items.

First, the $107 million asset valuation loss, and secondly, the $215 million Visa litigation charge.

Earnings per diluted common share without these items would have been $0.66.

The third quarter of 2007 also included a charge of $115 million related to Visa litigation.

This charge represented the company's proportionate share of the litigation settlement between Visa and American Express.

Third-quarter earnings per diluted common share without this charge would have been $0.67.

Finally, the fourth quarter of 2006 benefited from three notable items including: a $52 million gain on the sale of the company's 401 record keeping business, a $22 million charge to pre-pay certain debt, and a reduction in tax liabilities related to the resolution of certain state and federal tax examination.

After consideration of these items, the fourth quarter 2006 earnings per diluted common share would have been approximately $0.61.

Hopefully this gives a little clearer view of our current core earnings moving into 2008.

Net interest income in the fourth quarter was higher on both the year-over-year and link quarter basis.

The $68 million increase in net interest income over the fourth quarter of 2006 was the result of a $10.6 billion increase in average earning assets, which was enough to more than offset the five basis point drop in the margin.

The $78 million increase in net interest income on a link quarter basis was the result of a seven basis point increase in the margin and a $5.4 billion increase in average earning assets.

The margin contraction year-over-year can be attributed slightly tighter credit spreads primarily due to competitive loan pricing and a decline in net refunds relative to a year ago.

An increase in loan fees and the relative improvement in wholesale funding rates partially offset these negative factors.

As Richard mentioned, we are comfortable with the expectation that our net interest margin will settle in the mid 3.40%s in 2008, which would be comparable to the full year margin in 2007.

The fourth quarter margin was slightly higher due to a number of positive events, including a lag in the repricing of a portion of our consumer products in conjunction with the last rate decrease, higher yield-related fees, our ability to garner favorable short-term funding rates during the current market turmoil, and an increase in net refunds due to the absence of share repurchases in the fourth quarter.

Going forward, our expectation for a stable net interest margin is based on steady to slightly improving credit spreads; continued growth in higher spread products, including credit card and other retail loans; the normalization of funding and liquidity in the overnight markets; and the resumption of our share repurchase program.

Our capital position remains strong.

In anticipation of the need to purchase certain securities from the rated money-market funds managed by FAF Advisors, the Company did not buy back shares of stock in the fourth quarter of 2007.

For the full year 2007, however, 58 million shares were repurchased.

These repurchases, combined with our quarterly dividend, resulted in 111% return of earnings to shareholders for the full year 2007, well above our 80% goal.

We remain well capitalized at quarter end with a tier one capital ratio of 8.3%, just slightly below our target ratio of 8.5% and a total capital ratio of 12.2%.

We anticipate that we will return to our target tier one capital ratio by March 31st, 2008.

Richard covered the highlights of our credit quality statistics for the quarter, but I wanted to update you -- I wanted to update our exposure to subprime lending.

Our exposure to subprime residential loans is minimal, and very little has changed from the end of the third quarter of 2007.

As of the end of this quarter, we had $4.2 billion of residential real estate loans and home equity and second mortgage loans outstanding to customers that could be considered subprime.

Those two portfolios represent 2.7% of total loans outstanding as of December 31st.

Although the percentage of subprime loans is very small, we have taken steps to address concerns related to the repricing of the adjustable rate mortgages and the impact that may have on our current customers.

This program was instituted in the spirit of the model introduced by the federal government, but we feel it contains additional flexibility.

The result of this program will be an increase in the total of restructured loans reported by the Company as we move into 2008.

My final comment relates to an accounting change that will impact the results in 2008.

Effective January 1st, 2008, the Company will adopt Financial Accounting Standard Number 157, Fair Value Measurements, and Number 159, Fair Value Option, as required by the Financial Accounting Standards Board.

The impact to our financial statements from the adoption of these Accounting Standards will be an expected reduction in earnings per common diluted share of approximately $0.02 at the time of adoption in the first quarter of 2008 and approximately $0.03 for the full year 2008.

I would now like to turn the call back to Richard for his closing remarks.

Thank you, Andy.

Last September, at our Investor Day meeting, I announced the formation of a new division in our Company focused on revenue growth.

We are calling this new division the Enterprise Revenue Office, the ERO, and appointed Matt McCullough, a name familiar to many of you to lead this effort.

As you might also remember I discussed the first group of activity the Enterprise Revenue Office will focus on, a set of 15 initiatives focused on building deeper relationships with our customers.

These 15 initiatives are expected to generate between $500 million to $750 million of incremental annual revenue beginning in 2009.

I'm very pleased to report we'll have six or seven of these initiatives up and running in pilot form in the first quarter, including three of the largest opportunities.

In addition, we are finalizing a number of activities that will allow us to become more proactive and disciplined in the pursuit of new sources of revenue, in particular as it relates to leveraging our broad payments capability.

I will continue to keep you updated on the progress we are making as these important activities begin to gain traction.

December marked my one-year anniversary as CEO of this Company.

Although the first year of my tenure proved to be anything but business as usual, for us, and others in the financial services industry.

I am very pleased with the strides we have made in this position of this Company for the challenges that lie ahead.

As you can see from the quarter's results, we have managed through this environment well.

Our management team is focused on the future and working on initiatives that will capitalize on current products, services and our geographic reach, while working with our new ERO to innovate and deliver new products and services for our current and our future customers.

As a Company, we will continue to utilize our core financial strength, including our profitability, efficiency, prudent credit culture, capital management and customer service, while selectively investing in growth of our businesses and people, both organically or via small strategic acquisitions to lead our long-term goals without taking risks that could jeopardize our future.

This Company is well positioned to produce a consistent, predictable and repeatable earnings stream going forward for the benefit of our customers, our communities, our employees and our shareholders.

That concludes our formal remarks.

Andy, Bill and I will now be happy to answer any questions from the audience.

Operator, we're ready.

Thank you.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster.

Your first question will come from the line of Ed Najarian with Merrill Lynch.

Good afternoon, Richard.

Hi, Ed.

Just two quick questions.

It sounded like from Andy's remarks that you would not be repurchasing stock in the first quarter, but would expect to resume repurchasing stock in the second quarter and beyond.

Is that the right read?

Hi, Ed.

We did not repurchase in the fourth quarter, this is Andy.

We did not repurchase in the fourth quarter in anticipation of the FAF transaction.

We will start to repurchase late in the first quarter.

Our first objective is to retain, get back to the 8.5% tier one ratio, but we do expect some, albeit at a low level of purchases in the first quarter.

Okay, thanks.

And back to normalized level in the future quarters.

Okay, thanks.

Sure.

And then second question, it looked like operating costs even after backing out the Visa litigation charges were stepped up pretty noticeably, I guess obviously related to a number of the revenue growth initiatives that you touched upon.

Is that sort of core expense level sort of a base level now from which we can think about sustaining or growing from, given the fact that you're moving forward with PowerBanking and a number of other revenue initiatives that you discussed, or would you expect to step down a little bit from the fourth quarter level?

Ed, the answer is I believe it represents the direction I'd like to go in having a higher expense base, but offset when the revenue starts to show.

So let's agree that we're starting to move that number up.

We still seek and will have positive leverage for the year of 2008, but in the beginning stages of an investment curve that we're in, I suspect that it will probably be a bit of the expenses ahead of some of the revenue.

And at this point I hesitate to cut back on that to the point that I'll either delay or lose the benefits that we're creating now in the momentum.

So from the near term, I think you're seeing a new run rate base, but as we deliver the revenue I'm expecting that will continue to keep the positive operating leverage and the industry leading efficiency ratios you've come to expect, and you could have my word that should we not find the revenue coming about, we have all kinds of opportunities to reduce the expense load to make sure we protect our ratios.

Okay, thank you.

That's very helpful and very good quarter, especially relative to what we're seeing from peers.

Thanks, Ed.

We're proud of it too.

Your next question will come from the line of Nancy Bush, I'm sorry, Butch, with NAB Research, LLC.

Hi, Nancy.

Also known as Nancy Bush.

AKA.

Yes.

Could you just speak to the deposit growth, I mean, is this coming in a particular geographic area or product or -- because it's rather startling to see so much deposit growth in such a short period of time.

Is there something here that has sort of kicked in and should we expect more going forward?

Right.

Andy, do you want to speak to that?

Nancy, two things.

I would say part of the deposit growth was unique to the fourth quarter.

We have some acceleration in broker dealer growth and activity that I would call more temporary in nature, but even peeling that back we are starting to see growth in our core consumer deposit products.

We are advancing a number of new products and a couple of pricing strategies still well within our constraints and within our range, but we are seeing some core growth in both consumer deposits on savings and checking side, so I think we are starting to see a turn to the curve that we've experienced the last couple of years.

And Nancy, you're right.

It is a meaningful change in the past and I think it's one that a lot of people hoped we would do some day.

It's not at the cost of the increment of our margin but we are taking advantage of some of the margin attributes that allow us to firm up and at the same time start being more competitive in some of these markets.

PowerBank to Ed's earlier question is one of those areas, but you will see us take different approaches in our community markets or in the markets that we have low market share which we're calling a program called self-banking, where we will be more aggressive in markets where the risk is so much lower.

So if we do our job well, you will see a slight increase in the cost of deposit managed against the overall margin remain flat and the growth of core relationships is something we've been long coveting for many years.

Great.

And secondly, if you could just speak to the profitability of mortgage banking right now.

There's been a great deal of hope that the remaining players would see better quality loans, better profitability, increased market share, if you could just speak to whether that is yet being seen.

Nancy, this for us, I'm happy to report didn't have to change any of our protocols, our products, our broker streams.

We were doing exactly the business a year ago that we're doing today.

We're seeing a highlight now though of the flight to quality that we called out in our notes.

It's a funny way to say it, but we do have customers and partners wanting to do business with us because we haven't changed our product set.

We haven't changed our return on the focus of customer service, and under the leadership of Danny [Argonia], our First Mortgage business, you know we're in the high teens as a national ranked mortgage provider and mortgage servicer.

That's a great place for us to be because it's a great business.

Our own customers get our own business, we do a lot of business for others, but it is for us a high quality business, and actually, the margins have improved because of the flight to quality.

That along with the hedging acumen that Andy has to bring to the table to make sure the business is managed in this difficult time has given us a very robust view of the future of mortgage banking.

That's one of our I think growth initiatives based on the size that it has in the Company.

Andy, do you want to add to that?

The only thing I'd add, Nancy, is in the fourth quarter given the dramatic change in interest rates day-to-day and the turbulence that occurred, our hedge results were a little less in the third quarter and that's some of the decline you're seeing on a link quarter basis, but the core underlying servicing and production revenue is very strong.

Great, thank you.

Thanks, Nancy.

Your next question will come from the line of Matthew O'Connor with UBS.

Good afternoon.

Hello.

Afternoon.

Richard, can you talk a little bit about how you can take advantage of the current downturn?

Obviously you've held up a lot better than others from an earnings point of view, your capital is intact, your stock's held up a better.

You mentioned opportunities in the commercial lending side but are you looking at other opportunities in this downturn?

I understand where the question's heading, but let me answer on two parts.

The first one and not exactly what you meant, but while a majority and I mean the majority of our peers I believe are focused on internal action, not the least of which would be capital preservation, dividend reviews, line of business reductions and perhaps contraction of employees, we're not working on any of those things.

And so issue number one is we have the ability to be focused on continuing to power through on the initiatives that this Company has long been focused on, which is to be as great an offensive stock as you've known us to be for years as a defensive stock.

And we would be doing that anyway but given that our peers might be focused under the things, that's a distinct advantage.

The follow-up to that is we have made that I think very clear to our 54,000 employees by involving them to be all the more advantageous in dealing with the very best customers and prospects we've may heretofore have not seen and take advantage of our window of opportunity and be very aggressive in the pride that they should feel about the Company that they keep.

So we're getting a lot of I'll call it the 12th man on the team kind of benefit and we're not shrinking away from that advantage.

In terms of the real technical and financial advantage, let's agree that to have a PE distinct advantage to your peers is something to understand and to manage.

In this case we just finished our Board meeting here this morning.

We're off site today in Atlanta where Novis is headquartered, and during the Board meeting we discussed issues about being very prudent with our advantages, keeping our, if you will, powder dry to make sure we understand what materializes in the next quarter in this great environment.

And let me say for anybody who wants to not be confused, we have no desires or needs to do any transactional event or transformational event to keep this Company moving forward as well as it can, and yet, we have advantages as you must understand them, evaluate them and make sure you don't leave them unfettered.

And we will continue to look at those advantages and make sure that we don't miss a chance where something may come along, but we are not seeking it, we are not looking for it, we like who we are, where we're headed.

I love the fact we're not under any disruption, but I'm not going to look a blind eye to opportunities if something comes along.

So it's not a goal, but we're not going to overlook an opportunity if something comes along, but it certainly would have to present itself and it hasn't yet.

And Richard just a follow-up on that last point.

I mean you might be in a position where you're in the driver's seat where there's a lot of potential sellers, just a few potential buyers.

Are you looking at it -- just prioritize in terms of what's most important from a financial point of view, strategic, new business lines, seems like you might have your pick to go to new places or new geographies.

Right.

I would say in order of things number one, number two and three, is financial.

This has just got to make sense for our Company in the near term and the long term, so you won't hear us consider deals and then wile away the issues of three years of dilution or marginally accretive or that's not the smart.

This Company is in a great position, in fact, arguably it's the sixth largest size, maybe the last point of large enough to be able to understand and manage without being too big to be complex.

So I'm going to be very prudent with the use of our capital and our position and not dilute what got us here.

And then if that financially made sense, and strategically would have to fit, that would be the second gateway, because we would only do things that make sense.

And as I know it today, Matt, we're still focused on small, end-market acquisitions that make sense in the deepening over the markets that we're in, small but meaningful and perhaps strategic payment opportunities anywhere on the globe that makes sense, and continue to look at that trust and wealth management business where there are businesses I think that will come to us in the next quarter or two from some companies downstream that say, I really think I don't want to be in this business anymore, I want someone else to do it for me and you guys have a track record.

So financial first, strategic second, and both are required before we could even go to any third or fourth considerations.

Okay, thank you very much.

Thanks, Matt.

Your next question will come from the line of Chris Mutascio with Stifel Nicolaus.

Hey.

Good afternoon, all.

How you doing?

I'm doing well.

I think first question, Andy could you itemize the things that caused a benefit to the fourth quarter margin again?

It went kind of fast and I couldn't write them down them down and then maybe provide how much each of those items benefited the margin?

Sure.

There are three principle reasons for the margin improvement.

Number one is that we did not purchase stock in the fourth quarter so our free funds were actually higher because of that lack of repurchase.

Number two is that we did benefit from the downward trend in rates, as you know we are liability sensitive, and as we projected in a downturn in rates we benefit and that helped us out in margin.

And then finally as you also probably know, the last month of the year and principally the last half of the last month, there was a lot of turbulence in the financial markets, which allowed us to actually benefit quite substantially in terms of our wholesale funding costs day-to-day.

There's a bit of a flight to quality and we had some days that were -- on an overnight basis we were borrowing at a low rate.

My expectation is all three of those things would begin to normalize, and as we talked about our expectation is for '08 to get back to that sort of mid 3.40% margin for the full year.

So in other words, you say those three items provided you seven basis points, 10 basis points of margin?

Again, I don't have each one itemized specifically, but the combination of all of those things I would say are sort of the seven basis points.

Okay.

So if the fed keeps cutting interest rates as aggressively as some may suggest wouldn't you still benefit from at least the second -- the trend in rates going down further?

You're correct.

We are still liability sensitive, but I will also say that given that where rates are today on some deposit products we are going to start to reach a floor on our downward pricing, so that the benefit, while still there, will begin to diminish as rates continue to go down.

Okay.

And if I could ask one follow-up question.

On the asset quality, it's clearing going to look better than most they are going report over the next couple days, but the one that you could look at is the 30 -- the 90-day past due was up 30% sequentially.

Is there any concern there that's a harbinger of things to come in terms of in flows and NPAs at some point?

Chris, this is Richard and I want Bill to answer that but yes that's a concern and yet so is the fact that 30 and 89 continue to be finding themselves back down to a more normalized level.

So if anyone in the next couple weeks tells any of you differently, we have a pretty good view of the next 90 days in banking.

We have a very blurry view after that.

It's just really -- you can't possibly predict much beyond your delinquencies and your charge-off routines.

Bankruptcies can come in faster from the sides than they used to be, and the valuation losses, dependent -- not dependent on how predictable you are on your loss by customers ability to repay.

The actual loss per in this case autos or homes or other things are much more difficult to predict than they used to be because the market has so many moving dynamics.

So we are concerned about that and we did plan as you know, we've telegraphed our net charge-offs and our nonperformers will grow over the course of the year.

We expect that if it changes the trajectory we will telegraph that to all of you.

At this point, it's definitely as we expected it to be and we're not immune, but we don't see any reasons to pull the trigger or call it for any kind of one-time event in order to account for any surprises that we didn't see at this point.

And that will be the CEO's approach, but let the Chief Credit Officer give you the real facts that might make more sense.

Yes, we did see some stickiness in the 90 days over the holiday season, that was probably a little more than we normally see.

But as Richard said, the good news was on our residential mortgage portfolios, including home equity, we were actually flat to down on our 30-89 day delinquencies, so that was a positive development for us.

Thanks for the candor.

Thanks, Chris.

Your next question will come from the line of Todd Hagerman with Credit Suisse.

Hi, Todd.

Good afternoon, everybody.

A couple questions.

Just to follow up, along those lines.

Just in terms of the comments that you made before just in terms of expectations for accelerating delinquencies and so fourth and the higher charge offs, but Richard, I think you mentioned that the expectation is that it will still remain within through the cycle type of a range.

Could you just kind of frame that out for us in terms of how you're thinking right now and whether or not the Board and senior management has kind of thought through the potential in terms of recession scenario and how that may impact those figures?

Yes, I'm going to have Bill answer the first question, but, Todd, let me go with the last one.

You might expect that we're fairly good stewards of our own numbers, and we have a recession scenario that we've built in our profit plan which is particularly watching for these signals, the early indicators, and then reacting if need be on the expense side of the equation to respond to that, so that we protect our original committment.

We're not seeing any events yet that would cause us to trigger our recession scenario neither at the Company level or at the individual line of business level, but you can rest assured we've done our homework and we know exactly what that looks like.

For U.S.

Banc, we're a fairly large consumer based Company, so should there be a recession or a technical slowdown either way, it affects us on the credit side and it also affects us in the customer demand side and it affects our payment businesses both on the acquired and issuing side.

So, yes, we and the Board have talked about that and we're good stewards of what's possible, but we're also operating in what we know today which is still fairly decent growth, albeit a bit slowing.

It's manageable for us and based on the mix of our businesses, there are some counterintuitive activity that goes on where some areas are actually strengthening at times and others are weakening.

So on the recessionary preparations we are prepared for that and have looked at our moving parts.

Regards to the rest of it in terms of the actual credit performance, let me have Bill add that.

Yes, you referred to the -- through the cycle comment and we've defined that before as between 60 and 80 basis points.

If you look at our balance sheet, we do have a fairly sizeable card portfolio relative to the size of our balance sheet.

And as we stated we do expect those losses to move up into the low 4% range, and as it does that, we will move up in that range of that through the cycle.

So, Todd, I think we are making clear to you guys we tell you what we know.

We said 60 to 80 over the cycle, and in our minds that would be the range in a more traditional time, post-bankruptcy reform and all of the other things.

These numbers could move on the high end or slightly above that range we just said, depending on how the performance of credit cards and the real estate businesses perform.

We're not seeing it go above that yet, but we're seeing it in that range and at the high end and we'll telegraph that to you guys as quickly as we see anything otherwise.

But we would not as I said be immune, and at this point, as you note, we did not add to provision, we don't feel we need to, but we're adequately provided for and we're going to watch the earnings of the other banks and see their addition to provisions might place us in a relative ranking.

On an absolute basis we feel very well provided and we want to make sure on a comparative basis we are as well, so we'll continue to visit that.

But at this point in time, I think you would agree if you've looked at the our numbers that the we're in a good position and a strong healthy balance sheet right now.

All right, I appreciate those comments, and if I could just add a follow-up.

Just again, along the lines of the mortgage side, the reference to the increase in the restructured loans this quarter, could you just provide a little bit more color around that specifically, you made reference to the subprime piece and being a driver of that increase.

Could you just talk a little bit more about what exactly kind of proportionally the composition there and any other whether it's accounting changes or I should say policy changes that may have been made within the residential mortgage portfolio that allows you to become a little bit more proactive in terms of managing these elevated delinquency levels?

What we looked at and these are subprime first mortgages, residential mortgages and what we looked at was a pool of customers in our subprime portfolio that have always made their payments as agreed, at a certain level, for two to three years.

And they were facing interest rate resets, which would cause a higher payment level.

And what the we did was chose to provide relief to them in the form of allowing them to maintain their current level of payment.

So it's still a performing mortgage, but accounting treatment would say that you have to report it as a restructured loan.

Todd, this is Richard.

I'm actually quite proud of that action because we've contemplated and built the rules before the President's recommendation and while it may not be five years as was recognized by the President's Commission, it's an extensively larger set of customers based on a different measure of need, and in our case, let it be said, U.S.

Banc doesn't want to own the house, we don't want to put people out of their houses and we want to do what's right.

Profit plans predicted we would not enjoy those increases for the next couple of years and it's to that extent that protects people and protects our assets that makes a lot of sense to us and our shareholders.

Okay.

And, again, just any policy changes to speak to in terms of with the mortgage portfolio specifically, in terms of how you're recognizing either the charge-off or foreclosure process?

No.

None.

Okay, terrific, thank you.

Yes.

Thanks, Todd.

(OPERATOR INSTRUCTIONS) Your next question will come from the line of Mike Mayo with Deutsche Bank.

Hey, Mike.

Hey.

Good afternoon.

Hi, Mike.

I know we talked before about competitive pressures and I thought you said it's easing up some on mortgage, but more generally, are you seeing the competitive conditions getting better, worse, or are they the same?

This is Richard.

I'll go first.

I'm seeing them to be the same.

Maybe a little different variation on things, but for us, pricing is not quite as aggressive as its been in part, because I think of just the inward focus, a lot of companies are looking at.

And when you're inwardly focused, you kind of try to shave off the edges on everything and this case it might be shaving down some of the pricing comparison.

So for us, we've always been a low-cost provider and a challenger in the market for price for the very top customers.

That is a little bit better than it's been in times past in part because I think we're leading with a certain level of certainty that we may not have had on a relative basis before.

On the positive pricing side, the actions, not the least of which that were taken yesterday, do as this does in some of the less rational deposit prices moving away from the competitive view, and that's not the to say we don't give our customers what they deserve.

But it is nice to have less pressure on some of these and realistic deposit gatherers with the FDIC insurance that has been provided to them, it's very hard to compete.

So I think there is current and will be slightly beneficial deposit pricing going forward.

Then absent that, everyone is out think clawing for the next customer and doing what they can to make sure that they offset some of these pressures with decent revenue growth.

So on that side it's just as competitive as it's ever been and I think in our case we just have a slight few advantages we're seeing.

And what about your willingness to extend credit?

Have you pulled back even just a tiny bit based on what you're seeing with credit losses for the industry?

I'll let Bill answer that, technically, but the answer is in certain things, yes.

But for the most part, no, because this is my moment to say to you all, we weren't doing most of this for the last few years and many folks criticize us for not growing our assets more robustly, and now that we haven't changed our formats we're still growing at about the same levels we were, but I think it appears to be a little more core than maybe it was known to be before.

So for us, overall no, we're not changing our approach or our policy but on the other hand, Bill, there are a couple of categories --

The really the only category that we are not originating out of anymore is -- which was never that significant is the subprime home equity.

We had less than $1 billion.

We still have less than $1 billion, and it's running off right now.

That's about it.

All right, thank you.

Thanks, Mike.

Your next question will come from the line of Brock Vandervliet with Galleon Group.

Hey, Brock.

Thanks very much.

Just wanted to confirm your over the cycle comment.

I'm assuming that's an average number, 60 to 80 basis points over a cycle.

Correct?

That's correct.

Okay.

So, at a peak period of losses, what would that imply, 100?

In our minds, 90 to 95 is on the high end of that range and the 55 to 60 is on the low end, so when we get to the core, that 60 to 80 is right in the center of that curve.

Okay, great.

And I'm relatively new to this story, if you could just review your home equity exposure?

Sure.

I can do that.

90% of our home equity portfolio is originated out of our branches.

That's all prime and it has a weighted average loan-to-value of 71%, and then there is the other piece -- the only other piece, which is just this less than $1 billion I referred to that's in the finance company.

Right.

And of the home equity paper what percent do you have the first mortgage in front of it?

I think about 20% to 25% where we have the first mortgage.

And welcome to the story, and if we had an hour I'd tell you the rest, but I will say that our finance Company is a wholly-owned start up from 1995 that we started from the old Star Bank in Cincinnati.

So it has always been a home-grown product that has been lead by a guy named Randy Griffith, who has lead us through all of these difficult times with no remorse and no regrets.

It's the kind of businesses we offered our customers and subprime for us has always been first and foremost customers who qualify at a different price point and in this case, they're stressed for sure, but there's never been a single point of failure for our Company, nor has it been a major earnings stream.

It's just been part of the composition of building customer relationships.

Also by the way as they graduate to prime, have been welcomed into the bank at the prime level, and have been part of our long-term growth, you just wouldn't see it over the years.

Okay, and --

And I'll just add-on the prime portfolio, the branch portfolio which is 90% of the business, the net loss rate on that in the fourth quarter was 21 basis points.

Okay.

And finally on the 90 day past due, is that mostly a seasonal impact that you'd expect to kind of settle back down here in Q1?

It will come, it should come back down and there is a seasonality to it, but as I said earlier, there was some stickiness that we did not see in previous holiday seasons.

Got it.

Well, thanks for taking all of the questions.

And, Brock, to follow-up on that for everyone's sake, as I said earlier, we do operate under the traditional old fashion banking knowledge that 90-day delinquencies are a predictor of future charge-offs, 30, 80, 90 delinquencies are a prediction of potential problems.

Bankruptcy is out of the site comes out as a surprise sometimes, but you get all of that information and all of a sudden it's your new bankruptcy.

And the valuation of both homes and automobiles is probably the one thing that's most volatile now because our predictability has been proven to be absolutely on point.

We have a really good idea of who is going to go delinquent or who's going to have a charge-off.

What we don't know as well as we used to, by no fault of our own is the amount of that loss until which time the valuations are clear and deals are settled in the market place or we get the results after the fact.

So I think it's important.

We're one of the first banks to report that as you look at this course of the credit, most banks are quite good at understanding risk of charge-off or risk of default and loss for commercial and consumers, but the ability to size the absolute loss is probably more difficult than its been.

So we're not hedging, we're not trying to act like we don't know, and we're also not sitting on something we know that's bad either, because we simply can't see much beyond 90 days, probably most certainly within 45 and after that we just watch the signals and adjust to it as we learn.

And for me, as the head of a Company that's got its basis on risk management and understanding customer relationships, it's not only what happens but it's how we treat our customers through this period, it's how we manage with them to try to help them get through this time that will forever build relationships that will go generations forward, if we're there to help them when the times are tough.

And that is our number one objective, not at the cost of the shareholder but at the benefit of the shareholder and that's the art of the science here.

Thank you.

Yes.

Operator?

And we have no further questions at this time.

Are there any closing remarks?

There are, thank you, Operator.

Thank you, Tina.

I just want to thank you all once again for following this Company, and showing an interest.

If you're an investor, thank you for that.

I've always closed my presentations, and I won't hesitate to close today with the commitment that this Company focuses on being among the very best banks in the country in every measure, but to be consistent, predictable and repeatable.

And I can't think of a time that that will mean more than it does in this very volatile time.

We aren't savants, we are not mindreaders.

We don't know exactly what's going to happen in the future, but we know our Company very well.

We know everything going on inside of it, and we're quite pleased to present to you these results for quarter four and for 2007, despite my chagrin that the shareholder did not gain a return last year from U.S.

Banc over the long course of time they have and it's our hope over the long course of the future they will again as well.

So we look forward to continue to communicate with you especially during the quarter as we progress through this challenging time, and if there's any news to tell you, we'll be the first to tell you.

Thanks, Operator.

Ladies and gentlemen, this does conclude today's teleconference.

You may all disconnect.