美國合眾銀行 (USB) 2009 Q1 法說會逐字稿

Welcome to US Bancorp's first quarter 2009 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 11:00 am Eastern time through Tuesday, April 28th, at 12 midnight Eastern time.

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

Thank you, Rachel, and good morning to everyone on the call today.

Richard Davis, Andy Cecere, and Bill Parker are here with me to review US Bancorp's first quarter 2009 results and to answer your questions.

If you have not received a copy of our earnings release and supplemental analyst's 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 uncertainties.

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

I will now turn the call over to Richard.

Thank you, Judy, and good morning, everyone.

Thank you for joining us.

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

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

US Bancorp reported net income of $529 million for the first quarter of 2009.

Diluted earnings per common share were $0.24.

I am very proud of our first quarter results as they reflect the Company's ability to produce strong core operating earnings in a very stressed economic environment.

Equally significant is that we achieved record total net revenue this quarter, and it was driven by core growth in both net interest income and fee revenue.

Although core operating earnings were strong, significantly higher credit costs, including the cost of building the reserve for expected credit losses and to reflect existing economic conditions, resulted in earnings that were lower than the first quarter of 2008.

The current quarter's earnings compared favorably, however, to the prior quarter's earnings, due to a combination of higher fee income and lower expense.

Significant items impacting the Company's first quarter earnings included $198 million of net security losses, a $92 million gain on a corporate real estate transaction, and $530 million of provision expense in excess of net charge-offs.

In total, significant items reduced diluted earnings per common share in the first quarter by approximately $0.28.

Our performance metrics were impacted by these significant items of with return on average assets in the current quarter of 0.81% and return on average common average equity of 9.0%.

Excluding the significant revenue items and incremental provision expense, return on average assets and return on average common equity would have been approximately 1.56%, and 19.7% respectively.

As I stated, our Company continued to do well this quarter on an operating basis, and I would like to review a few of those highlights with you now.

We recorded strong growth in total average loans year-over-year.

Total average loans outstanding increased by $30.5 billion or 19.6% with solid growth in all major categories.

Excluding the impact of recent acquisitions, total average loans on a core basis grew by over 11% year-over-year.

On a linked quarter basis, total average loans increased by $8.5 billion or 4.8%, and excluding acquisitions, by almost $2 billion or 4.4% on an annualized basis.

This linked quarter annualized growth was somewhat muted by a decline in overdraft balances outstanding and seasonally lowered non-interest bearing corporate card balances.

Excluding these these two non-interest bearing loan categories, total average loans on a core basis increased by 6.4% annualized linked quarter.

This growth in average loans outstanding illustrates that our company is continuing to provide credit to our customers, but average loan outstandings are just part of the story as not all new loan originations and commitments to lend are fully reflected in these numbers.

In fact, during the first quarter of 2009, US Bank originated almost $14 billion of residential mortgages.

We originated over $4 billion of consumer loans, including installment loans, student loans, lines of credit and home equity lines and loans.

We originated new prime-based credit card accounts with lines totaling $2.4 billion, and we issued over $8 billion of new commitment and renewed over $14 billion of commitments to small businesses, commercial, and commercial real estate customers.

These statistics clearly demonstrate that US Bank continues to be responsive to and supportive of the borrowing needs of both our new and current creditworthy customers and the government's efforts to maintain the flow of credit in these stressful economic times.

Another highlight of the first quarter results was our outstanding growth in average deposits.

Total average deposits increased by $29.7 billion, or 22.7% over the same quarter of last year.

And over $16 million or 11.1% unannualized on a linked quarter basis.

Without acquisitions, this year-over-year growth rate was 12.3%, while linked quarter growth was 6.8% unannualized.

This tremendous growth in average deposits, as well as loans outstanding, is clear evidence that our Company is benefiting from the uncertainty in the financial markets and the flight to quality by consumers and businesses that are looking for a safe, stable, and sound financial institution.

In fact, we are currently the highest rated financial institution in the country with a AA rating from S&P, and a AA3 rating from Moody's.

These ratings have given us a significant advantage as our customers make the decision as to where they will place their business and where they will place their trust.

As I previously mentioned, the Company reported record total revenue in the first quarter.

A major contributor to this success was mortgage banking, which also produced record-setting revenue with increases year-over-year and linked quarter of $128 million and $210 million, respectively.

The growth in mortgage banking revenue reflected the higher origination fee, servicing revenue, and a favorable change in the fair value of mortgage servicing rights net of economic hedging activity, which was essentially neutral for the quarter.

Total mortgage production of $13.4 billion was another quarterly record and was significantly higher than both the same quarter of 2008 and the prior quarter.

The majority of this production is packaged and sold into the secondary market, and we expect to continue to accommodate the increased demand for mortgage products from both new and existing customers.

Finally, I would like to draw your attention to non-interest expense, which benefited this quarter from the implementation of the Company's cost containment plan in late January.

Year-over-year, excluding the impact of acquisitions, total non-interest expense was essentially flat while the $67 million decline in expenses on a linked quarter basis was the result of seasonally lower spending and the Company's cost-saving efforts.

Both of which were more than offset by the added expenses related to the two acquisitions made in November of last year.

Our efficiency ratio, as reported for the first quarter of 2009 was 45.8%.

We continue to be one of the most efficient financial institutions in the industry, and I'm pleased to report that we achieved this positive core operating leverage this quarter on both a year-over-year and linked quarter basis.

In total, the first quarter results underscored the inherent value of our Company's strong balance sheet and its diversified earnings stream.

As customers actively seek a bank partner that can provide the products and services they need and the safety and stability they require, our balance sheet businesses continue to grow and prosper.

As consumers and businesses pull back on their spending and the equity markets falter, our fee-based businesses remain solid, but their growth is tempered.

It is, however, this diversified earnings stream that has allowed us to perform despite a stressful economic environment, and it is this diversified mix of businesses that has us very well positioned for the recovery phase of the current economic cycle.

Moving on to credit, as I pointed out earlier, an increase in credit costs, including the cost of building the reserves for expected credit losses and to reflect the existing economic environment, drove the year-over-year reduction in the Company's net income.

Net charge-offs of $788 million were 24.7% higher than the fourth quarter of 2008.

As expected, a slightly lower percentage increase than we experienced in previous quarters.

The increase in net charge-offs, once again, reflected the continued stress in residential homes and mortgage-related industries and the impact of the worsening economy on both our retail and commercial customers.

The most significant increases in net charge-offs were recorded for lease financing, primarily small business leasing, construction and development loans, and credit cards.

Total net charge-offs to average loans outstanding were 1.72% in the first quarter, compared with 1.42% in the fourth quarter.

Also, and as expected, non-performing assets increased this quarter.

The change reflected an increase in non-performing loans in the Bank's core loan portfolio and the impact of the recent acquisitions of Downey Savings, and PFF Bank and Trust.

As of March 31st, total non-performing assets were $3.410 billion compared with $2.624 billion at December 31st.

Included in total non-performing assets were $702 million of loans and other real estate covered by a loss share agreement with the FDIC, in conjunction with our two California acquisitions.

In other words, there is a minimal amount of potential loss in these loans, given the terms of our agreement with the FDIC.

The majority of the increase in non-performing loans within the core bank portfolio was related to residential mortgage and residential construction-related industries, as well as other commercial real estate lending.

In fact, of the $361 million increase in commercial non-performing loans, approximately 43% was real estate-related.

The ratio of non-performing assets to loans plus other real estate owned, excluding covered assets was 156 basis points at March 31st.

Restructured loans that continued to accrue interest rose by 26% this quarter, as the Company continues to work with customers to renegotiate loan terms, enabling them to keep their homes.

These efforts are in synch with the government's goal to restore the housing markets, and our desire to retain the value of these relationships for our shareholders.

As expected, given the upward trends in both net charge-offs and non-performing assets, in addition to the continued weakness in the economy, we increased the allowance for our loan loss this quarter by recording an incremental provision for loan losses in excessive charge-offs of $530 million.

This represents an amount equal to 67% of the current quarter's total net charge-offs.

With this addition, the Company's allowance for credit losses to period in loans, excluding covered assets, was 2.37%, compared with 2.09% at December 31st, and the ratio of allowance to non-performing loans, excluding covered assets, was 169%.

Going forward, we will continue to assess the adequacy of our reserve for loan losses and provide for credit losses at a level that reflects changes in the credit risk of the loan portfolio and the current economic conditions.

Our Company entered this credit cycle with a strong balance sheet, and we fully intend to protect that position through this cycle and beyond.

Finally, and importantly, our capital position remains strong.

Our Tier 1 and total capital ratios were 10.9%, and 14.4%, respectively, at March 31st.

Both well above our target levels.

Additionally, our tangible common equity to tangible asset ratio was 3.7% at March 31st.

While tangible common equity as a percent of risk-weighted assets was 4.0%.

Both ratios were higher than on December 31st, having benefited from earnings and the recent dividend reduction.

I will now turn the call over to Andy.

Thanks, Richard, you have now heard the key highlights of this quarter's results from Richard.

Overall the results reflected the strength and quality of our core earnings, and I would like to spend a few minutes to provide you with more detail.

I will begin with a quick summary of the significant items that impact the comparison of our first quarter results to prior periods.

First, non-interest income included $198 million of security losses.

Included in this total were $254 million of impairment charges on several securities, including a perpetual preferred issue of a major US financial institution.

Our SIV exposure and a few agency and non-agency mortgage-backed securities.

These impairment charges were partially offset by gains on securities sold of $56 million.

Second, the other income in the first quarter included a $92 million gain on a corporate real estate transaction.

And third, we recorded an incremental provision for credit losses in excess of net charge-offs of $530 million in the first quarter.

Significant items in the first quarter were in total, $636 million, and reduced diluted earnings per common share by approximately $0.28.

For comparison purposes, during the first quarter of 2008, the Company recorded $251 million of security losses, the results of impairment charges on structured investment vehicles, other preferred securities, and non-agency mortgage-backed securities.

In addition, non-interest income in the first quarter of 2008 included a $492 million Visa gain and a $62 million charge related to the adoption of FAS 157.

While non-interest expense in the first quarter of 2008 included two special items totaling $47 million.

Additionally, results in the first quarter of 2008 included an incremental provision for credit losses of $192 million.

The net impact of the first quarter 2008 significant items reduced diluted earnings per share by approximately $0.02.

Finally non-interest income in the fourth quarter of 2008, included $253 million of security losses and incremental provision expense of $635 million.

Together, these items reduced fourth quarter 2008 diluted earnings per common share by approximately $0.34.

Now, a few comments about operating earnings this quarter.

Net interest income in the first quarter was 14.5% higher than the first quarter of 2008.

Primarily due to a strong 13.7% increase in average earning assets.

As projected, the net interest margin for the first quarter was 3.59%, four basis points higher than the previous year.

Net interest income was slightly lower on a linked quarter basis, as a 4.1% increase in average earning assets was offset by an expected decline in the net interest margin.

The slight improvement in the margin on a year-over-year basis was principally the result of growth in higher spread assets.

On a linked quarter basis, the expected reduction in net interest margin was primarily due to the full-quarter impact of the two California acquisitions, the repricing of a number of consumer lending products that lagged to decline in [funding] costs in the fourth quarter, as well as a normalization of funding and liquidity in the wholesale funding markets.

Going forward, assuming the current rate environment and yield curve, we expect the net interest margin to remain relatively stable.

Total non-interest income in the current quarter was lower year-over-year, primarily due to the $492 million Visa gain recorded in 2008.

Offsetting the negative impact of that one-time item were favorable variance in mortgage banking revenue as Richard discussed earlier, as well as treasury management fees and commercial product revenue, which were higher than the first quarter of 2008 by 10.5% and 15.2% respectively.

The growth in both of these two categories reflected the wholesale banking group's ongoing revenue initiatives, and the bank's bank-wide BDR or Building Deeper Relationships project.

Seasonality, a slowing economy, and unfavorable equity market conditions, led to a decline in several fee-based categories this quarter.

Merchant processing services revenue was lower on both a year-over-year basis and linked quarter.

While corporate payment products revenue declined from the same period of last year, although remained flat to the prior quarter.

Both of these payments-related categories reflect the slowdown in consumer and business spending but remain positioned for a recovery.

Trust and investment management fees were also lower year-over-year and linked quarter as adverse equity market conditions reduced the value of assets under management and consequently, related management fees.

.

Deposit service charges decreased from both the comparable time periods as changes in consumer spending patterns lead to lower fee-related activity.

Finally, within non-interest income, other income, excluding the impact of significant items was lower year-over-year due to higher end-of-term residual losses on consumer auto leases and lower equity investment income.

On a linked quarter basis, the corporate real estate transaction and as expected lower end-of-term losses on retail auto leases accounted for the majority of the variance.

As we indicated in our last call, the end-of-term losses on auto leases peaked in the third and fourth quarter of 2008 as a number of cars coming off lease began to decline.

I will now turn the call back

Thanks, Andy.

In summary, I am very proud of the results for this quarter.

I am more than -- more confident than ever that this Company with its diversified mix of businesses, coupled with its longstanding, prudent approach to risk, and the remarkable dedication, loyalty, and hard work of its employees, will continue to outperform despite the stress of the current environment.

We are, in fact, building momentum in our balance sheet businesses, while remaining poised to capture the extraordinary opportunities of the present for our fee businesses as the market, the economy, and the world recover.

In conclusion, our fundamental businesses remain strong.

We are not immune to the challenges facing our industry, but we are open for business and continue to prudently lend to creditworthy customers.

We continue to wisely invest and grow our franchise.

We continue to support the communities in which we operate.

We continue to serve our customers' current needs while building deeper relationships for future.

And most importantly, we continue to create value for our shareholders.

Value that is derived from our high-quality balance sheet, capital strength, and earnings power.

Factors that have enabled US Bancorp to successfully navigate the challenges of the present, while remaining well positioned to seize the opportunities of the future.

That concludes our formal remarks.

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

Rachel?

(Operator Instructions) Your first question comes from Chris Mustacio with Stifel Nicolaus.

Good morning, Richard and Andy and Judy.

How are you?

Good.

Good morning.

Richard, or even Andy, can you go a little more color on the mortgage banking side.

I have had some other banks report some pretty good increases or write-ups of the MSR.

It didn't look like that occurred with you this quarter.

And mortgage production volume was up nicely, but the increase in the production volume was lower than the type of gain we saw, if you will, from the origination of sales volume.

Sales volume and origination of sales was up about five-fold quarter-to-quarter, and mortgage production was up less than half.

Is the driver gain on sale -- has that spread widened to such a degree?

And, if so, can you comment on the sustainability of those types of margins you can get on the sale of the loans.

Chris, this is Andy.

First, regarding your hedge question.

Our hedge was essentially neutral for the quarter against the servicing valuation.

But, that was an improvement versus the fourth quarter.

As you know, the fourth quarter rates were highly volatile, and we actually recorded a negative in the fourth quarter of about $70 million.

On a quarter-linked basis, that did improve the numbers.

Year-over-year, it was slightly positive in the first quarter of 2008, we were negative about $13 million.

So, the neutrality in the first quarter was helpful.

Okay.

Regarding the production versus servicing numbers.

The production number was the principal driver in the first quarter, both on a linked basis and a year-over-year basis, producing $174 million linked, and about $130 million quarter-over-quarter.

It is the principal diver.

We had a record quarter in terms of not only production but also applications.

We would expect that strength that we saw in the first quarter to continue at least until the second quarter.

You are also seeing widening spreads on the gain on sale on those loans?

Not yet, but the key driver in the revenue increase is the production levels.

Okay.

I may have missed this.

If I could just follow up.

On the tax question, I know your tax rate was a bit low this quarter on a taxable equivalent basis.

What is the outlook going forward so I know how to model that?

Right, Chris, on a TEB basis, we are at about 21.5% this quarter.

Higher than last quarter, but lower than the first three quarters of 2008, and it's really a function of where our income levels fall.

We would expect the rest of the year to fall somewhere between 20% and 25% on a TEB basis.

Okay.

Thank you very much.

You bet.

Your next question comes from Ed Najarian with ISI Group.

Hi, Ed.

Good morning, how are you?

Hi, Ed.

Good.

Richard, in past calls, you have been at least willing to give a three month-type of credit outlook.

You didn't do that on this call.

I'm wondering if you are still willing to do that in terms of the pace of increase in charge-offs and NPAs.

And then, if you could also comment, maybe a little more broadly on how you are thinking about additional reserve build throughout the balance of '09, that would be helpful.

Thanks.

Be happy to.

Thanks, Ed.

I have a report that our last few quarters, including this quarter are very consistent with what we have expected along this cycle, and we're looking the same for the next couple of quarters going forward.

In other words, the kind of trajectory you have seen in both the increase in charge-offs and non-performing loans in the future couple of quarters are not expected to be very different than the last few quarters.

So we have just got a nice steady, unfortunately negative, but steady stream northward both non-performs and charge-offs moving in the 20% to 30%, 35% range linked quarter as you have seen for the last four or five quarters.

We are happy to report that, if nothing else, it is very predictable.

We're able to really see well ahead into the 90 days on the consumer side where the modeling has become much more precise.

It's much more measurable as regards to delinquencies becoming -- what percentage of those become charge-offs, which of those go into bankruptcy.

We have a much better view on that.

Consumer is much more mature in this cycle in terms of credit quality and understanding the future implication.

I would say commercial and commercial real estate are a little more lumpy.

In that as I've said in prior quarters it's not quite the modeling, it's more the deal-by-deal or the systemic nature of the kind of loans that are going into stress.

In our case, because of a significant amount of stress we had in our California housing portfolios last year, we were able to replace some of that now.

That that has matured, and it is some of the more traditional old fashioned CNI and CRE stress that we are seeing.

And both of those will continue to show non-perform first, and then some of those will translate into charge-offs later.

I'll remind the audience that the charge-off nature of a non-perform, particularly in commercial real estate, where they are primarily collateralized, is not necessarily equal to that of an unsecured credit and certainly not equal to that of a stressed consumer credit.

Our non-performs are up slightly more than our charge-offs, but I wouldn't necessarily read that to believe we are going to have a higher incidence down the line of charge-offs.

More consistent with the prior quarters, and you can pretty much just draw a line as we have done.

We don't see anything tempering yet.

We don't see it coming to an end.

But, we also don't see any unexpected outcomes that would cause our trajectories to change in the next two quarters.

Okay.

So for the next two quarters, we can expect that trajectory line that we have been seeing to continue upward at the same pace.

That's how we're planning it.

And then that brings to the second part of your question which we'll continue to provide reserves to be adequate for those expectations.

And I don't expect us to stop reserve building until which time we see strength in the reduction, not just the continued trajectory northward, and I think we're going to find loans to start to moderate in that regard late in the year.

But for the next couple of quarters, I would expect us to see some reserve build, and yet we'll determine the level of that as each quarter comes to a conclusion as we have a better view into the next 90 days and the next 180.

Do you -- just one last question.

Do you think this quarter's reserve build was abnormally high?

Or, next couple of quarters could be similar?

No, this -- this quarter was a good example of kind of an average for the last year.

As you know, we have been between 55% and 100% build.

This was 67%.

It probably reflects that we think we're probably in the middle of this whole cycle, and I think that you'll find something in that same range between 33% and 100% in the next few quarters.

But, it could be that wide of a range.

We really don't make that decision until the very end of the quarter when we have a very good view of the next 90 days.

Okay.

Thank you.

Your next question comes from John McDonald with Sanford Bernstein.

Hi.

Good morning.

Couple more credit questions.

Commercial real estate.

The net charge-offs in the non-construction book were better than I expected.

I was wondering if Bill could give some color on that?

And then, on construction, you have talked about in the past how you have gotten ahead of some of the construction credits.

Can you remind us where you stand there?

Yes, sure.

First, I'll do the construction loans.

What we have been talking about last year was our California residential mortgage portfolio.

This quarter, we saw additional stress, not just in California, but also in the Pacific Northwest.

Obviously, Las Vegas, Phoenix-type areas.

In sum total, those areas outside of California are not as big as our California exposure, but needless to say the residential construction portfolio remains under stress.

On the commercial mortgage side, again, about half of that -- or more than half of that is really owner-occupied.

So it really ties into our middle market and small business and community lending areas.

So, that's a fairly stable book even in the downturn.

And then, the other mortgage classes, obviously we do have retail, office, etcetera.

Those are fairly broadly diversified portfolios -- projects throughout our footprint.

They are all recourse loans.

So as you expect the trajectory of your overall charge-offs and MPAs to continue on a similar pace, do you expect some shifting there where the construction slope moderates?

And then other commercial real estate and CNI pick up a little bit?

Yes, they will probably be some of that, but clearly the stress, the high levels of stress will remain in the construction category.

And they will -- depending upon the length of the downturn, there could be more stress in the mortgage lending area, but so far that's been more case-by-case or regional basis.

Looking at particular markets as opposed to broad-based.

Okay.

A question on the fee-based businesses, some of the trends and sensitivities.

Richard you had given some sensitivities both to the payments and wealth management revenues to the economy, consumer spending, and market levels.

Based on what you have seen so far in the first quarter, do you still feel good about those relationships?

We do.

In fact, I'll give you a little more highlight.

In the first quarter, the same-store sales for the customers that our payment businesses are aligned with was down 9.6%.

To be more specific, North America, which is about three quarters of our volume, was down 9.7%, and Europe was down 9%.

That is 25% of our volume.

That was very aligned with what we would have expected.

Our performance in the payment businesses related to consumer and small business behavior was down 2.2%.

So that reflects that we're gaining some market share, and we're still growing the businesses underneath all of that stress.

And for the second quarter, we forecast that 9% to be very similar for Quarter 2 in our book of business.

And if that's the case, we'll probably continue to see a very moderate flatness in the benefits coming from the payment side.

But as Andy mentioned in his comments, the pipeline is built.

Everything is ready for a higher flow when the economy recovers both here and overseas we'll see that information translate directly on the bottom line.

And, we're really looking forward to that.

On the trust side, a number of our businesses are aligned directly with the valuations in the markets.

And as the markets are impaired, that continues to take some of the information directly into the bottom line of our business success.

But like payments is open and ready to roll when the trust business picks up as a relation to the markets improving, we'll get the benefit on that, too.

So for the quarter I was actually pleased to see -- a couple of years ago on this call we were talking about how our payments and trust businesses -- the non-balance sheet businesses were really coming through like gangbusters while we dealt with an inverted yield curve and a decreasing margins and spreads on the balance sheet.

Now, we have got a reverse where the balance sheet businesses are enjoying a yield curve again and amazing growth while the payment businesses and trusts are hanging in there, but ready and positioned for when things turn on.

Right now with two or three cylinders of the four running, I look forward to the day when we have all of them up and running at the same level.

Okay, thanks.

One quick follow-up on credit cards.

Can you give some color on your outlook for charge-offs in credit card, maybe relative to unemployment and maybe relative to the industry?

Are you seeing a performance differential in your book between your partner cards and your generic bank cards?

Yes , the first part -- the relationship to unemployment.

It's pretty clear to all of us that card losses do correlate with unemployment.

Because of our prime nature of our book, we do expect our losses to go up with unemployment, but not to the levels that are seen in some of the other bank portfolios.

So it will -- it will go up, as unemployment rises through the balance of the year.

With regard to bank brand versus partner brands, clearly the bank brand shows higher losses than the co-brand-type activities.

But both portfolios are prime-based and basically have been operating in

Also, John, you wouldn't know this yet.

You'll see it in the 8-K.

But our total 30-plus delinquencies are up compared to the fourth quarter, but there has been an improvement in the early stage delinquencies which causes us a certain level of tempered enthusiasm for the fact that the consumer might be starting to get more solid around their ability to manage their debt, and the long-term view that that means to our credit card.

But, as you see in our portfolio's performance, the best in all the managed portfolios.

I expect it to not only continue there but slightly separate itself a little further because our consumers are performing quite well during this period, and our ability to restructure and work with them on cases where they need help has been quite successful.

Okay.

Thanks, Richard.

Some other banks have talked about that early stage bucket improvement on the 30-day delinquencies and maybe cited seasonality on that.

Have you seen any evidence of seasonality there or maybe a little more help there?

Well, yes, there is -- I mean, it is -- there is a seasonal influence there.

But last year, I think the important distinction is last year we really didn't see any lift from the normal tax refund-type payments or the seasonality of it.

This year there does appear to be actual lift from from the seasonality.

Like the old fashioned lift.

Yes.

Thanks very much.

Thanks, John.

Your next question comes from Nancy Bush with NAB Research.

Good morning.

Richard, a question for you.

There is a great deal of debate becoming more heated in Washington about whether the banks are actually lending or not.

Can you just give us your take on this?

And there seems to be a belief that banks are not lending, and should be.

And just what more you can do to increase lending in line with your receipt of TARP funds?

Right.

Nancy, I think it's fair to say that it is individual-bank related.

I think a lot of banks are lending, and some of the, perhaps 80-20 rules, some of the larger banks not being as aggressive as in prior periods is what you're seeing.

In our case, of course, we are lending, and we said that from the beginning.

I reflect on yesterday's Wall Street Journal story that shows the February results compared to January where we were showing slightly below the median.

And in fact we were down -- in February over January, we were down by 4.4%.

To be very specific, our new originations and commitments were up 4.4%.

Our commercial real estate was up.

But, our commercial and industrial renewals were down for the month.

If you look at the whole quarter which we'll see eventually, that negative 4.4% was actually 3.6% for quarter one improvement over quarter four.

So, my first issue is, any one period of time picked at the wrong moment for the wrong optics is not really what is a suitable way of determining banks' lending.

In our case, I went through in my early comments all of the net or the gross new loans we have made.

But on the net position, this also gives you a sense that we are lending more than we did 90 days ago, and if you want to tie that to TARP and suggest that we are good stewards of the investment by the taxpayers, I think we can prove that any time under any period to show that we are robustly making loans.

But I will say probably the most dangerous aspect of that is the number of creditworthy and interested borrowers that exist in this current downturn.

I think it's fair to say that banks and even the government will take a risk by trying to align the success of the economic recovery with the amount of lending that is accomplished because there are a number of customers who are neither as qualified as they were a year ago, nor are they interested in exceeding additional levels of debt.

I think the banks that are growing in this environment absolutely must be taking market share because I don't think overall there's more lending out in the marketplace at this stage in the recession.

And I think it's fair to say that banks in general -- in total may reflect that and therefore be flat to negative, but individual banks that are actually making the loans shouldn't be dismissed as either making it up or not being able to justify their position because there is plenty of lending out there being accomplished.

I said it 90 days ago, and I'll say it again.

And, I didn't get any customers calling me so maybe one will.

But, we have not denied a single creditworthy customer since the beginning of this downturn for any reasons of either capital or appetite.

We simply have continued to be prudent with our underwriting as we were many years ago.

And we're making loans to whoever qualifies under our terms.

And in this case, you'll see very shortly we have continued to increase quarter-over-quarter, and you will see that we have been good stewards of that TARP money.

I will also say -- courtesy of a few of my peers have mentioned this, and I will reflect it as well.

There is a slowing down of interest in consumer appetite and commercial appetite in the last couple of weeks, maybe the last half of the quarter one.

In February and March, we saw a little bit less appetite.

So, I think there is a reason to believe that as the cycle matures, people are have becoming a little more careful in what they do to defend their balances sheets.

I think they are also being a little bit more careful to become more productive in the time when they need to cut back on costs and rationalize their businesses.

But, for those who are asking for loans, there is still plenty of money out there, and I think the banks are willing to make those loans for all intents and purposes.

While I have got you, would you care to update your view of TARP?

Sure.

I'm looking forward to learning more about it.

As you've all read, and as I know as well, we're expecting a White Paper from the government, this Friday, on the 24th.

I'm also lead to understand that we'll be getting an individual update some time in and around that time to find out how our performance during the stress test occurred.

At which point, I'm of the mind I'll learn I have a chance to rebut any of the findings or confirm those those findings.

And then early in May, I guess we'll all find out some levels of detail how we performed.

I started on the stress test because I do believe that that is the proxy or the gateway to the question on TARP.

I have indicated before, and I'll remind you all that we would like to pay back our TARP obligations only and after we have permission from our regulators, and it's in good alignment with what the government wants at the right time.

But it's my hope that if the stress test results are positive, I think that's your first right to then say I would like to repay the TARP, if I may.

Find out what the terms of that include.

What the timing would be best for both our shareholders and for the government -- for all of the optics that go along with it.

And then move forward on that basis to move this Company back to an independent status.

That's my goal.

Thank you.

Thanks, Nancy.

Your next question comes from David Rochester with FBR Capital Markets.

Good morning.

Thanks for taking my questions.

Sorry if you had mentioned this earlier.

Could you roughly give us the amounts of the larger real estate company loan that went bad -- that boosted CNI MPAs?

Well, we cited $110 million.

But other than that, we can't name names.

Yes, it was $110 million, David.

I apologize, I missed that.

What -- in looking at the rest of the increase there.

What specific industries aside from those related to residential construction home-building industries would you say made up the preponderance of that increase?

A couple of the areas that we have seen stress outside of that is gaming.

We do do gaming credits.

We have seen stress in that area.

Also, newspapers have been an area of high stress.

Those are a couple of the two main industries.

Okay.

And finally could you update us on where you see the unemployment rate peaking in terms of timing and level?

I know you had mentioned over the next couple of quarters, you were looking at reserve build and maybe that would be tempered after that.

Could you kind of update us on how bad you think the economy will get?

And when we'll start to see, you think, where we'll start to see a turn?

Yes, we're looking at the unemployment rate near the end of this year hitting between 9% and 10% on the high end of that range, but not hitting 10%.

And if you look at the performance guidelines that you'll see later on the stress test, they will be somewhere between those same scenarios.

So, I think we have been consistent with what the market is telling us.

We haven't built for the Armageddon scenario.

(Inaudible), but we haven't.

And under any circumstances, we find ourselves able to be profitable through the cycle.

And I think what we're looking for, David, is late in the year that starts to peak and then starts to trend back down slowly.

But surely, into 2010.

We're of the mind that the economy starts to show the possibility of recovery late in the year or early first part of the year, but we're not building any financial metrics around that to happen until 2010.

Great.

Thanks guys.

And your final question comes from Richard [Branston] with Goldman Sachs.

Hi, good morning.

Just a couple of questions.

The first one is on the restructured loan bucket.

Could you just give us an update on the redefault rates in the restructured loan portfolio?

As well as give us a breakdown of how the composition of that portfolio has changed?

Sure.

The -- obviously, you know most of it so mortgages, the single biggest category.

That will continue to grow as we continue to work with our client base in trying to prevent foreclosures.

What we would look at is we measure who -- that we restructured, and we have been doing this back, beginning in -- actually prior to '07.

Where we restructure the loan, and then they eventually go into foreclosure or we have to take a loss or an event like that.

On that basis, we have restructured over 8,000 loans and 12% of those reentered foreclosure.

Or, actually entered foreclosure.

Okay.

And the other -- go ahead.

Yes, sir.

On the redefault rates that you have seen.

How are those evolving?

Because I guess you have been -- you have been conducting the program long enough now that I assume you have got some good data on how the redefault rates are evolving.

The cumulative redefault rate is 12%, but you may be speaking about the vintage impact of that, because obviously the ones we restructured most recently have not yet had the potential to go into foreclosure.

So if you look at some of the older vintages, it differs by portfolios.

We have some restructure-types that have maxed out at around that 12% range.

Some of the older vintages get up to 20% or 30% range, depending upon the program.

Richard, this is Richard.

You have all read about and heard about from the OCC about their recent findings that redefault rates are higher for loans where the payment went up, even if the payment was precluded from going up higher.

We have seen that same early incident.

Those with payments going up, performed less positively than those with flat payments or reduced payments.

And in accordance with that, that's early learning, and we're working now to evaluate our go-forward approach to make sure that we take that same guidance and keep payments flat or reduce payments for those restructured credits so that we don't have a long-term redefault problem that may not have shown itself yet.

Okay, that's great.

And then the second question I wanted to ask is on deposit pricing trends.

It looks as if that has now become a little bit more rational, but it would be just helpful to get your perspective on how that has changed in the last couple of months.

Richard this is Andy, and your statement is correct.

What we have seen is some of the more irrational price -- deposit pricers -- are not in the marketplace any longer.

I would say the large banks are pricing in a similar band that is rational and reasonable.

There are still a few outliers.

Principally, smaller banks.

But, I would say that it has rationalized quite a bit in the last quarter.

Okay.

That's great.

Thanks a lot.

You bet.

Rachel, anybody else?

That concludes the Q&A session.

Let me just thank you for joining our call.

On one hand, I couldn't be more proud of the fact that I hope you appreciate the simple transparent nature of our earnings.

It's a little old-fashioned except for the fact that loan losses and provision continue to be a question mark.

But for us, we have our Board meeting today and our annual shareholder meeting, and we're going to declare once again, that without a lot of noise and fanfare, we're just a basic old-fashioned bank going through a cycle, able to earn through it under any circumstances.

And pleased to see that underneath all of that we're building some very strong momentum for a future that will be quite robust for our shareholders as the credit world finds itself more settled in the coming quarters and coming years.

So, thank you for that support.

If you have any questions, we'll be certainly happy to answer them later today.

Thank you for joining us on the call today.

If anyone has any questions, please feel free to call me at 612-303-0783.

Thanks.

Thank you.

This does conclude today's US Bancorp first quarter 2009 earnings conference call.

You may now disconnect