美國合眾銀行 (USB) 2008 Q3 法說會逐字稿

Welcome to US Bancorp's third quarter 2008 earnings conference call.

Following a review of the results by Richard Davis, Chairman , President, and Chief Executive Officer, and Andy Cecere, US Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question and answer session.

(OPERATOR INSTRUCTIONS).

This call will be recorded and available for replay beginning today at approximately 9:30 a.m.

Eastern Time through Tuesday, October 28 at 12 o'clock midnight Eastern Time.

I would now turn the conference call over to Judy Murphy, Director of Investor Relations for US

Thank you, Regina, and good morning to everyone who has joined us on the call today.

Richard Davis, Andy Cecere, and Bill Parker are here with me to review US Bancorp's third quarter 2008 results and to 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 risks and uncertainty.

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 over to Richard.

Good early morning, and thank you for joining us.

Andy and I would like to start the call today with a short review of our third quarter results.

After we've completed our brief formal remarks, we'll open up the line and welcome questions from the audience.

Our Company recorded net income of $576 million for the third quarter of 2008.

Reported earnings per diluted common share of $0.32 were $0.30 lower than the earnings per diluted common share in the same period of 2007, and $0.21 lower than the prior quarter.

Although the Company's core businesses continue to grow, the decline in reported earnings from a year ago and the prior quarter was the result of securities losses, a consequence of the current market conditions and an increase in credit costs.

In our view, the quarterly results reflected the underlying strength of our banking franchise and our business model, particularly our diversification and prudent approach to risk management; but the results also demonstrated the fact that we are not immune to the challenges of the current environment.

Significant items impacting the Company's third quarter earnings included $450 million of securities and market valuation losses, and a $250 million incremental provision expense.

These items combined reduced earnings per diluted common share by approximately $0.28.

Understandably, our performance metrics were impacted as return on average assets in the current quarter fell to 0.94% from 1.95% in the third quarter 2007, and return on average common equity dropped to 10.8% from 21.7% in the third quarter of last year.

Without the securities and market valuation losses and the reserve build, return on average assets and return on average common equity would have been approximately 1.74% and 20.3%, respectively.

Let's review some of the highlights.

Total average loans grew by 12.9% year-over-year, lead by solid growth in all major categories.

Note that a small portion of the increase was due to a balance sheet reclassification and the purchase of student loans, in addition to the acquisition of Mellon 1st Business Bank.

Extracting these items, average loan growth year-over-year would still have been a strong 10.2%.

On a linked quarter basis, total average loans increased by $3.5 billion, or 2.1% on an unannualized basis.

Excluding the acquisition of Mellon 1st Business Bank, average loans grew 1.7 % unannualized quarter-over-quarter.

Average total deposits increased by 12.1% over the same quarter last year.

Although the linked quarter average total deposits were lower by 1.7%, total deposits at September 30 were $4.4 billion or 3.2% higher than at June 30, as growth accelerated during the last weeks of the quarter, particularly in the consumer bank.

Similar to our growth in average loans, Mellon 1st Business Bank had an impact.

Excluding this acquisition, average deposits were higher by 10.4% year-over-year and lower by 2.6% on a linked quarter basis.

As the strong growth in average loans and average deposits demonstrates, we continue to find our Company is benefiting from the uncertainty in the financial markets.

Customers seek stability, as well as a financial services provider that is willing to provide the products and services they need.

Our bank has been and is a beneficiary of the flight to quality aspect of this challenging economic environment.

We have a strong capital structure, and are in the position to provide our customers with high quality banking products and services.

We can and we will continue to compete for the best customers nationwide.

Our net interest income in the third quarter increased by 16.7% year-over-year and 3.1% unannualized linked quarter.

This increase was the result of an improvement in the net interest margin, which came in at 3.65% -- a four basis point higher than the previous quarter, and 21 basis points higher than the same quarter of last year, in addition to the quarter's strong growth in average earning assets.

The majority of our fee-based businesses recorded excellent growth year-over-year.

The most notable increases included, Commercial products revenue, which grew by 23.4%; treasury management fees, which increased by 8.5%; and payments-related fees, which rose by 8.1%.

On a linked quarter basis, however, growth in the fee-based categories was somewhat muted, reflecting the changing market conditions and seasonality.

Commercial products revenue was one exception, with a growth of 12.8% over the prior quarter, demonstrating that the wholesale group's revenue initiatives continue to gain momentum.

Payments related fees were essentially flat quarter-over-quarter, as both the decline in same-store sales volume and a change in mix from higher to lower spread customer sectors limited the growth in fees between the second and third quarters.

Seasonality and market conditions contributed to the decline in Trust and Investment management fees and treasury management revenue, while mortgage banking revenue was impacted by our lower production, as higher mortgage rates slowed application volume.

Finally, within the non-interest income -- the "Other Income" line -- posted the largest decline both year-over-year and linked quarter.

The variances in this category were partially due to the market valuation losses; but the majority of the decline was due to the end of term losses and impairment on auto lease residuals.

Total non-interest expense in the quarter was $47 million higher than the third quarter of last year, but $12 million lower than the previous quarter.

A large portion of the increase of the expense was year-over-year and can be attributed to continued investment in both our fee-based businesses and banking franchise.

Our efficiency ratio as reported for the third quarter of 2008 was 48.1%, and 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.

Moving on to credit.

As expected, credit costs trended higher again this quarter.

Net charge-offs of $498 million were 25.8% higher than the second quarter of 2008 and in line with projections we made in early September.

The increase in net charge-offs reflected continued stress in the residential home and mortgage related industries, declining home prices, and the impact of the worsening economy on our commercial and retail customers.

The most apparent stress was seen in California residential homebuilding, which was the primary driver of the increase in net charge-offs in the commercial construction and development category.

The net charge off ratio on the first residential real estate loans increased this quarter to 1.21% of average loans outstanding, while the net charge off ratio on home equity and second mortgages fell slightly to 1.07%.

The majority of the increase in net charge-offs on first mortgages can be attributed to loans originated through our Consumer Finance division, as our branch-originated portfolios continue to perform very well.

Within the retail loan portfolio, the largest increase was in the "Other" retail loan category, about half of which is related to auto loans, while credit card loan net charge-offs accounted for most of the remaining linked quarter increase in consumer net charge-offs.

The net charge off rate on credit cards rose just slightly to 4.85% in the quarter, well below the industry average and indicative of the quality of this prime based portfolio.

Also, as expected, non-performing assets climbed to a higher level this quarter.

At September 30th, the total non-performing assets were $1.492 billion, or 31.5% higher than at June 30th -- again, within the range projected in early December.

The majority of the increase was related to residential construction, residential mortgages and related industries; however, the economic slowdown and the rising commodity prices also had an impact on some of our commercial and retail customers.

The ratio of non-performing assets to loans plus other real estate loans was 88 basis points at September 30th, well below the ratios posted by our peer banks to date.

Restructured loans that continue to accrue interest rose by 14.7% this quarter, as the Company continued to work with customers who are current or will become current on their payments to renegotiate loan terms, enabling them to keep their homes and retain the value of the relationship for our shareholders.

As a result of the upward trends in both net charge-offs and non-performing assets, in addition to the ongoing concerns about the economy, the Company increased its allowance for loan losses in the third quarter by recording an incremental provision for credit losses of $250 million.

With this addition to the allowance for credit losses, the Company's reserves were adequate at September 30th, with the ratio of allowance to period end loans at 1.71% compared with 1.60% at June 30th, and the ratio of allowance to non-performing loans of 222%.

We expect both net charge-offs and non-performing loans to trend higher in the fourth quarter, although we believe the growth rate will moderate slightly from what we've experienced between the second and third quarters of this year.

Going forward, we will also continue to assess the adequacy of our reserve for loan losses and provider for credit losses to reflect portfolio and economic conditions.

We entered this credit cycle with a strong balance sheet, and we will continue to protect that position going forward.

Finally, and importantly, our capital position remains strong.

Our Tier 1 and total capital ratios were 8.5% and 12.3%, respectively, at September 30th, both at or above target levels.

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

Thanks, Richard.

I would like to begin with a quick summary of the significant items that have impacted the comparison of our third quarter results to prior periods.

At our investor conference in September, we disclosed a number of significant items that were expected to impact our Company's third quarter results, and the impact was as predicted.

Included in our September presentation were the following, First, we expected an impairment charge on our SIV exposure of 150 to $250 million.

The actual impairment was $215 million.

Second, we expected an impairment charge in our exposure to GSE preferred perpetual stock of $97 million.

The actual impairment was $97 million.

And third, we expected an additional reserve build similar to those made in prior quarters of 2008.

The actual reserve build was $250 million, which resulted in a total provision to net charge-off ratio of 150%, essentially the same percentage as the prior two quarters' reserve build.

These items, totaling $562, million were consistent with the numbers we disclosed in September, and reduced earnings per diluted common share by approximately $0.22.

Subsequent to that presentation, market conditions and specific events lead to several additional valuation losses in the third quarter.

They included, First, $42 million in securities losses representing impairment on non-agency, mortgage backed securities held in the available for sale portfolio; second, security losses on the preferred stock of Washington Mutual, $25 million, Lehman Brothers, $20 million, and other smaller failed institutions, $12 million; and finally, recorded market valuation losses on other income -- on the "Other Income" line -- that were triggered by the Lehman Brothers' bankruptcy filing and other market-related events.

These two items reduced other income by $39 million.

These post-conference events lead to charges of $138 million, and together, reduced earnings per diluted common share by approximately $0.06.

In summary, all of the significant items detailed here reduced earnings per common diluted share by approximately $0.28 in the third quarter of 2008.

For comparison purposes, during the second quarter of 2008, the Company recorded $63 million of securities losses, primarily as a result of impairment charges on the structured investment securities.

In addition, second quarter results included incremental provision expense of $200 million.

Together, these significant items reduced second quarter earnings per diluted common shares by approximately $0.11.

Finally, as you may recall, the third quarter of 2007 included one significant item, which was $115 million charge related to the Visa litigation settlement.

Now just a few comments about our operating earnings.

Net interest income in the third quarter was higher on a year-over-year and linked quarter basis, due to both strong earning asset growth and an expanding net interest margin.

The improvement in margin on both the year-over-year and linked quarter basis was the result of growth in higher spread assets and the benefit of being liability-sensitive in a declining rate environment.

We were also able to maintain very favorable short-term funding rates, as market volatility continued throughout the quarter.

Going forward, assuming the current rate environment and yield curve, we expect to maintain a fairly stable net interest margin.

This assumption is based on expectations of steady to slightly improving credit spreads, continued growth in higher spread products and a normalization of funding and liquidity in the overnight markets.

As Richard mentioned, the growth in non-interest income was affected in the third quarter by losses on auto lease residuals.

Specifically, $85 million of the decrease in other income year-over-year and $47 million of the decreased linked quarter was related to auto lease residuals.

We continue to carefully manage the residual risk on this portfolio.

Given the current market for used cars, we expect adverse market pressure on auto lease residuals to continue; but they will be manageable for our Company.

In fact, given the origination dates of the remaining leases, 2008 is expected to be the peak year for residual losses, as the number of cars coming off of lease declines in 2009 and beyond.

I will now turn the call back to Richard.

Thanks, Andy.

In conclusion, despite the ongoing challenges and condition of the financial markets, our fundamental business performance remains strong.

We're not immune to the current environment; but the advantageous mix of our business line, the quality of our balance sheet and strength of our capital have and will allow us to navigate through this economic cycle and emerge with our business model intact and a Company well-positioned for the future.

The most important message we want to deliver today is that this management team and all of our 54,000 exceptional employees remain engaged and focused -- focused on capitalizing on this window of opportunity to grow our businesses by deepening our customer relationships and acquiring new customers; focused on serving our communities through business partnerships and employee volunteerism; and focused on creating value for our shareholders by maintaining our prudent approach to risk, while sustaining and enhancing US Bancorp's position of strength.

That concludes our formal remarks.

Andy, Bill Parker and I would now be happy to answer questions from the audience.

Regina?

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Matt O'Connor with UBS.

Hi, Richard.

Good morning.

In the past, you said you're not too interested buying large franchises that are under pressure; and I'm just wondering how the programs being implemented by the government would impact that, specifically the ability to offload some of the assets and obviously the potential for the capital infusion.

How does that change your thinking with potentially some consolidation out there?

Thanks, Matt.

Yes, thank you for that.

It makes it a little easier to do those things.

But first and foremost, whether the capital is less expensive or the opportunity that TARP is present, we'll continue to look at deals on an accretive basis where they make sense and where they would fit into this Company's long term structure.

So it would definitely make it more attractive, and so some of our positioning and our targets look more attractive and our valuation is easier now.

But to the extent that it has to hit all of the normal Bellwether marks and the expectations we have for the near term and long term, it still has to be a good deal.

So it doesn't really change our philosophy, but it does make it easier to find our way to partnerships that might be more accretive sooner.

Okay, and just separately, has the pick up in deposit growth continued into October?

And in which markets in particular are you seeing largest (inaudible) growth?

Yes, it's actually accelerated into October.

I don't think there's been a day in October we haven't seen a net inflow of an exceptional level.

It happens in most of the places where you've seen some of the more headline stressed companies; so it's intuitive where we have branches in and around locations where the banks that have been partnered with others we have found our way to higher deposit growth.

So primarily on the West Coast and in Ohio and in some of the core markets that some of the smaller community banks might have also some stress, but it's intuitive.

It's exactly where you think it would be; and it's actually -- October is reflective of more consumer and small business, lots of numbers of accounts moving over.

Up and through September and even last quarter is primarily large municipal and large corporate accounts moving money in, so we're now we're seeing kind of the whole effect of the flight to quality.

Okay.

All right.

Thanks a lot.

Thanks, Matt.

Your next question comes from the line of Mike Mayo with Deutsche Bank.

Hi, Mike.

Hey, Mike.

Hey, how you doing?

Good.

So just following up on the deal question, why wouldn't you go out and buy another bank that's less efficient, especially if you had a government guarantee?

And also, is there certain part of the country that you're interested, either near or long term?

Did you say why wouldn't we?

Yes, why wouldn't you?

Oh.

I mean, it makes sense what you've done, and now the price has come down, and maybe you can get government assistance.

And I just -- I don't -- you know, everyone asks, "What about US Bancorp?" Everyone else has shown some kind of move, whether it's J.P.

Morgan or Banc of America or Wells Fargo.

I hear you.

Now, first of all, you know me, and I'm not motivated by what everybody else is doing, so it only works if it works for us.

And the prices actually don't come down.

I mean, the fact of the matter is that if there was more money in the market, I suspect that the target prices might actually go up.

So for us, it's just going to have to be a deal -- like I said to Matt -- that fits all of our criteria, which is immediate accretion and long term value.

And I do think that there is more of that out there, so I am telegraphing that we're more active and more interested than we might have been before.

But it doesn't change any of the parameters and it doesn't change our appetite for taking risk.

It's got to be the right deal and it's got to make sense.

So sure, we're looking at it more.

And as far as your use of the new Treasury program, whether it's for capital or disposing some problem assets, any interest?

Well, you know, you and I could get together and we would both come up with the same conclusion.

It's too new to rate.

We have to decide if we participate in the way -- the topics that you and Matt were talking about, then yes, we'll achieve a use of that capital -- which is quite attractive on those terms -- and we'll evaluate what that means for acquisitions.

In terms of selling into the TARP or participating in that regard, we don't have any particular reason to need that; so for us, that would just be a celebration of getting the markets moving again and opening up the flow of the commercial paper markets and other good things.

So we celebrate it, but we probably wouldn't use that part of it.

And I guess in the last point, in terms of your outlook for problem assets, you said the growth rate should moderate slightly --

Yes.

-- but that's off a higher base, so should we think about a similar dollar increase linked quarter, or --?

And if you can give us some kind of the -- what you -- how you view the ins and outs?

Yes, good point.

You know, October 21 is a little early in the quarter, unlike when we get into the last month.

We've been actually dead-on accurate when we make these predictions.

But I'll say that both -- on a percentage basis, we expect it to come down; and I would say on a dollar basis, perhaps down but not quite as much because of what you just said today.

I'd also say that we're seeing a better firming up of net charge-offs as our portfolio ages in this economic environment, and a little less certainty on the non-performing loans, because you could have one or two or three large deals come out of nowhere virtually, and you can be a bit surprised.

So accounting for that surprise -- and in both cases, they will both come up year -- quarter-over-quarter, they will come up at lower levels, and I think that will be both in percentages and dollars, but not a lot.

It's still going to -- we're still in the middle of this stress, and I think for us, we're coming into this -- as I said last time -- we're coming in later and lower, and I expect we'll come out of it faster and more assuredly.

Our non-performing assets to loans at .88 basis points is probably the point on this whole day that I'm most proud of.

To be under 1% on non-performing assets, that just shows you how late we were to this party and how low we're going to be into this cycle I believe, because that's probably the best measure of the core operating prudence of making loans a couple of years ago.

And then last follow-up.

To what degree is this rolling recession by asset class?

So there's no question you've done better, but to what degree are we just going to see the problems later in areas less connected to residential real estate?

Yes, I'll tell you.

I think I have a sense that the housing related issues were the first phase and that's what went from pure mortgage to home equity and into housing developers and maybe some of the commercial real estate.

So I'm going to put that kind of in one category.

And then the economic recession that I believe we're in is just the normal course of moving into the more consumer and small business portfolios; and so I see it rolling but I don't see it -- the source wasn't the same thing.

It wasn't just all housing that created the consumer slowdown.

It's kind of the two things together.

And in terms of rolling, I don't think -- rolling suggests that you eventually get out of one of the problems and move to the next.

I think everything is under some level of stress, but it can either be housing related and at the later innings, or it can be in the early innings of the economic slowdown which is affecting the core portfolios.

But I wouldn't be one of the CEOs to tell you that I see housing infecting everything or where I see anything of an unexpected outcome that we wouldn't have all predicted as we have learn more each month on how the consumers are behaving.

All right.

Thank you.

Yes.

Thanks, Mike.

Your next question comes from the line of Ed Najarian with Merrill Lynch.

Hi, Ed.

Good morning Richard, how are you?

Good.

I think Mike asked the bulk of my questions, but I just had one more.

Could you provide some context on how the current environment is, or how you expect it to impact some of your fee income items looking forward -- some of the ones that might be more market or economically sensitive?

You mentioned Trust and Investment management fees, things like merchant processing fees -- things that look like they're getting a bit negatively impacted, either by the market or the current economic environment.

Yes, those are good questions, and I was hoping we could get into that.

Andy, why don't you walk through primarily payments and trust?

Right.

I'd say three areas, Ed.

The first is the Trust and Investment Management, as you already mentioned.

The way we get paid on that is on market -- on level of assets.

As the market goes down, we do not get paid as much, so there is a sensitivity there and you saw that.

That was flattish.

It was down second quarter versus third quarter also because of cyclicality related to tax fees.

The second area would be our merchant processing line.

What we saw in this third quarter were same-store sales down about 3% versus the normalized level of up 2 or 3%.

So while we grew, we grew at a lower level and that may continue in the future.

And the third area is one we talked about, which is our end of term lease losses.

We do expect that the third quarter was the peak for, that but we will see continued pressure before it turns round in the fourth quarter and into 2009.

Okay, thanks.

You bet.

Your next question comes from the line of Vivek Juneja with J.P.

Morgan.

Hi, Vivek.

Hi.

A couple of questions.

Construction NPL's jumped up quite a bit.

Can you give any color on where you are seeing that?

Yes, Bill, why don't you do that?

Yes.

Again, that's primarily our California home building portfolio.

That's where we saw pretty poor results --

And what's the size of that?

That's 1.1 billion in residential construction in California, and that's where we saw a bulk of our losses in that same category this quarter.

We think that this was an unusual quarter, and we did a lot of remargining on a lot of the assets.

We think that should taper off in the future quarters.

Okay, so your -- net charge-offs on that are still to come, though?

Well, we took a loss this quarter and there will be more, but we think we're ahead of it now.

Okay.

And then Bill, while I have you, the consumer finance mortgages, the net charge-offs on those are moving up and there's a faster increase in both 30 to 89, as well as 90 day past dues.

Can you comment on that?

Well, are you talking first mortgages?

Yes -- which is about a $6.9 billion portfolio.

Yes.

There's clearly -- you know, those were in general higher loan to value mortgages.

That's why they were in the finance Company.

And yes, we do see continual -- continued increase in both delinquencies and foreclosures in those portfolios.

And Andy, just to -- since you commented on other income more in terms of change linked quarter and year on year, what was the dollar amount of leased residual losses so we can -- ?

$84 million.

Excellent.

And Richard, from your commentary, it seems like -- so you are going to participate in TARP?

No.

Didn't say that.

I'm evaluating it, that's for sure.

We don't need the second piece of it if you consider two pieces, one as having the capital and the other one as using the vehicles to dispose of assets.

I don't expect us to use the latter.

The former we're evaluating, both the landscape of opportunity and whether or not -- the pluses and minuses of accepting the money is right for our shareholders.

Okay.

And when do you think you'd get to a decision on that?

November 14th.

[LAUGHTER].

So that's the deadline.

So we'll use all that.

Okay the 30 day deadline is basically it?

Yes.

Okay.

Yes.

Thanks, Vivek.

Thanks, Vivek.

Thanks.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Nancy Bush with NAB Research, LLC.

Good morning, guys.

Good morning, Nancy.

You had mentioned in your commentary the impact of economic stress on some other commercial sectors, and I'm assuming that you mean other outside of residential construction, et cetera.

Could you just tell how things are kind of rolling through the other commercial loans?

Yes.

Bill?

Okay, yes, hi, Nancy.

Hi.

The rolling through is just intuitively what you think.

I mean, in our middle market book, we have lumber yards, forest products, home building suppliers -- all of those have been weakened by the downturn in new home construction.

There's a little bit in some of the newer retail spaces that were put out where the rooftops -- new rooftops were going up had seen a little bit of stress as well; but again, we do all of that with our existing relationship client base so we always have significant support behind those.

But those are some of the areas where we've seen sort of spillover outside of the direct residential mortgage.

Is what you're seeing right now going on in the economy, you know, wit -- looks like a deepening recession, has that kind of changed your future lending plans at all, particularly as related to retail?

Is that a sector that you're overly concerned about at this point?

Yes, you know, the piece that changed was really the decline in home values, and we reacted to that several quarters ago.

So the mere fact that there is an economic slowdown hasn't really materially changed how we do our underwriting.

Yes, Nancy, this is Richard.

We're actually very bullish on that topic.

We haven't not lent to anybody that's qualified in the last six quarters.

I will agree that our qualifications have been adjusted as the world's gotten tougher as we've learned from some of the areas that were higher risk.

But if I had to put it in the scheme of things, we probably tightened our underwriting by 10%.

But we are making loans to everybody who qualifies; and I've got to say, even on a large syndicated basis, I haven't come across customers that have been unable to find enough large banks to take care of their needs.

So while I know the bulk of minority is out there with the stress in the marketplace and people can't find loans, I think it might be a bit over rated to the extent that there's a lot of money and a lot of banks like ours that make loans to small businesses and to consumers and to middle market companies that they are performing well and they were prepared for this downturn, and they've managed their businesses or their personal circumstances quite well.

So we're actually quite steady state -- and I know that sounds a little (inaudible), but it's really quite true.

Okay.

And also, on the credit card charge-offs, you're substantially below the industry average right now, probably by about 100 bips.

Right.

Can you continue to maintain that differential, do you think?

Yes, definitely.

I mean, it's really a classically prime portfolio.

You know we have a lot of co-brand in there, where those customers are like the old American Express kind of customers.

They don't resolve and they're high quality.

So I would expect that spread to -- I'd even put a guess out there that that spread will increase because we'll see some continued stress -- we're at 485, we'll probably move into the 5's next year -- but I've heard others say they get into 6's and 7's, and we don't see any trajectory for that at this stage.

Great.

Thank you.

Yes, thanks, Nancy.

Your next question comes from the line of Eric Wasserstrom with [Galliant].

Hi, Eric.

Hi, how are you?

Good

Just to follow-up on Nancy's first line of questioning, it seems like most of your commercial losses are in areas related to the home building industry; but are you seeing any weakness in C&I performance just based on broader economic metrics?

Again, I mean, most of the weakness -- or where it's really showing up -- is anything that's feeding into or touching home building or home building construction or people remodeling homes.

All those types of suppliers have weakened significantly over the last 12 months.

The rest of the economy -- or the rest of the C&I portfolio is just your basic middle market book, and maybe a little bit of additional stress but nothing material.

Yes, Eric, it's nothing remarkable there; and if you remember, these are probably customers that were originated anywhere from two to four years ago, and we were originating at least half, if not less than half, of the run rate of our peer group.

And at the time, we weren't -- we're not trying to say we were smarter; we just simply didn't see a yield curve and we didn't think we were going to pay for the risk, so we simply didn't do those kind of loans for customers that we didn't have a high repayment likelihood.

So it's not surprising that we should have a significantly lower effect in the C&I portfolio.

Now, if the recession continues for a very long and painful duration, then they will be affected just like consumer.

But for now, they are just moving along as we expected them to.

Great.

And can you just tell me, what is your baseline economic assumptions currently?

We still -- this is Andy speaking.

We still continue to expect a decline in home prices, probably in the neighborhood of 5 to 10% from today's levels, and limited growth into 2009 overall.

And we projected -- or we plan around a yield curve that's essentially the same and no significant change to rates.

And how about an unemployment expectation?

Moderately up from today's levels.

Thanks very much.

You bet.

Thanks, Eric.

Your next question comes from Chris Mutacio with Stifel Nicolaus.

Hey, Chris.

Good morning.

Good morning.

Most of my questions have been answered -- and Andy, if you mentioned this in your prepared remarks, I apologize -- but can you kind of give me a view on your tax rate going forward on an effective basis?

Yes, our tax rate this quarter was lower because of some of the one-time items, Chris.

Right.

And I would expect on a normalized go forward basis we would be right around the 30%, 30.5%.

All right, thank you.

You bet.

There are no further questions at this time.

I'll now turn the call over to Richard Davis for any closing remarks.

Thank you, Regina.

Thanks, everybody, for joining us this early morning.

We knew that there was a lot of other calls, so hopefully we accelerated our conversation.

We're available to you for the rest of the day.

Judy Murphy is especially standing by to answer any questions you have, but I hope you appreciate this.

We are well in control of this Company's destiny.

We're very careful and watchful over this environment, but we also have in the mind the shareholder focus that we've always placed first and foremost, and you can have our confidence that that's what we work around every day.

So thanks very much.

Thank you.

Thank you.

Thank you.

Thank you for your participation in US Bancorp's third quarter 2000 earnings conference call.

You may now disconnect.