美國合眾銀行 (USB) 2010 Q2 法說會逐字稿

Welcome to US Bancorp's second quarter 2010 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 record and available for replay beginning today, at approximately noon Eastern time through Wednesday, July 28 at 12:00 midnight Eastern time.

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

Thank you, Lori, 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 second quarter 2010 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 could materially change our current forward-looking assumptions are described on page two of today's presentation, 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.

Good morning, everyone.

Thank you for joining us.

I would like to begin on page three of the presentation, and review a few of the highlights of our quarterly results.

US Bancorp reported net income of $766 million for the second quarter of 2010, or $0.45 per diluted common share.

Earnings were $0.33 higher than in the same quarter last year and $0.11 higher than in the first quarter of 2010.

Earnings per share included a $0.05 benefit related to a nonrecurring exchange of perpetual preferred stock for outstanding income trust securities, which was recorded during the quarter as a direct increase to net income applicable to common shareholders.

We achieved record total net revenue of $4.5 billion in the second quarter.

This represented an 8.7% increase over the same quarter of 2009 and was driven by favorable changes in both net interest income and fee revenue.

We continue to post strong year-over-year average deposit growth of 12.3%, or 4.1%, including acquisitions.

Total average loans grew by 4%, benefiting from recent acquisitions.

Excluding these acquisitions, average loans declined by 2.7% year-over-year.

Credit quality improved in the second quarter.

As both net chargeoffs and nonperforming assets declined from the levels posted in the first quarter.

The decline in net charge-offs led to reduction in the provision for loan losses on both a year-over-year and linked quarter basis.

Additionally, although total provision expense is lower, it also included $25 million of provision in excess of net charge-offs to reflect current economic conditions.

We maintained our strong capital position, but the Tier 1 capital ratio and the Tier 1 common ratio increasing to 10.1%, and 7.4% respectively at June 30.

Slide four graphs our performance metrics over the past five quarters.

Return on average assets in the second quarter was 1.09%, and return on average common equity was 13.4%.

Both ratios trending upward over the past five quarters.

The five-quarter trends of our net interest margin and efficiency ratio are also shown in the graph on the right side of slide four.

This quarter's net interest margin of 3.9% was unchanged from the prior quarter and 30 basis points higher than the same quarter of 2009.

Our second quarter efficiency ratio was 52.4%.

Although best among our peers, this higher ratio compared with prior quarters reflects ongoing investments and the impact of recent legislative and regulatory actions on revenue and expense.

We fully expect to remain best in class in terms of efficiency, but anticipate that the new regulatory and legislative actions, as well as our continuing investments in our franchise will serve to keep our efficiency in the low 50s versus the high 40s, which we've enjoyed for many years.

Turning to slide five, our capital position remains strong.

As previously noted, our Tier 1 capital and Tier 1 common equity ratio rose to 10.1% and 7.4% respectively at June 30.

Additionally, our tangible common equity to tangible assets rose from 5.1% at June 30, 2009, to 6.0% at June 30, 2010.

Our Company continues to generate significant capital each quarter, due to the momentum in our diverse business mix a number which we are less capital intensive than traditional balance sheet businesses.

In addition to our superior efficiency and ongoing profitability.

Moving on to slide six, average total loans outstanding increased by $7.3 billion year-over-year.

As noted on the slide, excluding acquisitions, total average loans declined by 2.7% year-over-year.

On a linked quarter basis, total average loans decreased by 0.9%.

The lack of growth in average loans outstanding excluding acquisitions was largely due to the lower usage of revolving lines of credit by our commercial and corporate customers, and due to lower demand for new loans from credit-worthy borrowers.

Utilization of outstanding commitments by these commercial and corporate borrowers continued to decline from an average of about 28% in the first quarter of 2010 to approximately 27% in the second quarter of this year.

Despite the reduction in average loans outstanding, we continue to see the benefits of the flight to quality, as we add new customers and grow loan commitments.

More importantly, although total average loans declined on a linked quarter basis, total loans outstanding were higher at June 30 than on March 31, signifying we are seeing some improvement in loan demand as we continue to originate and renew lines and loans for our qualified customers who want and need credit.

In fact, during the second quarter of 2010, US bank originated over $10 billion in loans of real estate mortgages, originated over $5 billion of other 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 $1.7 billion, and we issued $11.4 billion of new commitments and renewed another $17.9 billion of commitments to small businesses, commercial, and commercial real estate customers.

Overall, excluding mortgage production, new origination, plus new and renewed commitments, totaled approximately $36 billion, about $9 billion higher than the previous quarter's total.

Total average deposits increased by $20.1 billion over the same quarter of last year, and $800 million on a linked quarter basis.

Excluding acquisitions, the growth rate was 4.1% on a year-over-year basis.

Turning to slide seven, the Company reported record total net revenue in the second quarter of $4.5 billion.

The growth in revenue was driven by earning asset growth and expanding net interest margin.

Our fee-based businesses, growth initiatives, and acquisitions.

Turning to slide eight and credit quality, second quarter total net charge-offs of $1.114 billion were 2% lower than the first quarter of 2010.

Nonperforming assets excluding covered assets decreased by $261 million, or 7%.

Notably, excluding covered loans, early and late stage delinquencies and the majority of the major loan categories also improved during the second quarter.

The decrease in net charge-offs to nonperforming assets, in addition to the favorable changes in early and late stage delinquencies and other indications of ongoing improvements in our loan portfolios indicate that we have reached the inflection point in credit quality.

Accordingly, we expect the level of both net charge-offs and nonperforming assets excluding covered assets to continue to decline in the third quarter.

Turning to slide nine, you can see that given the current economic uncertainty, we increased the allowance for credit losses this quarter by recording a $25 million incremental provision for loan losses.

This represents approximately 2% of the current quarter's total net charge-off of approximately $1.1 billion.

This compares with an incremental provision equal to 15% of net charge-offs in the first quarter of 2010 and 50% of net charge-offs in the second quarter of 2009.

This incremental provision resulted in an allowance for credit losses to period end loans at June 30, excluding covered assets, of 3.18%.

The ratio of allowance to nonperforming loans excluding covered assets ended the quarter at 146%.

Turning to slide 10, we wanted to provide more commentary on the credit card loan portfolio this quarter.

Average loans outstanding grew by 14% year-over-year.

But declined slightly on a linked quarter basis.

The net charge-off ratio during the past four quarters has been favorably impacted by the portfolio purchases made in September of last year.

We have displayed the ratios adjusted for these transactions in the chart on the left side of the slide.

Similar to the other major loan categories, early and late stage delinquencies improved, while net charge-offs increased over the prior quarter, reflecting growth trends and seasoning of the portfolio over the past number of quarters.

Going forward, losses on the credit card portfolio are expected to stabilize, but remained higher than historical levels, as long as unemployment remains high.

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

Slide 11 provides additional information on the commercial real estate portfolio.

Average total commercial real estate loans have increased over the past year, primarily due to the growth in CRE mortgages where a lack of permanent financing previously available in the CMBS market has allowed us to extend financing for credit-worthy projects and borrowers.

Net charge-offs on the CRE portfolio remain fairly low at 1.11% of average loans outstanding.

The net charge-off ratio on the commercial real estate construction portfolio, however, remains elevated, as we continue to resolve and reduce exposure to these assets.

Delinquencies on that portfolio have improved year-over-year and property values are stabilizing.

You'll find additional credit details on all of our major loan categories in the appendix of this slide presentation.

I will now turn the call over to Andy.

Thanks, Richard.

I'll take just a few minutes to provide you with a few more details about the results.

I turn your attention to slide 12, which gives a full view of our second quarter 2010 results compared to those recorded in the first quarter of 2010 and the second quarter of 2009.

Earnings per diluted common share were $0.45 for the second quarter 2010, $0.11 higher than the prior quarter and $0.33 higher than the second quarter of 2009.

The key drivers of the Company's second quarter results are detailed on slide 13.

The $295 million, or 62.6% increase in net income year-over-year was the result of an 8.7% increase in net revenue driven by a 14.5% increase in net interest income and a 2.7% increase in noninterest income.

Additionally, the provision for credit losses in the second quarter was lower by $256 million in the prior year's quarter.

As the $185 million increase in net charge-offs was more than offset by a decrease of $441 million in incremental provision, as the need for additional reserves significantly declined.

These favorable changes in total net revenue and the provision were partially offset by an 11.6% increase in noninterest expense year-over-year.

Net income was $97 million,(Sic-see presentation slides) or 14.5% higher on a linked quarter basis.

A 4.6% growth in total net revenue and a favorable variance in the provision for loan losses more than offset the 11.3% increase in noninterest expense quarter over quarter.

A summary of the significant items that impact the comparison of our second quarter results to prior periods are detailed on slide 14.

Earnings per diluted common share in the second quarter included a $0.05 benefit related to the nonrecurring exchange of perpetual preferred stock for outstanding income trust securities.

The accounting for the ex exchange included a charge of $18 million to other expense and $118 million credit to equity, which was recorded directly as an increase to net income applicable to common shareholders for the current quarter.

Other significant items for the second quarter of 2010 included net securities losses of $21 million, a $28 million gain related to the Company's investment in Visa, and a provision in access of net charge-offs of $25 million.

Significant items impacting the first quarter of 2010 and the second quarter of 2009 are also highlighted on slide 14 for your review.

Turning to slide 15, net interest income increased year-over-year by $305 million, or 14.5% due to a $13.2 billion increase in average earning assets and an expanded net interest margin.

This increase in average earning assets was almost entirely acquisition-related.

Net interest margin was 30 basis points higher than the second quarter of 2009, primarily due to our ability to replace wholesale funding with low cost deposits and achieve overall lower funding costs, as well as improved credit spreads.

On a linked quarter basis, net interest income was higher by $6 million, as a slight decline in average earning assets was offset by favorable funding costs and day basis.

The net interest margin was flat to the prior quarter, as the growth of low cost deposits and a favorable change in LIBOR spreads were offset by lower credit card yields as a result of the card act.

Assuming a current rate environment in yield curve, we expect net interest margin to remain relatively stable in the third quarter of 2010.

Slide 16 provides you with more detail on the change in average total loans outstanding.

Average total loans grew by $7.3 billion, or 4% year-over-year.

Excluding acquisitions, total average loans declined by 2.7%, as you can see from the chart on the left.

This decline was driven by a 14.3% year-over-year decrease in average commercial loans outstandings.

As Richard pointed out, the reduction in commercial and corporate lending was primarily due to utilization, which has declined from 35% in the second quarter of 2009 to 27% in the current quarter.

The majority of the loans related to FBOP and PFF and Downey were reported as covered loans and the $9.8 billion year-over-year increase in this category was due to the acquisition of FBOP corporation.

On a linked quarter basis the 0.9% decline in average loans outstanding was again driven by the decrease in commercial and corporate utilization.

Moving on, slide 17 illustrates the favorable growth the Company has experienced in low cost core deposits over the past five quarters.

Average total deposits grew by $20.1 billion, or 12.3% year-over-year, partially due to acquisitions.

Importantly, low cost core deposits, noninterest-bearing, interest checking, money market, and savings, excluding acquisitions, grew by 17.4%.

This growth reduced the need for wholesale CD and foreign branch-type funding, contributing to the net interest margin expansion.

On a linked quarter basis, average deposits increased slightly, principally due to higher non-interest bearing account balances and savings accounts.

Slide 18 presents in more detail the changes in noninterest income on a year-over-year and linked quarter basis.

Noninterest income in the second quarter of 2010 was higher by $55 million, or 2.7% than the second quarter of 2009.

Excluding the $26 million favorable change in significant items, noninterest income was higher by 1.4%.

This positive variance was driven by an 8.4% growth in payments-related revenue, a 42.4% growth in commercial products revenue, illustrating the success of recent investments and growth initiatives, and higher other income due to equity investment losses posted in the second quarter of 2009.

These favorable variances were partially offset by a $65 million decline in mortgage banking revenue, principally due to a 35% reduction in production volume, partially offset by higher servicing revenue and a favorable change in the MSR valuation and related hedge, as well as lower trust and investment management fees and deposit service charges, the latter of which affected recent legislative and pricing changes.

On a linked quarter basis, noninterest income was higher by $192 million, which included a favorable change from significant items, specifically lower net securities losses and the Visa gain, totaling $41 million.

The favorable change in noninterest income excluding these items was driven by payments-related revenue, which rose by 6.4% driven by seasonally higher transaction volumes, a $44 million increase in commercial product fees, primarily resulting from higher syndication fees, and a $43 million increase in mortgage banking revenue, driven by higher production volume and a favorable variance in the MSR valuation and related hedge.

Deposit service charge was the only category posting a decline on a linked quarter basis due to the impact of our new overdraft fee policies.

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

Slide 19 highlights noninterest expense, which was higher year-over-year by $248 million, or 11.6%.

The majority of the increase can be attributed to acquisitions, which accounted for $79 million of the increase, higher compensation and benefits driven by incentives, merit increase, and the restoration of our 5% salary reductions taken as part of our cost savings programs in 2009 and additional staffing.

A higher cost related to investments in taxed advantage products accounted for $66 million of the increase.

An increase in professional services expense, technology, communication expense, related to investments and projects, and overall investments made in corporate banking and wealth management initiatives.

Offsetting these unfavorable variance was the net positive impact of $105 million in significant items, including the FDIC special assessment booked in the second quarter of 2009.

On a linked quarter basis, noninterest expense was higher by $241 million, or 11.3%.

The net result of an increase in compensation due primarily to growth in incentives and commissions, merit increases, and additional staffing, higher professional services expense, and marketing and business development charges related to seasonally low first quarter levels, and other expense, which was impacted by the integration costs related to the conversion of 150 FBOP branches, cost relates to affordable housing and other tax advantage projects and a number of expense items related to insurance and other related matters.

Finally, the tax rate on a taxable equivalent basis was 25% in the second quarter of 2010 compared to 24.2% in the first quarter of 2010 and 23.6% in the second quarter of 2009.

Given that recent regulatory and legislative actions will have an impact on our results in 2010 and beyond, we wanted to take a minute to summarize and quantify the impacts that we know at this point.

On slide 20, we have listed the two changes that have already had an impact on our results.

Overdraft legislation has led to a number of policy changes and those changes, coupled with our own pricing changes, have reduced revenue.

We estimate that our pricing changes and legislative revenue reduced revenue in the first half of 2010 by approximately $60 million and will reduce revenue by an additional $170 million to $220 million in the second half of this year, bringing our total full year estimate between $230 million to $280 million.

This is slightly lower than our previous estimate and does not include any mitigating actions.

The Card Act has impacted both our net interest income and fee income year to date, totaling approximately $50 million.

Card Act is expected to reduce revenue further by approximately $120 million to $140 million in the second half of 2010.

The total year impact will be in the range of $170 million to $190 million.

This is slightly larger than our original expectations, as more specific information regarding late fees and opt-in and opt-out assumptions have been updated.

The President is expected to sign the Dodd Frank Wall Street Reform and Consumer Protection Act today.

And on Slide 21, we have indicated which provisions may have an impact in our Company's results going forward.

The provisions listed in the first groupings on the slide, including the Collins Amendment, changes to the FDIC calculation and rate, and the Dermott Amendment will all have a direct impact on our results.

First, the impact of eliminating trust preferred securities from Tier 1 capital would reduce the Company's Tier 1 capital ratio by 140 basis points, phased in, beginning in 2013.

The change in the calculation and rate used to determine our FDP deposit insurance will increase the Company's assessment by approximately $200 million in 2011.

While the impact of the reduction, of a reduction in interchange fees on debit card transactions is yet to be determined, as the rate reduction will not be known until the federal reserve completes its review.

As we have previously indicated, total debit interchange revenue in 2009 was approximately $500 million, on about $37 billion of total sales volume.

Our Company can mitigate some of the impact through the reduction and/or elimination of debit card reward programs and offsetting actions in our acquiring businesses.

A number of the provisions of the new Regulatory Reform Act as detailed in the second section of slide 21 will have an immaterial impact on our Company, including the vocal rule, transparency and accountability for derivatives, mortgage securitization, mortgage reform, and investor protection.

Finally, several provisions, the specifics of which have not yet been determined, are expected to increase regulatory, compliance, and legal costs over time.

These provisions include pre-emption, the Consumer Financial Protection Bureau, the establishment of Financial Stability Oversite Council and the measures to end to big to -- bailouts.

I will now turn the call back to Richard.

Thanks, Andy.

Overall, we believe that regulatory reform will increase accountability and transparency within the financial services industry.

And we are fully supportive of effective industry regulations and consumer protection measures that create a stronger, safer financial system.

It does come, however, at a cost for our industry.

As Andy pointed out, a number of the provisions will result in lower revenue, increased operating expense, and/or higher capital levels.

All, however, are manageable for our Company, given our momentum, our size, our risk profile, and our business mix.

I'll conclude my formal remarks with slide 22.

Our second quarter results clearly demonstrate the strength of our franchise, the benefits of our diversified business mix, the results of our recent investments, and importantly, our ability to prudently manage financial credit and operational risk.

We posted record revenue, industry-leading efficiency, improved credit quality, and strong liquidity and capital levels.

We continue to lend, gather core deposits, and expand our businesses, while improving the profitability and overall performance of the Company.

We remain well positioned to capitalize on the economic recovery, as we continue to enjoy the benefits of the flight to quality, as we continue to invest, as we continue to opportunistically acquire, and as we benefit from the core businesses that are scalable and can be leveraged as the economy recovers.

We and others in the financial services industry continue to face the challenges of the new regulatory and legislative oversite and action and yet an uncertain economic environment is one that we can manage.

However, regulatory reform, although not without some uncertainty, is progressing.

The economy is beginning to slowly recover and we are cautious, but optimistic about the sustainability of that recovery.

In the meantime, US Bank will continue to work closely with the regulators, government representatives, and our peers to ensure that our industry plays a vital role, as it always has, in the economic recovery and long-term growth of our economy.

We are positioning this Company for the future.

We are growing from a Company known best for its defensive posture to one also known for having created a winning offense.

Our momentum is growing and we're on our way to exceeding our goals for this year, all for the benefit of our customers, employees, communities, and importantly, our shareholders.

That concludes our formal remarks.

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

(Operator Instructions) Your first question comes from the line of Ed Najarian ISI Group.

Good morning, guys.

Good morning, Ed.

I just had two quick questions.

The first one is related to page 20 and I just wanted to clarify that a little bit.

So just looking at the first line item on the overdraft legislation you were at a $60 million run rate in the first half of the year.

If that were to continue at that pace, you would get to $120 million on a full year basis.

Obviously you're saying that's going to step up, but it strikes me that it's not going to step up incrementally from the first half by $170 million to $220 million, but going to step up by, say, $110 million to incrementally $110 million to $160 million.

Right.

Is that the right way to look at it?

It is.

This is Richard.

The first half reflects our own actions.

The second half reflects the regulatory actions that effectively begin August 15.

So assume if you will that beginning this year, as you know we decided to give our customers a choice on how they wanted to handle their overdraft.

And in doing so, we changed all of our overdraft pricing scenarios such that under $10 they don't get charged anything.

Up to a certain level below $25, it's a nominal charge.

Then the top fee is $33.

So they won't have the $35 cup of coffee, but they'll have the choice to not be embarrassed if the transactions default sometime in the future after the rules come into place in mid-August.

Having done that, we've already reduced the overall costs for overdraft income for the entire Company by creating a better set of choices for people to select from, which they are in the middle of doing now, Ed.

And by the end of the, the period of August 15, we will have the opt-in selections made and then customers can start moving forward.

We originally offset a premise of 10% opt-in.

Once we've made our changes to our pricing scheme, we're seeing higher levels of opt-in, but we haven't yet got the final number until mid August.

Then on August 15, we have all the new final prohibitions that come in place for the new rules and that's what reflects the difference of the $110 million to $160 million over the run rate of quarter one.

But we do think our actions by stepping down and changing the overall pricing scenarios will serve us well to have the customers making more choices that they like and effectively opting in more often and using the services we provided for many years to protect them from embarrassment or uncertain expectations of their financial management.

Okay, thanks, Richard.

Then, Richard, I have another question for you that's a little more conceptual.

So, we've seen, I think, a pretty -- or we're seeing this quarter a pretty wide discrepancy between the performance of the larger regional banks that have already repaid TARP, like yourselves, versus some of the smaller regional banks and midcap banks.

Also obviously now we've gotten, a bit probably more onerous regulatory backdrop to deal with than we had maybe thought four or five months ago, and we're seeing some mixed economic data.

So in your mind, as you look at those three things today, does that make you less likely or more apprehensive about potentially pursuing an acquisition that would be non-FDIC supported today versus some kind of a larger deal that would be -- would have been non-FDIC supported say in your mindset three or four months ago?

In other words, does the last three months make you less acquisitive?

No, it doesn't, Ed.

It actually makes me ponder whether or not the parties we might be interested in working with would be more interested.

And I'm not sure yet.

It seems to me that one of the benefits -- sense about our Company is we have the luxury -- the earned luxury of not having to react too quickly to some of these new rules and changes and allow ourselves to wait and see what the market wants because we're not bobbing at the water mark of whether or not we're going to make money each quarter.

Seems to me that all of the things you mentioned are negatively biased toward the near term, but actually over the long-term, I think the stronger banks will end up finding solutions and continue to strengthen their position on a relative basis.

For us, if nothing happens of a major acquisition, we'll be fine for the rest of my life.

But if the opportunities that come along now accelerate others' willingness to talk and consider an opportunity, it doesn't change my interest.

It's all going to come down to the math and the opportunity to make us a stronger Company because of it.

And if that doesn't happen, it wouldn't happen anyway.

But I do think that our willingness to talk to others hasn't changed.

The likelihood of others being willing to talk might, but I couldn't guess at this stage whether or not it's going to change their posture or not.

I'll sit and wait and meantime, we'll manage what we have and be proud of the Company we've got.

Do you think the factors that I've outlined have brought down what you would be willing to pay for various properties, because the--?

Yes, they definitely have.

My willingness to pay less has got to be less painful than their willingness to move on.

Okay, great.

Thanks.

Value in the near-term has come down, that's for sure.

Thank you, Richard.

Thanks, Ed.

Your next question comes from the line of Jon Arfstrom of RBC Capital Markets.

Thanks, good morning.

Hi, John.

Hi.

Question for you on capital, either Richard or Andy.

You talked about in your prepared comments hoe you're waiting for guidance from the regulators regarding capital levels.

I'm just curious if you have any thoughts on when and how we might get that guidance.

My guess, my personal guess is that we're still waiting for the BASL III activities coming out of November at which point the G-20, I believe the G-20 countries are expected to set some parameters for capital and liquidity and timelines, if that's the case, and that's everything we know today, then I think that becomes trigger number one, where the fed then has the jurisdiction to go back and decide what those rules are and how they apply to each bank, and then after which time they can decide whether each bank's current stress testing scenario against those requirements at some point in time would allow them to increase their dividend.

So having said all that, we're still I think first in with our application to increase the dividend.

I think the fed, up until the last few calls have been waiting, like we all have, for a stronger, sustained economic recovery.

I think that's still present, but I think now all that has been trumped by the waiting and seeing on the G-20 activities in November, at which point we'll start getting some guidance on what kind of capital levels we need to look for at a certain period of time, measure those against the stress test and then get permission to go or no go.

Okay.

And then just thoughts on the trust preferreds.

I know it's quite a ways out, but is that something you wait and see and the final capital guidance becomes part of that equation?

It does, Jon.

That's correct.

It may well be whether they are qualified or not, may be good investments.

We're not sure that we wouldn't dispense of all of them, but we have plenty of time to decide and watch how that happens.

Okay, and then just if you think about a capital allocation model going forward, I guess the old model of a few years ago was a high payout ratio and buyback being the difference and basically returning earnings to shareholders.

Do you expect the model to be different as you come out of this, or do you think we'll go back to that old model?

We'll plan to go back to the old model.

So we still like -- our old model was a majority of the earnings payback in the form of dividends or share repurchases with the remainder putting back into the Company for investment.

We still see that.

We're going to make sure that there's room for both buybacks and dividend increases over the course, long course of the future.

But we like that model.

We think it's served us well and shareholders deserve that.

Okay, thank you.

Thanks, Jon.

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

Hi, Ken.

Thanks, good morning.

I was wondering if you can help us size -- I know you're not going to give explicit color on the potential impact from interchange, but can you help us just size the revenue pool that would be at issue with the pending rule changes, so kind of debit ex prepay card?

Our debit revenue is in the neighborhood of $500 million for 2010.

The exact impact of the legislation is unknown yet, the fed will undertake a nine-month study and take into account both the risks and the expenses of that business and come up with some guidance and until we get that guidance, we really don't know the bottom line of that.

Ken, this is Richard.

I for one am quite emboldened by the fact that now we've moved from the political to the regulatory environment on these now 201 rules to be written, because regulators have a more balanced and a more measured view of how things operate.

And I'm highly confident that the fed, for instance, given the authority to set those appropriate rates and allow us to account for fraud and the cost of doing business, is a far cry from going to zero, that's for sure.

And they are going to make sure that we get paid fairly for those activities.

I think there will be other places that will make sure the merchants don't overplay their hand in the rights that they are going to be given.

But if we're not going to keep that $500 million level, but certainly not go down to zero and it's somewhere in between.

I'm not typically Pollyanna, but I think it's going to be a fairly measured decision and the fed will take the time that needs to be taken to decide what the right level is.

Okay, great.

Thanks a lot.

Your next question comes from the line of John McDonald of Sanford Bernstein.

Hi, John.

Hi, John.

Hi, good morning.

I had a question on the net interest margin.

You guys already have a very high margin compared to peers and it's held up very well.

Andy, the outlook for the margin to be stable.

Just wondering how do you keep it stable with the incremental impact from the Card Act presumably adding some pressure?

I assume there's some reinvestment risk with yields going down in a flat rate environment.

What are the offsets that are able to keep the margins stable at a high level here?

John, let's look at the second quarter.

It actually came in a bit higher than we talked about.

We thought maybe mid 380s, there were two offsetting factors.

First, Card Act is putting some pressure on margin related to the reduction and the ability that we're able to charge customers in terms of the rate.

That has been offset by LIBOR spikes that occurred in the second quarter.

We are asset sensitive to LIBOR.

The increase in both one-month and three-month helped us.

That, combined with our lower funding costs, as we continue the core deposits, and still pretty good stability in terms of credit spreads on the loan side have all allowed us to have margins relatively flat and we expect that same trend to continue in the third quarter.

Okay, that's helpful.

Richard mentioned the efficiency ratio and a few factors keeping it in the low 50s, could you just elaborate on that a little bit?

What are some of the factors you're thinking about there?

Yes, so I think there are a couple things.

If you think about where we were in the high 40s.

Let's go six quarters ago there are two key factors, I think I'll narrow it down to that.

Number one is at that point in time we had no FDIC insurance expense and as you know now, we do, and in fact it's increasing.

So that factor in itself probably cost us 2 to 3 points.

The other factors on some of the legislative head winds that we've talked about, Card Act, Reg E, and the like, those are going to reduce our fee revenues a bit.

And again, that's probably a point or two.

So the combination of of those things are why we think from the high 40s to the low 50s.

So that's always been a result, never a goal.

We've been proud of the fact that it's been high 40s and it may well get back there one day, depending on how long it takes for banks to get fairly paid for services rendered, but it's not going to be in the near term.

In addition to those things, what we could have done, and you all know we could have gone on a mass expense reduction plan or some austerity program and we're not doing that.

And not because we're not shareholder friendly, but because we've got to finish what we started.

With you all's permission a few years ago right in the beginning of the downturn, we decided to invest in the Company from technology, to people, to market positions, and we made great progress and you haven't even yet seen the kind of benefits that will accrue when things normalize, and I'm counting on being around to tell you about them.

But the fact is, is that we are not quite done.

Our investment in the corporate bank, in technology, in the Internet, in our branch refresh program, in our wealth management buildout we're not finished.

So that might be worth 100 or 200 basis points on the efficiency ratio, but you would regret on my behalf if we stopped making those investments at this point in the investment curve and forgave the benefits that are going to come from that.

I would say we would probably be right around 50 were it for the loss of some income in the near term based on regulatory legislative actions plus the cost of FDIC, it's going to be more like 51, 52 for a while because we're going to continue to finish these investments.

It's not going to go above that.

We're not sending you signals to post to 55 or 58.

We know how to manage expenses around here, but we also know how to manage investments and we're counting on you to trust us there.

Great.

One quick follow-up to Ed's question on page 20, regarding Reg E and the Card Act impacts.

Second half '10 estimates that you put here, is that a reasonable estimate of kind of the run rate going into '11, or is it ramping up through the second half of this year and the run rate might be a little bit higher than that?

John, if you took the high number and divide it by two, that would be a good estimate for quarterly run rate before any mitigating actions.

Okay, great.

And one last quick thing Richard mentioned, or Andy, you did, about Durbin and the possibility to maybe offset whatever impact that might be with some merchant acquiring actions, is there any color you can provide around that?

It's not much detail, but I think you know that besides the merchants getting the net benefit of what would be the issuers costs the acquirers have the opportunity to not pass along all those benefits as well.

So depending on how our acquiring portfolio of merchants choose to not pass along some of those benefits, we'll be the net benefit factor.

It's not a one for one, because our acquiring portfolio is not exactly the size of our issuing, but it's substantial.

All things told, while you hear about issuers and merchants being the two sides of the coin the acquirer is in the middle there and typically stands to have some hedging benefit from what would otherwise be a cost to an issuer.

We haven't sized it yet, but it's meaningful enough to mention.

Got it.

Thank you, guys.

Okay, thank you.

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

Hi, guys.

How are you?

Good.

Two quick questions.

Number one, on the loan loss provision and reserve, you continue to add and I think your commentary was that the $25 million add was due to your outlook for the economy.

Will this likely continue to be the case, or are you going to get to a point where you just match or maybe even release?

Have you changed your mind on that at all?

Tell you what, thanks, Nancy.

It's math for us, and so Bill and Andy and I manage to the math.

There's a little bit of art in there, but most of it's science.

Our $25 million could have easily been up $50 million or down $50 million.

It wouldn't have been outside of a range of the art of it but it still indicates that the economy is not wholly better, unemployment is not significantly improved and housing prices are not done probably falling.

Our math says, especially on the polar goal that I'll have Bill explain, that we still need be at or right above our current loss experience.

That same math, if it turns out that things get better and it tells us that we have more than we need in reserves, we will recover some of those reserves in future quarters.

But it is not one of our goals.

We're not putting away $25 million this quarter to hope to get back in seven quarters.

If we get any back, it's because the world improved faster than we expected it to and we wanted to end the cycle with a fortress balance sheet within the bounds of being reasonable for both shareholders and the return the cost of holding those monies.

I think you'll be pleased to see the math will always dictate it, we'll tell you just how far we're off we are if there's a little are in it but right now our math says hang close to where you are and there's probably a positive bias to going to a zero reserve build if things continue, maybe a reserve recapture, but currently not in our thinking.

Bill, why don't you explain some of the math.

And Nancy, this is Bill.

I mean, think of it as sort of two at the margin, two offsetting factors.

We had performance.

Good performance in both of our consumer portfolios with declines of early and late stage delinquencies.

We also had improvement in our wholesale portfolios with our credit indicators there.

But offsetting that was really an increase in economic uncertainty that we saw, especially towards the latter part of this quarter.

So those two things kind of offset each other going forward, if hopefully continue to see the credit improvements and what we need to see is more certainty in the economic environment.

Here we clearly -- we did say a few quarters ago we wouldn't recapture reserves.

We may well do that if the math tells us.

We didn't see that math even becoming part of the possibility, but it is now, and if it happens, it's because we're dictated by the rules we've been following from the beginning, not because of any kind of earnings benefit it would create.

Okay, and another question on credit quality, just to sort of slightly rising losses in the CRE book, what's the outlook there?

I mean when do we get to a period of plateauing or improvements there?

Well, yes.

We did have an uptick.

I would not consider it material and as I've said before, the residential construction which of course has been the most (inaudible) it is coming to an end the latter half of this year, so that should wind down this year yet.

The balance of it, I think it's going to be a good 12 to 18 months before you see real stabilization across the real estate portfolios.

So our losses will remain elevated, but they will be up a little, down a little from where they are now.

Thanks very much.

Thank you.

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

Hi, Betsy.

Good morning, hi.

Couple of questions.

One on the deposit insurance expense, the $200 million increase from 2011.

I just wanted to understand if that includes the one component or both components in there?

Yes, Betsy, it includes both components.

So the first is the change in the calculation from deposits to total assets, less tangible equity and long-term debt.

I would say that's two-thirds of the change.

And also included in there is a 3-basis point assumption for an increase in the actual expense rate from the FDIC.

Okay, and that is for the legislation, the second piece?

The second piece is not related to legislation.

That was already preannounced earlier this year and assumed -- and actually in the accrual that we took -- the three-year accrual that we took a 3 basis point increase beginning in 2011.

Right.

So we're thinking to the third piece which is not sized here which is that $19 billion tax they talked about at the end of last week, by which $8.5 billion of it would come out of FDIC.

We don't have the size, we don't know what the rules are, we don't know the allocations, so we have not accounted for that.

And the first piece of the component, the change in the calc, that two-thirds piece, what type of premium assessment did you apply there?

So what we did was we took the current assessment -- the two pieces again are, first, use the current assessment against that change in the calculation.

Secondly, increase the current assessment by 3.

Got it, yes, I got it.

Okay.

And then the second question has to do with the costs associated with the credit cycle.

On prior calls we've talked about how costs have been somewhat elevated due to credit cycle related cost collectors, et cetera.

Right.

Could you just give us a sense in your, as we're talking through the expense ratio, when, if ever you think that those types of costs are going to be mitigating?

Betsy, I would say from a year ago, other loan expense, ORE related expense is probably up in the neighborhood of $20 million or $30 million versus a year ago and that will start to come down as we start to get more stability, but it's not hugely material to the efficiency ratio.

Right, okay.

And then just the general cost of managing the portfolios a little bit more tightly, that's in your opinion just business as usual?

Yes, it is.

I mean, it will definitely have a positive bias when things get settled, but we'll turn that energy into going, finding new loans.

That kind of goes into the last question I had which is how are you thinking about the standards that you're applying in the loan book?

Are you where you think you need to be?

I think the answer is yes, but is there any kind of change at the margin going on, either in the commercial or in the consumer space?

And could you talk a little bit about competition for your best clients, and is there any signs of life out there in terms of the competition?

Yes, this is Bill.

There's definitely signs of life in terms of competition.

Everything's pretty competitive now.

But on the wholesale side, we've changed our standards very, very little throughout this cycle.

But -- and we are seeing more activity just recently.

M&A, of course, has picked up.

But we're seeing a little bit of activity in our middle market now, which is very positive.

And on the wholesale side -- on the consumer side, again, until the housing market really stabilizes, that has a huge impact on just sort of consumer thinking, behavior, willingness to borrow.

So until, until this housing cycle gets over, which I think is still years away essentially, to get through stabilization, I don't think we're going to see really much material change in the lending activity there.

Betsy, this is Richard.

We are definitely enjoying a couple of good luck pieces here.

It's always good to be lucky.

First, our growth and out buildout of our corporate bank at the national scope level with our high grade bond business and our ability to now be involved in leading deals and comanaging deals has been perfectly timed.

So many of the larger banks that have trimmed that back or for other reasons not become as aggressive, a lot of companies are welcoming a new player in and our timing was just perfect.

You'll see that to grow handsomely as we deal with our customers and actually get new customers because of it and I think despite our 0.9 linked quarter shrinkage of the balance sheet, it's primarily offset, most of that, if not all of it, by our continued lack of usage on lines already outstanding.

While the market isn't robust, I do think we're not kidding ourselves to think we're stealing share slightly, slowly, and methodically over the last couple of quarters.

And I hope we'll be one of the first to show a core growth of loans coming up shortly, but it won't be because of underwriting changes.

And it still might be because we'll compete on price.

We did that going in and we'll do it going out.

We have the luxury of competing on price, but not on quality.

So hopefully we'll take the better customers and grow our book that way.

Thank you.

Yes.

Your next question comes from the line of Chris Kotowski of Oppenheimer.

Hi, Chris.

Yes, hi.

I'm thinking about, the sort of transition between credit recovery and growth, and you have a big geographic footprint and you referenced the stress in the housing market, as that seems to be the underlying cause of the malaise.

I'm wondering if you look through your geographic footprint, are you noticing a difference in consumer behavior in the more -- in the less stressed markets, like let's say Twin Cities or something, is consumer behavior different there than in Southern California?

And are we seeing the normal growth in the less stressed markets?

Yes, when you look at some of the better markets now, twin cities, you mentioned one, some of the Coastal California markets have come back pretty nicely, you do see more normal patterns of behavior.

Yes, you do, and where housing prices have been really impaired, the Vegas, the Phoenix, inland California, they are not.

I mean their home equity loans aren't growing at all because there's no equity.

It's very aligned with that, and I think that, and then you'll also see some relationship to municipal strength, where in certain cities and municipalities are strong, employees feel confident.

You see higher consumer activity, where the communities might be under some stress and some layoffs and you'll see holding back and that's across virtually all the footprint, depending how strong those municipalities or state governments are handling this downturn.

Okay, all right.

Thank you.

Thanks, Chris.

Your next question comes from the line of Paul Miller of FBR Capital Markets.

Hi, Paul.

Most of my questions have been answered, but I guess the real issue is on the economic front.

And you've covered the fact that you don't see a need to really send in reserves until you see really good economic data, but how much of an impact do you think this tax credit really did have in some of your markets?

And how much do you think that -- you did say that you expect it to continue to trend down, but the economic data has probably been worse than anybody would have expected at this point.

You mean tax credit on the new housing?

Yes.

I'm sorry about that.

I think it's just like the cash for clunkers, it didn't really change the overall sales over time.

It just moved them into a different period.

I think that is affecting.

I'll tell you, I'll give you more detail, Paul.

We're looking at unemployment in our base case forecast to slightly trim up for the rest of the year, maybe hit 10% and then kind of stick there for a while.

If that's the case, then we're not going to see a lot of robust change in people's sentiment.

Now, you know that in some of our credit metrics, overall employment isn't the thing to measure anymore.

Because if we have someone in a credit card that was unemployed 24 months ago, we charged them off 18 months ago, they are not in our numbers at all and they are not coming back into the cycle.

So in some cases, it's the newly unemployed we're tracking against some of our credit policies and also just in kind of the robustness of how people feel about their confidence to incur debt and move forward.

So we're not expecting unemployment to move very much.

And in terms of the Case-Shiller Home Index we're also not expecting that to move at all up for a while, if not settling in different markets, but overall with a slightly negative bias.

Just think about it.

The volume, the inventory alone that still has to pass through the process and be available to be resold is so significant that -- one thing you won't hear about in 2020 is anybody that bought a house built in 2009 to 2012, because there won't be any.

We're not being negative here, we're just thinking the reality of the sheer weight of the duration of this downturn is going to take an equal amount of energy to get out of it and we would be more prudent to consider a slow but steady recovery than one that's going to bounce back fast.

When you talk about utilization rates going from I think 42% to 27%.

I believe last call you were hoping that you would start getting that utilization rate up in 2011.

Do you still feel that that can start to inch up in 2011?

When you're talking to customers, you're seeing some activity.

Are they getting more confident, or is it just the last couple of months has really scared them off?

Paul, this is Andy.

We were actually 35% a year ago, second quarter of '09, maybe a year and a half ago or so we would have been in that 40% range and we're at 27%.

What I will say is the last couple quarters, the rate of decline is slow.

So for example, quarter one versus quarter two, we were down just 1 point from 28% to 27%.

But last few quarters, we were down a couple points, or 3 points each quarter.

Certainly the rate of decline, the rate of decline has slowed, it sort of steadied out, but we don't have enough data yet or haven't seen signs of it increasing thus far.

Anecdotally though, for God sakes, I hope it does, oh, my gosh.

I mean, these are people that have money available.

They are cash rich, and by the way, Paul, we have the ability of watching their cash flows before their credit flows and they are not reducing their cash balances so that probably will be our first trigger and we'll see that first.

Eventually, let's think about it.

Just anecdotally, there's got to be a fatigue factor where you've just got to start reinvesting.

You can only be so efficient for so long and if you're going to be competitive in your own business, you've got to start making investments and start putting product back out there.

Doesn't seem to be yet.

I do think 90 days ago we thought we might have seen the bottom, and we didn't and it did get weaker in the last 90 days and I think has a lot to do with confidence coming down and the uncertainty of whether this recession is really over yet.

I'm not surprised by it, but I should hope that we'll be able to tell you shortly that things are starting to turn.

I hope so too.

Thanks a lot, gentlemen.

Your next question comes from the line of Matthew O'Connor from Deutsche Bank.

Hi, Matt.

Richard, Andy.

Two unrelated questions.

First on expenses, you highlighted some integration and litigation costs and I was just wondering if you could size and help us get a feel for what the run rate expenses will be from here?

Yes, you know what I would say, Matt, is this quarter probably is pretty representative of the run rate, the integration expense was less than $20 million.

One of the increases that did occur was the increase in tax credit amortization, which directly helps, or improves our tax rate.

So it's just almost a one for one on the tax rate.

We continue to expect to expand that business, so those are sort of offsetting items.

And then--.

The other positive, our CDC -- if it's not number one, it's number two in the country.

We do a lot of community development business.

And it's not without -- the risk of being confused, because it does increase the expense level, but at least, of course, at least if not more, dollar for dollar improves the tax rate.

And so we can't show it in those ratios so much, but it's not just a passing comment, it's real money.

It's a lot of tens of millions of dollars and it's probably going to get bigger.

So it's good that we remind you that that's a business that we do well.

It's very sticky for customers and it's actually helping communities build and grow with some very, very high headlines of getting back into the recovery.

And one other item I would mention, is a year ago, second quarter of '09, we had implemented our 5% contingency cost saves, so there were many 5% salary reductions across the Company.

We reinstituted that salary back to normal levels in October of '09 and then since had a merit increase, so that's principally the reason for the increase in compensation.

Okay, and I think you might have mentioned it before, but the tax rate that we should use go forward as a result of the increase in the credit?

Yes, I would say the tax rate you're seeing is pretty representative of what we expect for the rest of the year.

Okay.

And then -- okay.

And then just separately, I appreciate that you've had big inflows into deposits and loans are just starting to flatten out here.

You've been adding some securities.

Not a huge amount, but just a little bit here and there.

How are you thinking about the securities book in light of the environment where rates have come down quite a bit and trying to protect the NIM, while also protecting current revenues?

Our first step was, as we talked about in the call here is reducing some of our wholesale funding which has helped our margin, increased our core deposit base, increased our margin and been helpful on a number of fronts.

The second area, some increase, as you said, not huge, but some increase in the investment portfolio.

Again, to protect our interest rate sensitivity, we continue to be asset sensitive.

Most of what we're buying are floaters and we'll continue to focus on that area.

Okay.

So continue to trend up a little bit but not a significant increase?

Correct.

Okay, thanks very much.

Thanks, Matt.

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

Hi, Heather.

Hi, good morning.

Actually, I just wanted to follow up on Matt's question.

Can we circle the camera back and look a little bit longer term at the margin outlook?

If the fed really does do nothing here for the next 18 to 24 months, what kind of pressure do you expect on your margin?

And also, what kind of purchase accounting accretion do you have to potentially offset that?

The purchase accounting accretion is not material, Heather, so let's start there.

With regard to margin, what we've done and will continue to do, is look out maybe the next 90 days, like we do on our credit, because a lot of things could charge with margin, the yield curve could change, rate levels could change, credit spreads could change.

There's a lot of different moving parts.

So what I'll tell you for the next 90 days is that we expect it to be relatively stable, again, given the current yield curve and credit spreads and our level of core deposit funding.

If over the long-term rates do go up, as you can see from our Q and you'll see it again, is we are asset sensitive.

So that would be beneficial to us.

Steeper yield curve would be beneficial.

In fact, across most of our rate scenarios, we run over 20 rate scenarios, we would be positively biased, the only thing that would be negative would be a twist, which is short rates up, long rates down.

And just to follow up on that, if the fed doesn't raise rates for 18 months or so, I know that it's not realistic to say the rate environment won't change at all, but if it didn't change at all, what kind of pressure would you expect just from securities, yields grinding lower and fixed rate loan yields grinding lower?

Well, I think there are two key factors in that.

What is the loan growth expectation over that 18-month category?

And as we talked about, that's -- we're seeing some pickup, some slowing of decline.

So to the extent that picks up, that would be helpful.

And the other factor and Bill touched on this a little bit is the credit spreads.

We're seeing some positives right now.

Competition is coming back a little bit, so that could cause pressure, but right now, again, we see a relatively stable margin.

Okay, great.

Thank you.

Sure.

Thanks.

Your next question comes from the line of David George of Baird.

Good morning, thanks for taking the question.

Good morning.

On the topic of rates, as it relates to your trust and investment management fee line, I'm assuming that low rates have eaten into your money market, typical management fees that you've seen historically.

Can you quantify what the impact of low rates has had on that line, just -- I'm assuming that the vast majority of that's incremental profit, just trying to kind of size the rate impact, if we're thinking about kind of longer term earnings power, what kind of improvement we can expect, going out three, five years to the extent that rates, assuming they do go up at some point in the future?

You are right, David.

The fee waiver issue is impacting our fee income because of our large money market fund position.

You can think about it in terms of at its current level, it's in the neighborhood of $20 million to $25 million a quarter.

Okay, great.

Appreciate it.

Thank you.

Good question, because you're right, it's been very painful.

Your next question comes from the line of Meredith Whitney of Meredith Whitney Advisory Group.

Hi, Meredith.

Ms.

Whitney, your line is open.

We went over the hour, so it's possible people have jumped to another call, but we'll stay here as long as you'll ask us.

There is no response from that line.

Okay.

Your next question comes from the line of Mike Mayo of CLFA.

Good morning.

Hi, Mike.

Hi, Mike.

I just want to understand the lower usage through revolving line of credit.

Others are stable and you're down from 28% to 27%, and I know it's not a big decline, but can you give any more color on that?

Yes, we can.

First off, let's make sure we only look at wholesale, so we're not looking at home equity or credit cards or things like that, so there may be an apple to oranges there.

But we've got it broken into four categories, commercial, corporate, commercial real estate, and community and Bill, you might give some color on that.

Yes, what we've seen actually in the last couple quarters, we've seen slight upticks in our middle market and community books.

So--.

Which is middle market, commercial, corporate commercial, real estate, and community?

Okay, so there's corporate, right, there's corporate, which is the large.

Middle market.

Commercial real estate.

And then community.

And they are all sizable.

Our community book is about as big as our middle market book as it relates to small loans and medium size loans.

Okay.

Given that--.

It's the corporate book, with the biggest single piece, which is the one that's continued to decline.

And it has slowed.

The decline has slowed, but that is bringing down our overall utilization rates.

So, Mike, that's a real good definition, clarification, because the corporate book, which has the capital markets alternatives available to them, has been the one by far that has fallen off the most.

The good news of our national corporate bank becoming a full service bank is if, in fact, some of this had to do with M&A or other capital activities, we're actually not outsourcing that anymore.

We're actually keeping it in-house and doing it for our own customers.

So we're not without some benefits when that happens, but it's the corporate book by far that's providing the alternatives that's leading the traditional loan category in the near term.

And can you give numbers simply on that slice of it, the corporate book?

Yes, the corporate book utilization is at about 19% and that's coming off of a high of, say, 34, 34%, in that cycle.

That was in '08.

So two years.

About 34% to 19%.

And where was that last quarter and the quarter before?

It was in, it was 19%, 20%-ish.

All right.

So that was down.

Yes.

And you're saying the middle market was up?

Flat?

Yes, no, middle market was actually up.

Commercial banking was up.

Give the three quarters for that.

Commercial was ended at 39%, and at year end it was 38%.

Up just a little bit.

Okay.

And then I know this is not apples to apples.

Others have utilization rates ranging from 45%, or Banc of America would be like 31%, JPMorgan is a little higher.

Your number at 27% is so much below others--?

If I put my credit cards in at 78% then I would be up in the 30% to 40%s, too.

Their numbers are just commercial though, also.

Okay.

Then I don't know.

Okay.

Yes, all I can tell you is more than half of ours is large corporate.

And that has by far the lowest utilization.

Got it, and then just one follow-up, expanding the corporate lending to more national, can you just describe where you are in the lifecycle of that initiative?

Yes, so, it starts out with taking care of our own customers and showing them that we don't have to send things out of the Company anymore, then we've introduced the larger setup of shop in the trading floor in New York.

A group of people on the trading floor in Charlotte.

We're going to be moving into Dallas, so it moves and follows with new people in new markets where we can be available to folks.

And it starts to then move into our ability to work with our corporate payments group, where we have so many other businesses and our corporate trust group, where we have so many clients who we haven't introduced the full corporate banking suite to.

Having said all of that, I would say we're in inning four of a nine-inning game and we're ahead.

As long as the market allows us to be a new entrant to people who have used legacy companies before, this benefit won't stop.

So is this going back more in the direction of, say, Piper, the old days?

Oh, my God, no.

Thank you for making that clarification.

Oh, no, no, no.

This is us doing what we did in footprint, now out of footprint, and what we did for our own customers that we weren't doing for our corporate payments and our trust customers who didn't think of us as the bank part, they just thought of us as the specialty part.

This is expanding and drilling down on what we already do.

We're not doing anything new here.

We're just doing it better.

I guess the only question is out of footprint, that's quite a bit different then?

But that was our limiting factor.

I mean, if I was going to do business with a customer down in Orlando because one of the largest food companies is down there, because we don't have branches, that's what we were two years ago.

Now I've got people in Orlando calling on those wonderful companies, expressing what we can do for them and they say, yes, I don't care if you have a branch down the street or not.

I just never thought of you.

It's all part of branding and the development of a reputation that basically says we've been here a long time, you just didn't know us.

We want to introduce ourselves and be on point.

It's just that, it's more of the same, but better.

It might make it easier to do acquisition out of footprint?

Well, that's not altogether out of the question but this is an easier way to do it.

I can control every step of this one, but if we can't beat them, then you join them and you go into their marketplace and you start taking market share and that's what we're doing.

All right, thank you.

Thanks, Mike.

Thanks, Mike.

Your next question comes from the line of Matt Burnell of Wells Fargo Securities.

Hi, Matt.

Good morning, gentlemen.

Thanks for taking my call.

Most of my questions have been asked and answered, and I know we're over the hour, but just a couple of follow-up questions.

I believe you mentioned the opt-in in terms of the Reg E percentage was approximately 10%.

Did I get that correct?

So that's what we set as a goal.

As we set our forecast in place in the last couple of quarters, so when we thought about it.

An opt-in would be our best guess of people who say I still want you to cover my overdraft at whatever price point.

We then decided to survey our customers, I know, novel idea, and find out where their tolerance was for the willingness to continue to suffer an overdraft, but pay a more fair price.

That's when we changed all of our pricing approaches in the last three to four months.

That has served us to get a better opt-in than 10%, but we're still a month away from the final answer and I'm not going to predict it, but it's going to be higher than 10%, but at lower income levels.

So we'll see how that balances.

We'll be able to tell you all of that in the next call.

Okay, thank you.

And question on deposit repricing, how much more benefit do you think you can get, assuming rates don't move dramatically over the next quarter or so, or at least through year end from deposit repricing?

You've had quite a nice benefit from that over the past four to six quarters.

What can we look for in terms of that supporting net interest margin over the next couple of quarters?

I would say most of that's reflected in the current net interest margin.

So what you see is what we're going to get.

And I guess one drill-down question in terms of the residential mortgage portfolio, we noticed that a couple debt restructuring in that portfolio were up a little bit quarter over quarter.

Can you provide a little bit of color as to what's going on there, what your expectations are for the next couple of quarters for TDR balances?

Yes, I mean that's reflective of all the HAMP restructurings and that will continue.

I mean, we see upward pressure both on that line and nonperforming loans in the residential mortgage through the balance of the year, although those increases will continue to moderate.

Okay.

Thanks very much.

Thanks, Matt.

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

Hi, David.

Good morning.

All my questions have really been asked, but one concern investors had during the quarter was banks exposures to municipalities and your securities position is a little bit outsized proportionally.

Just wondering how your municipal portfolio performed this quarter?

And then on the balance sheet, is there anything else really tied to municipalities, whether it's LCs, wrapping bonds, or any exposure for that matter?

Good question, David.

David, we're comfortable with our position.

We have about a $7 billion municipal security portfolio against our $50 billion or so, $49 billion securities book, it's very high quality, 99% plus is investment grade, it's very well diversified across every state.

We have limits.

We have limits across category investment, and it's performing very well.

So we have no concerns about that.

In terms of exposure, yes, on the loan book side, we do have a government banking unit and they do all provide letters of credit for banking.

Typical example would be the state pool programs where they provide the school financing for all the different school districts.

So, yes, we do do that kind of financing.

That's part of the loan book and managing through the loan book.

And how is that concentration in proportion to other industries?

Is it outsized or kind of in line with other sectors?

It's very in line with the size of the municipal market.

We have caps and we have letters and we manage those very closely.

It manages just like any other loan portfolio.

Okay, great.

Thank you.

Thanks, David.

Ladies and gentlemen, we have reached the allotted time for questions and answers.

I'll now return the call to management for any final remarks.

Thanks, Lori.

Great, thank you, Lori.

Thank you, all for listening to our review.

If you have any follow-up questions, please feel free to call and we'll answer them, Shawn, at 612-303-0778 or myself at 0783.

Thank you.

Thanks, everybody.

Thank you for participating in US Bancorp's second quarter 2010 earnings conference call.

You may now disconnect.