美國合眾銀行 (USB) 2009 Q4 法說會逐字稿

Welcome to US Bancorp's fourth 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 rye play beginning today at approximately noon Eastern time through Wednesday, January 27th at 12 midnight Eastern time.

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

Please go ahead.

Thank you Carrie, and good morning to everyone who has joined our call today.

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

Richard and Andy will be referencing a slide presentation during their prepared remarks.

A copy of the slide presentation as well as our earnings release and supplemental analyst schedules 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 can could materially change our current forward-looking assumptions are described on page two of today's presentation, in our press release and our Form 10-K and subsequent reports on file with the SEC.

I will now turn the call over to Richard.

Thank you, Judy.

Good morning everyone and thank you for joining us.

I'd like to begin on page three of the presentation and note some of the highlights of our fourth quarter 2009 results.

US Bancorp reported net income of $602 million for the fourth quarter of 2009, or $0.30 per diluted common share.

Earnings were $0.15 higher than the same quarter of last year, and equal to the $0.30 per diluted common share the Company earned for the third quarter of 2009.

We achieved record net revenue of $4.4 billion in the fourth quarter, and year-over-year positive operating leverage with an industry leading efficiency ratio of 49.1%.

The flight to quality continued this quarter, as we experienced strong year-over-year average deposit growth of 25.2%, 15.3% excluding acquisitions.

Average loan growth was 8.2%, primarily due to the acquisitions, as our commercial customers continued to pay down their balances, leaving year-over-year average total loan growth excluding acquisitions at 0.4%, a point of pride given the current low demand for credit.

As expected, net charge-offs and non-performing assets, excluding covered assets, increased again this quarter and at a more modest pace than the prior quarter.

Importantly, total credit costs declined on a linked quarter basis due to a decrease in the provision expense necessary to build the allowance for credit losses.

We maintained our strong capital position, with the Tier 1 capital ratio increasing from 9.5% at September 30th, to 9.6% at December 31.

Finally, during the fourth quarter, we completed the acquisition of the majority of the operations of the banking subsidiaries of FBOP Corporation, in an FDIC assisted deal, an acquisition that added 150 branches to our franchise, over $13 billion of loans and more than $14 billion of deposits.

We announced last November that we would be selling the three Texas branches acquired in this transaction and the buyer, Prosperity Bank announced the purchase of the branches yesterday.

That sale is expected to be completed by the end of the first quarter.

On slide four, we show our performance metrics over the past five quarters.

Return on average assets in the current quarter was 0.8%.

And return on average common equity was 9.6%, just slightly below the ratios posted in the third quarter of 2009.

The fourth quarter results included two significant items which were net security losses of $158 million, and provision expense in excess of net charge-offs of $278 million.

Excluding these significant items, which Andy will discuss in few minutes, return on average assets and return on average common equity would have been approximately 1.36%, and 15.3% respectively.

On the right hand of this slide is a graph showing the five quarter trends of our net interest margin and efficiency ratio.

Our net interest margin of 3.83% improved over the prior quarter by 16 basis points.

Primarily due to the higher loan spreads and lower funding costs while our efficiency ratio ended the quarter at 49.1%.

Our efficiency ratio reflects in absolute terms our prudent approach to managing operating expenses at a level appropriate for the current environment as well as our continued investment in our businesses and employees to ensure our future growth.

Turning to slide five.

Our capital positions remain strong.

Our Tier 1 capital and Tier 1 common equity ratios were 9.6% and 6.8% respectively at December 31st.

Additionally, our tangible common equity to tangible assets ratio rose from 3.3% at December 31st, 2008, to 5.3% at year end 2009.

Our capital position continues to benefit from our ongoing profitability.

With this positive earnings stream, business line momentum, moderating credit costs, we continue to expect to generate significant capital going forward.

As I have indicated in the past, this was the first factor with we considered when deciding whether this was the time, the right time, to recommend an increase to our current quarterly dividend rate of $0.05 per share.

We are confident that our earnings can support a higher dividend.

Unfortunately, there remains a great deal of uncertainty for all of us in the banking industry regarding potential legislative and regulatory changes in addition to the timing and the scope of the economic recovery.

What that all means for the level of capital would be required going forward.

I assure you, we are acutely aware of how important the dividend is to our shareholders.

At this point, however, the most prudent approach for our Company is to continue to work closely with our regulators and defer action on our dividend until a sustainable economic recovery is evident and clear capital guidelines are established.

Moving on to slide six, average total loans outstanding increased by $14.4 billion year-over-year, primarily due to the recent acquisitions.

As noted on the slide, excluding acquisitions, total average loans grew by 0.4% year-over-year.

On a linked quarter basis, total average loans increased by 5.3%, driven again by acquisitions.

As I mentioned earlier, and similar to last quarter, the lack of growth in average total loans outstanding, excluding acquisitions, was largely due to the lower usage of revolving lines of credit by our commercial customers.

Specifically, the rate of commitment utilization by our corporate and commercial borrowers declined from an average of about 32% in the third quarter of 2009, to approximately 30% in the fourth quarter.

The decline in average balances also reflected an overall softening of demand for new loans by our customers, both commercial and consumer, as they remain cautious, right sizing their own balance sheets to reflect the current economic conditions.

That being said, we continue to originate and renew lines and loans for our customers who want and need credit.

In fact, during the fourth quarter of 2009, US bank originated over $11 billion of residential mortgages, 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 for lines totaling over $2 billion, and we issued more than $9 billion of new commitments and renewed over $17 billion of commitments to small businesses, commercial and commercial real estate customers.

Overall, excluding mortgage production, new originations, plus new and renewed commitments were over $33 billion, slightly higher than the previous quarter's total, bringing the full year 2009 total to over $129 billion.

We remain responsive to the credit needs of our current and new-credit-ready borrowers.

In fact, we have begun to take a second look at small business loans that may have been turned down in the initial credit review process to see if there are additional opportunities to provide them with solutions to their financing needs.

We continue to strongly support the government's efforts to maintain the flow of credit necessary to stimulate and strengthen our economy.

Growth in average total deposits was a key highlight of our fourth quarter.

Total average deposits increased by $36.4 billion over the same quarter of last year, and $14.5 billion on a linked quarter basis.

Excluding acquisitions, the growth rate remains strong at 15.3% on a year-over-year basis, and 10.8% annualized on a linked quarter basis.

Our Company continues to benefit from a flight to quality.

And remains one of the highest rated financial institutions in the country as rated by S&P, Moody's, Fitch and DBRS.

Turning to slide seven, the Company reported record total net revenue for the fourth quarter of $4.4 billion.

In fact, we also achieved record net revenue for the full year of 2009, of $16.7 billion.

The growth in revenue was driven by earnings asset growth and expanding net interest margin, business line growth initiatives, and acquisitions.

Reported total net revenue was impacted in each of the last five quarters by securities valuation losses, which are detailed at the bottom of the slide.

Moving on to credit as we turn to slide eight.

Credit costs in the fourth quarter of 2009, including the cost of building the allowance for credit losses were higher than the same quarter of 2008, but lower than the previous quarter.

As expected, the rate of increase in net charge-offs moderated on a linked quarter basis.

Fourth quarter net charge-offs of $1.11 billion were approximately 7% higher than the third quarter of 2009.

This percentage increase was lower than the 12% increase recorded between the second and third quarters of this year.

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

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

The $184 million or approximately 5% increase was lower than last quarter's linked quarter growth rate of approximately 12%.

Another indication that credit quality is deteriorating at a slower pace.

At December 31st, total non-performing assets were $5.907 billion Included in total non-performing assets were $2.003 billion of loans and other real estate covered by a loss sharing agreement with the FDIC.

Given the terms of these agreements with the FDIC, the amount of potential loss in these loans is substantially reduced.

Turning to slide nine.

You can see that as expected, given the upward trends in both net charge-offs and nonperforming assets, in addition to the uncertain and still somewhat weak economy, we increased the allowance for credit losses this quarter by recording a $278 million incremental provision for loan losses.

This represented approximately 25% of the current quarter's total net charge-offs of approximately $1.1 billion.

This compares with an incremental provision equal to 40% of the net charge-offs in the third quarter of 2009, and 100% in the fourth quarter of 2008.

This incremental provision raised the Company's allowance for credit losses to period end loans at December 31st, excluding covered assets to 3.04% from 2.88% at September 30th.

The ratio of allowance to nonperforming loans excluding covered assets ended the quarter at 153%.

As we look ahead 90 days, we anticipate continued growth in both net charge-offs and nonperforming assets.

However, we expect the rate of growth to once again trend lower.

Given the current focus by the investment community on credit quality, we have included the following nine slides, which provide credit related information about each of our major loan portfolios.

I will highlight just a few items on each slide.

Beginning on slide 10, provides more detail on the commercial loan portfolio.

Which has declined from an average of over $50 billion in the fourth quarter of 2008, to approximately $43 billion in the fourth quarter of 2009.

Primarily due to the lower line utilization and lower demand.

The trend in utilization of outstanding revolving lines of credit is shown on the right hand side of the slide.

The net charge-off ratio on the portfolio increased to 2.28% in the fourth quarter, with losses coming primarily from the more leveraged sections such as correspondent banking and gaming.

Non-performing commercial loans as a percentage of average loans were 2.05% for the fourth quarter.

Very comparable to the previous quarter.

Slide 11 provides additional information on the commercial leasing portfolio.

Early stage delinquencies and net charge-offs have declined over the last two quarters in this portfolio, primarily due to improvement in small ticket leasing.

Moving on to slide 12 and the Company's commercial mortgage portfolio.

Average commercial real estate mortgages have increased over the past year, due to the lack of permanent financing previously available in the CMBS market.

Approximately 45% of the portfolio is owner occupied.

Overall, net charge-offs remain low at just 48 basis points of average loans outstanding.

The commercial real estate construction portfolio is detailed on slide 13.

And is the most stressed portfolio.

Net charge-off ratio of 6.24% remains elevated and reflects declines in the market value of both commercial and residential construction properties.

Residential construction loans outstanding have declined from an average of $4.7 billion in the third quarter of 2007 to $2.3 billion in the fourth quarter of 2009.

13.6% of the loans in this CRE construction portfolio are currently classified as non-performing.

Turning to the residential mortgage portfolio detailed on slide 14, the net charge-off ratio continues to edge higher currently standing at 2.37% for the fourth quarter of 2009.

On a positive note, and similar to the Company's other retail loan portfolios, early stage delinquencies for the residential mortgage portfolio improved slightly from 2.39% in the third quarter to 2.36% in the fourth quarter.

Restructured residential real estate loans that continue to accrue interest rose by 1.2% this quarter.

As you may recall, our Company began actively working with customers to renegotiate loan terms late in 2007, enabling many to keep their homes.

Since late 2007 including loan services for others we have modified over 27,000 residential mortgage loans, totaling approximately $4.6 billion.

Additionally, we began participating in the HAMP, the government's mortgage modification program, in September 2009, and have since begun trial modifications on over 7,400 loans, or 26% of eligible loans.

We expect the number of loan modifications that we complete over time will be lower than the industry average.

As our initial underwriting was generally more stringent on debt to income.

We are finding that a large percentage of the modification requests we receive are already below the 31% debt to income, and, therefore, do not qualify for HAMP.

Additionally, these loan modifications exclude acquired covered loans, which are modified following the terms of the loss sharing agreements with the FDIC.

Going forward, we will continue to actively assist our customers, whether through HAMP or other programs, and support the government's objective to restore the housing markets.

Slide 15 summarizes our home equity portfolio.

Currently overall demand for the home equity products is down.

Although we grew our average home equity loans by 4% year-over-year.

Our high quality traditional portfolio has performed very well during this cycle, with current net charge-off ratio of only 1.29%.

The Consumer Finance originated loans carry lower FICO scores, and represent approximately 13% of the total portfolio.

The net charge-off ratio on the Consumer Finance portfolio was 6.56% for fourth quarter.

Credit card loans are detailed on slide 16.

The net charge-off ratio has declined each of the last two quarters, due to a portfolio purchase in early September.

On the right hand side of the slide, we have adjusted the ratios for this portfolio purchase to show that the upward trend in the credit card net charge-offs continues.

Given the high quality of our portfolio, however, we continue to perform significantly better than the industry average.

Similar to the mortgage and home equity products, early stage delinquencies improved on a linked quarter basis.

Slide 17 provides additional detail on the retail leasing portfolio.

Net charge-offs have declined as better used car prices have significantly reduced end of term valuation and credit losses.

Finally, slide 18 summarizes the credit information on other retail loan portfolios.

Early stage delinquencies and net charge-offs declined during the fourth quarter, and as was the case with retail leasing, the auto loan portfolio loss rate improved as used car prices have rebounded from their lows late last year.

In summary, and going forward, we expect net charge-offs and non-performing assets to continue to increase but at a decreasing rate.

Additionally, we will continue to assess the adequacy of our allowance for credit 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.

I will now turn the call over to Andy.

Thanks, Richard.

The overall quality of our fourth quarter results reflect both the strength and quality of our organization, and I would like to take few minutes to provide with you a few more details about if results.

I turn your attention to slide 19 which gives a full view of our fourth quarter and 2009 results.

Earnings per diluted common share were $0.30 for the fourth quarter of 2009, equal to the prior quarter, and $0.15 higher than the fourth quarter of 2008.

For the full year 2009, the Company earned $0.97 per diluted common share.

Approximately 40% below the full year 2008, as higher credit costs more than offset a 14% increase in operating income.

The key drivers to the Company's fourth quarter results are detailed on slide 20.

The $0.15 per share increase year-over-year was the result of a 20.8% increase in net revenue, driven by a 9.2% increase in net interest income, and a 37.8% increase in non-interest income.

This favorable change in revenue was partially offset by a 15% increase in non-interest expense, and higher credit costs.

Credit costs were impacted by $478 million increase in net charge-offs, partially offset by a decrease of $357 million in incremental provision year-over-year.

As the need for additional reserves lessened.

Earnings per diluted common share were comparable on a linked quarter basis.

Positive variances in net revenue and the provision for credit Hosses were offset by growth in non-interest expense.

A summary of the significant items that impacted comparison of our fourth quarter results to prior periods are detailed on slide 21.

The two significant items in the fourth quarter of 2009 were net securities losses of $158 million, primarily representing impairment on our SIV exposure, and provision in excess of net charge-offs of $278 million.

These two items reduced earnings per diluted common share by approximately $0.18.

Significant items in prior comparable periods are listed on slide 21.

And reduced earnings per diluted common share by $0.19 in the third quarter of 2009, and $0.34 in the fourth quarter of 2008.

Turning to slide 22, net interest income increased year-over-year by $199 million, or 9.2%.

Primarily as a result of a $19.4 billion increase in average earning assets, $14.2 billion of which was acquisition related.

Net interest margin was two basis points higher than the fourth quarter of 2008, due to our ability to replace wholesale funding with low cost deposits, as well as overall lower funding costs.

On a linked quarter basis, net interest income was higher by $203 million, due to an $11.3 billion increase in earning assets, $9.2 billion of which was acquisition related.

And a 16 basis point increase in net interest margin.

The net interest margin improved due to the change in mix between wholesale funding and low cost deposits.

Overall funding costs and a favorable change in loan spreads.

The acquisition of FBOP did not have a material impact on net interest margin.

Assuming the current rate environment and yield curve, we expect net interest margin to remain relatively stable in the low to mid-380s for the first quarter of 2010.

Slide 23 provides additional detail on our growth in average earning assets this quarter.

Year-over-year average total loans grew by 8.2%, primarily due to acquisitions while average investment securities increased by $2.2 billion or 5.2%.

Linked quarter, average total loans you grew by $9.7 billion, again primarily due to acquisitions, while average investment securities rose by $1.6 billion or 3.7%.

Slide 24 breaks down the growth in average total loans by category.

Looking at the chart on the left you can see that the relatively small increase in total average loans excluding acquisitions was due to a 12.2% drop in average commercial loans as retail residential mortgages and commercial real estate were all higher on a year-over-year basis.

The majority of the loans related to FBOP and Downey PFF acquisitions were reported as covered assets.

Covered assets increased by $13.3 billion year-over-year with FBOP and Downey PFF contributing $8.9 billion, and $4.4 billion of the increase respectively.

On a linked quarter basis, the growth in average loans was primarily due to acquisitions, which accounted for $8.2 billion of the $9.7 billion increase.

Average commercial loans declined by $1.2 billion, and were partially offset by increases in residential mortgages and other retail lending.

Moving to slide 25, you can see the very favorable growth in low cost core deposits over the past five quarters.

Average total deposits grew by $36.4 billion, or 25.2% year-over-year.

Partially due to acquisitions.

Importantly, low cost core deposits, non-interest bearing, interest checking, money market and savings excluding acquisitions grew by 35.1%.

This growth reduced the need for wholesale CD and branch time funding and contributed to the net interest margin expansion.

On a linked quarter basis, average low cost deposits excluding acquisitions grew by $9.2 billion or 7.5% unannualized, which again had a positive impact on the net interest margin.

Slide 26 presents in more detail the changes in non-interest income on a year-over-year, and linked quarter basis.

Non-interest income in the fourth quarter of 2009 was $553 million or 37.8%.

Excluding the favorable change in net securities losses, non-interest income was higher by 26.7%.

The positive variance was driven by a 10.3% growth in payments-related revenue, mortgage banking related growth of $195 million, due to favorable change in the MSR valuation and related hedge of $103 million, and a higher gain on sale margins related to a 36.4% increase in production volumes.

41.2% in commercial product revenue due to concentrated sales efforts related to recent investments in growth initiatives and other higher revenues due to lower end of term lease, residual valuation losses and payments, contract termination gains.

On a linked quarter basis, non-interest income was lower by $77 million, primarily due to net significant items which were unfavorable by $121 million, a $58 million reduction in mortgage banking revenue, primarily due to a 25.2% reduction in production volume, and an unfavorable change in the MSR hedge of $34 million, and lower trust and investment management fees, deposit service charge and Treasury management fees.

These unfavorable variances were partially offset by an increase in other revenues related to lower end of term valuation losses and the payment's contract termination fee.

Acquisitions had a minimal impact on the variance and fee revenue on a year-over-year or linked quarter basis.

Finally on slide 27, we have provided highlights on non-interest expense which was higher year-over-year by $290 million, or 15%.

The majority of the increase can be attributed to acquisitions, which accounted for $86 million of the increase, higher costs related to investments in tax advantaged projects, which accounted for $79 million of the increase and FDIC insurance expense and other loan expense primarily related to costs associated with other real estate owned.

On a linked quarter basis, non-interest expense was higher by $175 million, or 8.5%.

Primarily the result of acquisitions which increased expense by $66 million, costs related to investments in tax advantaged projects which accounted for $60 million of the increase, the elimination on October 1st of the 5% salary reductions related to our early 2009 cost containment initiative, seasonally higher legal and professional expense and other loan expense associated with other real estate owned.

Finally, the tax rate on a taxable equivalent basis was approximately 21% in the fourth quarter, and full year 2000.

The rate is expected to gradually increase in 2010, with net income over time.

As you turn to slide 28, I will turn the call back to Richard.

Thanks, Andy.

In the fourth quarter of 2009, our Company posted record net revenue, achieved positive year-over-year core operating leverage, continued to lend, and grew our core deposit base, preserved the strength of our credit rating and capital base and completed a fourth FDIC-assisted transaction adding 150 branches to our franchise.

Just yesterday, we announced the completion of the purchase and conversion of 14 additional branches in Nevada from BB&T.

We positioned this company for growth and we're managing this company for the long term.

Our core businesses continue to perform.

We're operating from a solid capital and liquidity position and we are well positioned to capitalize on the economic recovery.

As we enjoy the benefits of the flight to quality, as we continue to invest in organic initiatives, M&A and joint ventures, as we opportunistically acquire, and as we benefit from core businesses that are scalable and can be leveraged as this economy recovers.

The coming year will not be without its challenges including a soft economy, and its impact on credit quality.

In addition to the new regulatory and legislative oversight and actions.

I'm confident that the momentum we have created during the past very challenging year has positioned US Bancorp to grow and prosper as we continue to prudently lend to credit worthy borrowers, judiciously invest in and grow our franchise, support our communities, provide best-in-class customer service, and importantly, create value for our shareholders by continuing our earnings power, high quality balance sheet, and capital strength.

That concludes our formal remarks.

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

(Operator Instructions).

Your first question comes from the line of Matt O'Connor of Deutsche Bank.

Good morning, Matt.

Good morning.

Hey, guys.

Some other banks have pointed to signs that loan demand is increasing, especially in small business and the lower end of middle market.

I'm just wondering if you can comment on what you think your opportunities are there and I guess first, if you would agree that there is some signs it's picking up.

Sure, Matt.

We are seeing short-term increases.

We had a nice December in virtually every small business category which includes the card, traditional lines, SBA, small ticket leasing, across the board.

January is starting out with kind of a moderate continuation but we're not seeing a robust strength.

So we're not going to call it a trend yet but we would agree that in the last part of the year we saw an uptick that would give us some hope.

In the rest of the markets, though, we're seeing, in categories we were seeing loans be fairly predictable.

There are some companies in each category that are getting stronger and they're starting to move out in front.

They're starting to use lending again as part of their growth initiatives but by far the majority of companies are holding back at this point, still using their profitability coming from efficiency and balance sheet management, not so much from growth.

And just separately on credit, your guidance for NPAs and charge-offs to increase but at a slower rate, the rate's already pretty low so feels like 1Q is probably about the peak.

One, is that a fair characterization and then two, shouldn't the reserve build be about done if that's the case.

Your conclusion is right.

That's exactly the one we wanted you to make.

We're getting down to the point where we've been completely consistent on that trajectory and it's been accurate and we're going to say it again because we're getting close to splitting hairs here.

We're going to get down to venom mall increases of both NPAs and charge-offs.

As long as there's no big surprise that we don't predict in the economy.

Having said that, you can continue to expect the provision that you're seeing.

We'll build it at a lesser rate until we think we have a solid, consistent pattern of improvement and once we see that, we believe our ratios are sufficiently acceptable and then you won't see us add to the provision.

We're not quite there.

That will be a lagging effect to our consistent expectation that's the inflections near term for charge-offs and NPAs.

Just to be clear, even if charge-offs and NPAs are flat or down a little bit say in 2Q, there will be some loan loss reserve build.

I think so.

We just want to be abundantly careful to make sure we see a repeated consistency, so one quarter in this environment isn't enough to convince all of us that we're done.

A couple of quarters, yes.

And because it's just a matter of time, not a matter of the facts, we probably will continue to add the provision a little longer until we're sure.

Okay.

Thank you very much.

Yep, thanks.

Your next question comes from the line of Betsy Graseck of Morgan Stanley.

Hi, Betsy.

Hi, good morning.

Thanks.

A couple questions.

One on the dividend.

You had indicated in the past that to consider any action on the dividend you needed a line of sight on earnings and clarification from regulators on capital and maybe could you just give us an update, especially given that Basel 3 has been announced.

I know it's not from the US regulators, but how does that factor into your thinking as to what you need to hear from the regulators in terms of line on sight on that.

I don't know that we're calling it Basel 3 yet, but it's getting that nomenclature.

Our line of sight is still very good for the Company and you might guess we are stress testers par excellence.

We know how to stress test the Company and we feel that a nominal dividend increase is quite reasonable for this company but we also realize and respect the need to work with the regulators who are working on Basel, they're working on what eventually will become G-20 constructs for global capitalization, And most recently they came out with new guidance for both dividend and stock repurchase paperwork that needs to be completed to confirm our preparation and that is connected to Basil.

So all that being said, we continue to work with our regulators to comply with all that necessary information.

We know that they are seeking and we agree that the economy needs to be on firm footing longer than it has been so far.

So my characterization would be that despite our own confidence in our own numbers and I would suspect even our regulators' confidence in our predictions under the backdrop of an uncertain economy, it's prudent for all of us to wait a little longer.

Fulfill the requirements of the very tedious but appropriate paperwork that needs to be complied with in terms of providing capital guidance and the necessary stress testing that goes along with it.

Andy, you might add to that.

We are working with the regulators in a number of different aspects of Basel 2 and fulfilling our requirements there, and they're on track with our own schedules.

The new guidance regarding the dividend, stock buyback, that came out as related to making sure that the stress tests are -- have been done sufficiently to warrant a change in those policies, is that right?

Yes.

I mean, it really is -- it's a stress test overlaid and intersected with capital and being able to say stress test isn't simply a matter of loan quality or earnings but they intersect it with your current capital positions, your ability to earn and generate capital and the quality of your forward view, put that all together.

What will be the eventual capital guidelines which they have not come out with which we're all waiting for.

Until those intersect, plus the economy needs a little longer to go, we think we'll be among the first to assess that decision but we're in the Q for that but we also appreciate the fact that waiting makes sense for all reasons go the stress test .

The stress test is kind of fluid.

It's not the same one that was done last April?

It's a stress test we do on our own numbers and forecasts and projections and we do that every quarter.

It's something we do on our own and use our own projections, our own definitions of what a stressed economy would look like.

Got it.

Those definitions be accepted by the regulators as the appropriate stress test that they would agree with so that they can make the assessment against our own evaluations.

Got it.

Separate question on this tax that's being suggested.

I know it has to go through Congress, et cetera.

Can you just give us a sense as to what the potential impact could be on your organization and how you anticipate managing for that?

Sure.

You mean the finance crisis responsibility fee.

Correct.

We understand why it's coming about and we can account for that in our forward EBITDA.

If it's a July 1st kind of event and we're looking at the 2010 impact, 125 to $150 million.

On a full year basis.

On a full year basis.

For us that would be about half that number.

Yes.

We also appreciate there may be some different definitions that will change what's included or not included.

Based on our fairly good core funding and our strong earnings I think the impact to our EPS as forecasted by actually many of you is not insignificant but it's in the 2 to 4% kind of a range on a full year 2011 and that's something that obviously we can manage and we intend to make up for in just continued excess performance and make sure our shareholders don't feel it.

The impact to us, Betsy, has really been diminished over the last four or five quarters as we experienced tremendous deposit growth with the flight to quality that we talked about, and given that loan demand has been a little weak out there, we've become a much more deposit funded as an organization overall.

Having said that, though, I must say that I'm disappointed at the idea that being kind of one size fits all.

We will forever be in that kind of middle ground of being large enough to hit all kinds of systemic important companies being a $280 billion, but we're also going to fight the good fight that we're a fairly simple Company and we're in the very basic business of banking and payments and some of these things are perhaps levied at us just based on our size and in some cases, based on the actions of a lot of companies in the last few years and a lot of those actions we did not take and on calls like this we were withstanding some of the alternatives that others were taking to make a lot of money and we didn't.

I'm going to continue to be outspoken to try to keep US Bank in the family of what's right for the industry, but I'm going to continue to distinguish with not being cast with the masses when it comes to things like fees, reputation, impacts and taxation.

I'm against it and I don't think it's right.

Thank you.

Yes.

Next question comes from the line of John McDonald of Sanford Bernstein.

Hi, John.

Good morning, John.

Good morning, guys.

Andy, the net interest margin was significantly better than your guidance, just wondering what surprised you on the upside and do you still have an upward bias in your outlook for first quarter or do you really expect it to be kind of flattish this time.

I really do expect it to be flattish, John.

It wasn't any one single item.

I would say it's a combination of three or four things.

First, loan spreads both in the wholesale and in the retail categories all were a slight bit better than our projections.

Secondly, our core deposit growth continues as you see from the numbers, that overall core deposit funding is at a lower cost and finally, our overall wholesale funding levels are a little bit lower than our expectations so it's a combination of all those things.

And given that level of trend we do expect it to be relatively stable in the low to mid-380s for the first quarter.

And John, as you compare to last year's fourth quarter, we had that slip to 383 based on Downey's primarily, this is more sustainable, across the board, repeatable kind of margin improvement that we feel confident and can settle in around there.

Andy, follow-up on your guidance about the tax rate.

Starting the year at 21 or so, does it ramp up slowly or does it depend on your profitability ramp or what's driving that.

It will ramp up consistent with our profitability.

So I would expect a moderate ramp-up, not a significant increase.

And toward what ultimately might be a normal tax rate for you guys?

As we look at the full year, full year of 2010, I would expect somewhere in the low 20s, between 22 and 25%.

Okay.

Tax adjusted.

Okay.

And then final thing, Richard was asked kind of in the past trying to understand the cumulative impact of a number of acquisition that's you've done, trying to assess how much of these deals are in your current earnings and how much are still to come.

Any sense of the cumulative impact the deals might have on 2010 and beyond on your earnings power?

John, this is Andy again.

What I would tell you, we try to isolate the specific expense items as you know it in the loan growth and deposit growth items in the slides and you can see the numbers there.

I would say as you look at the revenue growth that occurred here in the fourth quarter, about 20% of that revenue growth was related to the acquisition impact, FBOP and PFF and Downey.

The remaining 80% was really core.

Most of that increase was in the margin section.

The fee income component was relatively modest.

It was principally in margin.

John, to add to that, the Company a few years ago might well have had acquisitions like this and it would have been more of a play to save the expenses, run off the high cost deposits and move along.

In the last couple of years, this company now takes an acquisition and brings it on for more customers.

We protect the depositors.

We intend to develop the relationship and not lose them, just based on price.

We're not looking for the cost saves as much.

We're looking for the revenue growth.

What I would say to you is it's these acquisitions are joining the core franchise now of being more of a revenue focused company so there's an additional attribute there, a synergy that comes along with it that you should just include in the Company being bigger, doing better which is in our numbers as we thing going forward.

But if I perform for you guys like we said we would, this company entirely will perform better with higher levels of revenue and higher levels of operating leverage going forward because we positioned ourselves to grow as opposed to just be stable with expenses coming down.

Okay.

Thanks, guys.

Your next question comes from the line of Heather Wolf of UBS.

Good morning, Heather.

Hi, good morning.

I was hoping we could get a bit more information on the modifications.

Specifically, if you could repeat the dollar amounts again and also default rates, what's sitting in non-performing versus performing, level of debt forgiveness, et cetera, any information you could give us would be great.

Let's have Bill do that, Heather.

I'm going to remind you one of my comments, was, though the HAMP program gets all the headlines.

It's not the only program that a lot of us have participated in.

Particularly banks like ours that participated in FDIC deals.

In November of 2008, one of our agreements with the FDIC was to be the first bank besides Indy Mack which they at the time owned that would adopt the FDIC modification program so we've done and in fact it's a bigger number for us than HAMP.

Also, we have loans before either of those events we were doing what was right for customers by keeping them in their house and saving ourselves from a home.

So I want the cover story that it isn't just HAMP.

And I said it in my comments.

I'll say it again.

You won't see us in those monthly HAMP reports.

Don't have that kind of base of customers or kind of loan to value portfolio.

That's actually a good thing but headlines will always rank banks and suggest that those with the highest number are those doing the best.

Bill, bring some color around the numbers.

We have about a little over $1.3 billion of restructured mortgage loans and those are the accruing restructured loans.

And we look at both the 60 day redefault rate which is what the regulators use and then we also look at a rate where things enter foreclosure.

And our 60 day rate is 27.5%.

And one that's ultimately wind up in foreclosure is 17.6%.

The 27.5% compares to what the OCC put out in their third quarter modification report, where it shows the industry averages are close to 50% on that.

So ours are running significantly better, better than that.

Okay.

Great.

And any information on debt forgiveness?

Yes.

We do have programs for debt forgiveness.

If you run through the HAMP process, obviously you don't get there but we do have our own modification programs.

So we do sometimes look at that because the cost of putting up 114 reserve can be significant, so sometimes it's in the bank's and the borrower's best interest to do debt forgiveness.

What we're learning too is there's a new psyche around borrowers and we're learning that sometimes lower payments, sometimes lower principal, sometimes combinations causes behavior, permanent behavior change and sometimes it doesn't.

So despite best efforts, if you don't hit the right psyche with the right borrower you'll do all these actions and they'll continue to default and walk away, and I think the whole industry is learning new reactions to new actions that are coming along and probably another couple of quarters we'll probably figure out the best, highest, most efficient way to protect a customer and get them to stay with the home and give us the benefit of not having a property and then staying in it.

Okay.

Great.

And I just had one other quick question on deposit growth.

Sounds like it has been sort of surprising you guys to the upside.

I know it's been surprising me to the upside.

Do you have any color going forward about what to expect and maybe what to expect in different rate backdrops as well?

Our deposit growth has been across categories, both retail and wholesale, across geographies throughout our states.

And it's been incrementally positive each and every quarter.

As we look forward, I would expect to continue to see growth in our deposits.

We've become a little bit more aggressive in retail deposit pricing.

I would not expect to see the same level of robust growth that we've seen the last few quarters but still continued growth and given our expectation around the continuation of moderate loan demand, I think you'll see us continue to be more deposit funded.

Let me add to that.

There are a couple of things.

We have over 1,000 of our 3,000 branches are in small communities.

And we have a community banking strategy that forever has been unique and different and it's our secret weapon.

As you might guess, the propensity of banks that are under stress are small community banks these days and in those markets it's latent, it comes a little later than the beginning of the recession.

Customers start looking around thinking.

Wow, I really need to put my money in a bigger, safer name, in many cases.

So we're seeing robust growth and it just doesn't come out in the details, secondly we have a corporate trust business that starts to chin up again as the market starts to warm up.

There's lot of good core deposits that come in that category.

Lastly, our corporate banking strategy which we've been talking about for two years, typically gets visibility because of the actions we're taking now on the balance sheet or in our capital markets.

But one of the undertows to that success is more deposits that come along with those relationships and all those are adding together well above just what would be more deposits from each customer.

We have a lot more customers each with deposits.

Okay.

Great.

Thanks so much.

Your next question comes from the line of David Konrad of KBW.

Good morning.

Had a question regarding FDIC deals.

I mean, your capital ratios held in very well this quarter despite the FBOP deal which I think speaks to your capital generation capabilities but maybe from an operational standpoint, what's your appetite over the near term to look at more FDIC deals and then kind of bigger picture, how do you view the tradeoffs or the rankings between building your footprint through FDIC deals and increasing the dividend?

Okay.

David, it's Richard.

We said last time we're sticking to it.

FDIC deals need to be big enough and meaningful enough for us to put our Company through the distraction and so we're still looking at deals that have -- I don't want to -- probably 50 to 100 branches to make it worth the effort.

That means we're taking out of our scope.

And those sorts of deals.

They're just distraction costs more than they are financial costs.

If we look at those deals of the size I spoke to, FBOP's a great example.

If we don't feel we can protect those capital levels and continue to grow with our own operating performance then we won't make that tradeoff.

In other words, if we can't grow through it we won't put our burden on either the risk of the dividend being deferred longer, of the risk of our capital levels falling.

So it's got to hit that sweet spot and that has a lot to do with our own confidence in our earnings which is why we stress test everything to make sure before we do a deal we can afford to make those tradeoffs.

Dividend is very important which relates to capital.

We protect it as the precious asset that it is.

If a great deal comes along and we can afford it and it's meaningful enough to cause a distraction for the Company we will grab it and move forward.

And what's your views of the Chicago market with the recent deal you certainly increased your position in Chicago but the market shares are still light relative to too many people in that market.

What's your plans with Chicago.

Chicago, we're number nine now, I think up from 13.

What I like about Chicago is what I know about California, having been a native, it's not the entire market.

It's the markets we're in.

We're a very heavy Western franchise, neighborhood bank.

Now moving into the south with FBOP.

Not so much actually in the city, but enough to be connected to the commuters.

And so while I would love to be more than nine and we will make an effort to be more relevant in that market, we've got enough market position in the community that I think it's a unique strategy, between large metro and community and for us it's working quite well.

If I could go from nine to say five or six and strengthen the total performance in each of those markets, we would be satisfied with that.

Getting to the top three will probably take longer but it is a goal to grow Chicago and become relevant in its entirety, certainly we'll start in each market level.

Okay.

Great.

Thank you.

Your next question comes from the line of John Barnes with RBC Capital Markets.

Good morning, John.

Good morning.

Richard, last quarter you talked a little about deposit service charges.

You thought that maybe, the way things sat last quarter, it might be 20% or so out of revenues and just based on what you know now, do you think that that's still valid?

Yes, I do.

So first we have two step process coming up in our life on that topic and this is all pre what may come out of the consumer protection agency that I'm sure will come about.

In the end of the first quarter, we have our own identified opportunities to improve the transactions, routines and improve the reaction from our customers by changing the maximum number of overdrafts and the dollar amounts and all of that.

That occurs at the end of this quarter.

Then at the given the third quarter we will follow the rules of the Federal Reserve that's come up with a different overlay on rules and regulations on NSF and OD and all of those without any sense for what kind of new offsets we might create.

I don't mean just service charges but new ways of relating to customers and their total relationship.

That for us is a $200 million to $300 million kind of impact for USBank this year, and we will still await will be the potential further negative of what I think the consumer protection agency will probably overlay on some of those fees as they will consider either nuisance or excessive.

On the other hand I do think we and not related to what others do so much, is find a better value proposition where we can create different paradigms that include how you can be covered, provide insurance for customers when they in fact don't want to be surprised.

I think we're all expecting this opt in, opt out to be a moment of time where we learn a lot of customer behavior.

We're expecting extremely low levels of opt in as people begin opting out because we simply aren't going to build those financial expectations.

If they come along, we'll be surprised pleasantly.

We expect a very, very low percentage of people after they beginning in September to want to jump back in until they experience a moment of embarrassment at which point they may say tell me again now what are my choices and we want to have a much better menu of options.

Say look, if you don't want to be caught without money at a certain point of time, there are a number of different programs or different alternatives we can give you to make sure you have insurance to get through your life because perhaps your behaviors up until now you were paying a lot but you were also getting a lot.

So we're expecting $200 million to $300 million loss this year, by next year at this time I'll we'll have a much better understanding of behaviors, customers' willingness to pay for certain services and by then I think we'll have much better clarity around it but for now we're expecting the worst.

Will you be very aggressive in trying to urge customers to opt in?

We're not going to do that.

I want to them to initiate it.

If I were to tell you ahead of time to opt in because something hasn't happened to you, it won't be a very sustainable opt in.

The rules are going to require us to opt in every time you have an issue.

Have a moments where you know to call us the minute something happens.

Think of the alternatives.

With mobile banking and stuff like that, we could easily create a product where if you have an overdraft circumstance, step out of line, input something in your mobile phone and all of a sudden we'll transfer money over, go back in line and get your transaction.

There's lots of ways, prefunded debit cards we'll give you to put in your pocket in case you have a moment of uncertainty.

I think there will be plenty of ways to give customers alternatives and opt in will probably be last reaction to a choice that is in or out.

I don't want to force people into that.

Okay.

Just one quick follow-up, just the small business lending.

I think you talked a little about your focus on that.

Maybe that was a promise to the administration to go back and relook at the category.

Any surprises or is it about what you expected?

Yes, no, you mean the second look?

Yes.

Second look is really -- it's working.

It's a fairly nominal opportunity to override basically the computer programming that goes along.

Small business is not manually underwritten, but when you have now a loan that's close call, and it was going to be turned down by the computer, we do outsource it to a human.

The human takes a look at the circumstances, and sees what maybe the computer couldn't.

Low 10 to 15% levels we might find a way to make that deal.

It's not huge, but it's better than zero.

It's worth the expense we put against it for the opportunity to say yes and build the balance sheet.

I'd say it's a good tradeoff and it's working like I thought it would.

Thanks for the help, guys.

Thanks.

Your next question comes from the line of Dave Rochester of FBR Capital Markets.

Hi, Dave.

Good morning.

You had mentioned briefly that you were getting more aggressive in retail pricing, deposits, wondering what the driver for that was.

Are you seeing some of your competition doing the same thing right now?

This is Andy.

About a year and-a-half ago, I would say we were in the lower quartile in terms of deposit pricing in the marketplaces that we were in and in addition, there were a number of competitors who were very aggressive, outside of what I would call normal bounds in terms of deposit pricing.

We made a decision to be at least at the median in most of our markets.

We felt that's where we needed to be.

In addition, convenience and quality of our Company, we needed deposit price in the median.

Many of the competitors have moderated their level of pricing.

Those two things combined is certainly key factors in our ability to grow retail deposits.

Given the interest rate scenario analysis you guys have conducted, do you anticipate the margin comfortably rising above the 4% range, maybe to the 4, 4.25 range in the longer term as NPAs decline?

As I said in our prepared comments, we expect a relatively stable low 380s given the current rate environment in yield curve and as you can see from our Q1, you'll see from our K, we continue to be slightly asset sensitive.

That will help us modestly.

Stable next quarter, but in the longer term, say two to three years out, is there any reason structurally why you can't get to the 4 to 4.25 range that you see.

There's no structural reason we can't but we're not projecting out that far.

We were 424 a couple years ago and one of those issues was not defending deposit pricing.

We're not that bank anymore.

We're also going to stay on the high quality asset generation so we may not enjoy some of the higher margins that come with higher risk.

We're simply going to stay in the conservative category and kind of earn it the old fashioned way.

We don't see that at least in the next couple years as an outcome without having to stretch for it and we're not going to stretch for it.

Thanks, guys.

Next question comes from the line of Mike Mayo of CLSA.

Hi, Mike.

Good morning.

You guys gave some of the impact from FBOP on expenses, fees and loans.

What was the impact on net interest income for the fourth quarter and what was the impact on the margin?

There was no material impact to margin, Mike and net interest income was just about $100 million.

Okay.

And the HAMP program on the credit losses, the charge-offs were, what, 2.54%, if not for the HAMP program what would have charge-offs been?

Talking our total residential mortgage charge-off rate and what it would have been without the HAMP.

Yesterday CitiGroup gave a number.

We don't have that calculated.

Okay.

I mean, it would not be a material difference.

Most of our HAMP program is in the -- well, there's the FHA, part of the FDIC covered, but the -- on the securitization portfolio, so it's -- a lot of it's not on balance sheet.

You mentioned loan utilization went from 32% in the third quarter, down to 30%.

And I thought last quarter you said it was an all-time low.

So is this a new all-time low for loan utilization.

Yes, it is.

38% a year ago, so it's a big drop.

And we saw a little uptick in November, and then it came back down in December.

So it was short-lived and that might be year end issues of companies.

This is primarily our wholesale customers who have the open to buy.

They've got the line available and their payment down.

So that's the best indicator and I've used this when we talked to the administration as well, best indicator of loan demand, people that have it, can use it, it's preferred rate and they don't.

Until that starts to turn, that's your best proxy for what the loan demand is in the world, and we're not seeing it.

When you say wholesale customer, can you define that.

That's going to be anybody above small business, even in community banking.

Small business is not included, but anything from lower middle market to middle market to corporate including commercial real estate in communities and in the large market so everything but small business.

There's just not demand.

You're willing to loan but there's no demand?

You got it.

That's a good sound bite.

And then last thing, you went through a lot of one-time or noise in the quarter.

And I guess I can always follow up afterwards.

You had overprovisioning, you had the securities losses, you had a low tax rate and it seemed like you had some other noise in expenses and also fees, the other line.

Is there anything else you would want to really highlight in expenses and fees as being kind of nonpermanent?

In expenses, Mike, the fourth quarter is traditionally a high level mark for tax amortization expense related to our tax advantage programs and that's typically a seasonal activity that always occurs in the fourth quarter.

That would be the principal item there.

Many of the other things are acquisition related and they're going to be in the run rate on a go forward basis.

I don't want you to think it was a noisy quarter.

I actually thought it was pretty straightforward.

We did mention the impact of our cost containment activity in February of last year when the market was obviously getting worse.

We felt it was prudent to take a 5% expense reduction across the Company and we did and in October we thought that things were steadying back a bit and the Company's revenue was strong enough that we added it back to the pleasure of the employees and that run rate shows up in the linked quarter aspect.

But that is now the appropriate run rate that we are back at.

But were it not for those actions last year we wouldn't have been able to offset some of the other loan loss charges and things as well.

So we're pleased we did it, but that would be a non-sustainable linked quarter effect too, Mike.

Other than that I think you should see as pretty standard operating.

All right.

Thanks.

Next question comes from the line of Glenn Greenberg of Brave Warrior Advisors.

Good morning, Richard.

Your non-interest income you haven't really commented on in the Q&A, but it seems to be coming on very strong and I know you said you have a goal of having that be about equal to your net interest margin.

I wanted to get your thoughts on whether you see perhaps the potential for it to exceed net interest income given the slow growth in the economy.

I do.

It's competing -- a couple years ago it was ahead of net interest income because margins were tight.

The yield curve wasn't very yielded well and our payments and trust businesses were gangbusters.

The complete opposite right now and our payments and our trust businesses are just wide open for business, as I said before, the freeways got lots of lanes, there's just not many cars on it.

When they're ready, we're ready.

I think with higher margin and higher asset balance sheet growth, coupled with what will soon be the emerging growth of payments and trust, I would love them for compete with each other at intensely higher levels than a couple of years ago.

It will eventually start giving net interest income a run for the money.

Thank you.

Your next question comes from the line of Ken Houston of Banc of America.

Hi, Ken.

Hi, Ken.

It's actually Ian Foley for Ken.

You guys were one of the first to really go into the FDIC assisted deals with Downey and PFF.

Was wondering if any of the economics changed year-over-year when you did FBOP compared to the first two.

I would say the economics are very similar.

The expectations in terms of deposit runoff are consistent with what we -- what the actually are consistent with our expectations thus far with FBOP it's starting out the same.

The incremental revenue impacts from just having more outlet so-to-speak in the California marketplace is very positive as Richard mentioned.

No, they haven't changed substantially.

This is interesting.

But Downey and PFF really were thrift kind of deals.

And they were consumer deals and they were mortgage deals.

And FBOP was a core bank deal with commercial real estate and wholesale customers.

And so as much as they looked a lot alike they were entirely different and I would say we learned a lot from Downey in our better ability to value something like an FBOP by knowing the difference.

And each has different attribute.

But between those two, there's not a deal I can't think of the FDIC could put before us we wouldn't have high confidence in knowing exactly how to model and be able to optimize our bid in order to get the best deal if any of those comes along.

We've kind of seen both ranges of it.

I've got to give props to the FDIC.

They're good to work with.

They give us good feedback.

All the way from closing night through the accounting issues we've had very good success and have enjoyed that relationship.

Okay.

And one quick follow-up on the margin.

I know you said there was no impact.

I'm assuming that refers to the purchase accounting.

But was there any restructuring done to FBOP's balance sheet that could have strengthened their core margin?

No, we wrote down the loans to fair market value and that's reflected in the run rate but the impact to the margin was immaterial.

Thanks, guys.

You bet.

Your final question comes from the line of Meredith Whitney of Meredith Whitney Advisors.

Hi, Meredith.

Hi, Meredith.

Or not.

Your line is open.

This is me guessing she went to the B of A call.

If that's the last caller.

There are no further questions at this time, sir.

Judy, do you want to close it?

Yes.

Thanks, everyone for listening to our call today and as always, if you have questions, please give me a call.

Thanks.

Thanks, everybody.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.