美國合眾銀行 (USB) 2010 Q3 法說會逐字稿

Welcome to the U.S.

Bancorp's third-quarter 2010 earnings conference call.

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

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

(Operator Instructions).

This call will be recorded and available for replay beginning today at approximately noon Eastern Time through Wednesday October 27, 2010 at 12 midnight Eastern Time.

I will now turn the call over to Judy Murphy, director of investor relations for U.S.

Bancorp.

Thank you, Brandy, 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 U.S.

Bancorp's third-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, and good morning, everyone, and thank you for joining us.

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

U.S.

Bancorp reported net income of $908 million for the third quarter of 2010, or $0.45 per diluted common share.

Earnings were $0.15 higher than the same quarter of last year and equal to the second quarter of 2010.

We achieved record total net revenue of $4.6 billion in the third quarter.

This represented a 7.9% increase over the same quarter of 2009 and a 1.5% increase over the prior quarter.

Total average loans grew year over year by 5.8%, benefiting from recent acquisitions.

Excluding acquisitions average loans were down slightly from last year.

Importantly, however, on a linked-quarter basis average total loans grew by 0.7%.

We continue to post strong year-over-year average deposit growth, particularly in the low-cost categories, including non-interest-bearing, interest checking, money market and savings.

These categories grew on average 13.6% year over year, or 9% excluding acquisitions.

Once again, credit quality improved quarter over quarter as net charge-offs and nonperforming assets, excluding covered assets, declined by 10.7% and 4.6% respectively from the second quarter.

Our capital position remains strong and growing, with the tier one common ratio and tier one capital ratio increasing to 7.6% and expect 10.3% respectively at September 30th.

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

Return on average assets in the third quarter was 1.26% and return on average common equity was 12.8%.

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

This quarter's net interest margin of 3.91% was just slightly higher than the prior quarter and 24-basis points higher than the same quarter of 2009.

Our third-quarter efficiency ratio was 51.9%, slightly lower than the prior quarter but about the same quarter of last year.

We remain the best among our peers in terms of efficiency and the increase in this ratio year over year reflects both ongoing investments and the impact of recent legislative and regulatory actions on revenue and on expense.

Turning to slide five, our capital position remains strong and continues to grow.

Additionally, our tangible common equity to tangible assets ratio rose from 5.4% at September 30, 2009 to 6.2% at September 30, 2010.

Our Company continues to generate in significant capital each quarter due to the momentum and our diverse business mix, in addition to our superior efficiency and ongoing profitability.

As I've said before we are confident that our capital levels and our ability to generate new capital each quarter can support a dividend increase and allow us to meet or exceed any capital requirements that may be forthcoming.

Increasing the dividend remains a top priority for our management team and our board of directors, but we must continue to wait for final regulatory capital guidelines to be established and regulatory approval to begin before a dividend action can be taken.

We fully expect, however, to be one of the first banks to gain approval to raise our dividend once those guidelines have been determined.

Moving on to slide six, average total loans outstanding increased by over $10 billion year over year, but as noted on the slide, excluding acquisitions, total average loans declined by 0.4% year over year, as the average commitment utilization rate by our commercial and corporate borrowers declined from 32% in the third quarter of 2009 to 26% in the third quarter of this year.

On a linked-quarter basis, however, total loans increased by 0.7%, as we experienced slightly-higher demand for new loans from credit-worthy borrowers and as the average utilization rate on commitments stabilized, albeit at a historically low level.

Notably we recorded an increase in average commercial loans outstanding quarter over quarter.

This is the first linked-quarter increase since the fourth quarter of 2008.

At September 30th total loans were approximately $3 billion higher than at June 30th, again signifying that we are seeing some improvement in the demand coupled with an ongoing flight to quality as we continue to originate and renew lines and loans for our qualified customers who want and who need credit.

In factoring the third quarter of 2010 U.S.

Bank originated over $16.5 billion of residential mortgages, originated almost $6 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 $1.4 billion and we issued over $12 billion of new commitments and renewed almost $19 billion of commitments to small businesses, commercial and commercial and commercial real estate customers.

Overall, excluding mortgage production, new originations plus new and renewed commitments totaled approximately $38 billion, about $2 billion higher than the previous-quarter's total.

Total average deposits increased by $16.3 billion, or 9.8% over the same quarter of last year.

Excluding acquisitions the growth rate was 2.7% year over year.

Total average deposits declined by $658 million on a linked-quarter basis, primarily due to lower corporate trust, institutional trust and broker-dealer deposits.

Turning to slide seven, the Company reported record total net revenue in the third quarter of $4.6 billion.

The growth in revenue was driven by earning asset growth, an expanding net interest margin, strength in our fee-based businesses, organic growth initiatives and acquisitions, all tempered by the impact of recent legislative actions.

Turning to slide eight and credit quality.

Third-quarter total net charge-offs of $995 million were 10.7% lower than the second quarter of 2010.

Nonperforming assets, excluding covered assets, decreased by $171 million, or 4.6%.

On slide nine you can see that early and late-stage delinquencies, excluding covered assets, improved again this quarter.

The decrease in net charge-offs and nonperforming assets, in addition to the favorable changes in early and late-stage tendencies and as detailed on the right-hand side of slide nine, the continuing favorable trend in criticized assets all 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 fourth quarter.

Turning to slide ten you can see that this is the first reporting period since the fourth quarter 2007 that we have not recorded an incremental provision for loan losses.

This compares with a incremental provision equal to approximately 2% of net charge-offs in the second quarter of 2010 and approximately 40% of net charge-offs in the third quarter of 2009.

Despite this positive trend in credit quality we did not release reserves this quarter.

Contrary to some of our peers our loan portfolio, and particularly a number of consumer loan categories, has grown and the economy, although showing some signs of stability, continues to be uncertain with high unemployment and a very challenging real estate market.

We entered this cycle with a strong and resilient balance sheet and we intend to protect that position going forward.

Maintaining reserve levels commensurate with the growth and changing risk of our loan portfolio is an integral part of that effort.

You will find additional credit information on all the major loan categories in the appendix of this slide presentation.

Finally, I wanted to address concerns about the validity of our foreclosure process and calls by many for a national moratorium.

Our Company's primary goal is to keep borrowers in their homes wherever possible.

U.S.

Bank participates in a number of loan modification programs, including HEMP, which establish affordable payment options for our customers.

In addition, we have developed and implemented other foreclosure prevention methods that include early contact with delinquent borrowers, marketing outreach programs, and participation in foreclosure prevention workshops.

In fact, since 2007 U.S.

Bank has modified over 34,000 loans with mortgage balances outstanding of approximately $8.2 billion.

The manageable size and quality of our portfolio allow us to manage the foreclosure process internally.

Recall that U.S.

Bank did not participate in the large-scale origination and/or securitization of subprime or questionable loan structures.

The foreclosure process at U.S.

Bank follows well-established safeguards, including both individual and committee review of each loan file, to ensure that foreclosure documentation is accurate.

We routinely review our policies and procedures and we have just reassessed and reconfirmed the quality of our processes and controls.

We will continue to review our processes going forward and comply with any information requests we receive from our regulators or other government officials.

We do not, however, have plans to halt foreclosures and we believe that any blanket foreclosure moratorium would seriously impair the national economic recovery.

Before leaving this topic I'd like to spend a moment on discussing U.S.

Bank's role as trustee for mortgage-backed securities as our company is referenced from time to time, erroneously, as having certain responsibilities with respect to transactions where, in fact, our role is limited to very specific duties outlined in the documents that establish the trust.

As trustee U.S.

Bank does not have a role in the servicing of mortgages that are used as collateral in the trust.

As trustee we do not select the service of the mortgages or have a role in the actions the servicer takes in the foreclosure process.

Further, as trustee and/or custodian we do not have responsibility for determining the validity or enforceability of the underlying mortgage documents.

That is role of securitization's sponsor.

I will now turn the call over to Andy.

Thanks, Richard.

I will 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 third-quarter 2010 results compared with those recorded in the second quarter of 2010 and the third quarter of 2009.

Earnings per diluted common share were $0.45 for the third quarter of 2010, equal to the prior quarter and $0.15 higher than the third quarter of 2009.

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

The $305 million, or 50.6% increase in net income year over year was primarily the result of a 7.9% increase in net revenue and a $461 million decrease in the provision for credit losses, which was comprised of $46 million favorable variance in net charge-offs and a $415 million decrease in incremental provision expense.

These favorable changes in total revenue and the provision were partially offset by a 16.2% increase in non-interest expense year over year.

Net income was $142 million, or 18.5% higher on a linked-quarter basis.

A 1.5% growth in total net revenue and a favorable variance of $144 million in the provision for loan losses more than offset the slight increase in non-interest expense quarter over quarter.

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

The only significant item called off for the third quarter of 2010 were net securities losses of $9 million, not large enough to have an impact on the Company's EPS.

Earnings per diluted common share in the second quarter of 2010 included a $0.05 benefit related to the nonrecurring exchange of perpetual preferred stock for outstanding income trust securities.

Other smaller items are listed for your review on this slide.

Significant items impacting the third quarter of 2009 are also highlighted on slide 14, the largest item of which was a $415 million incremental provision expense.

Turning to slide 15, net interest income increased year over year $320 million, or 14.8%, due to a $17.8 billion increase in average earning assets and an expanded net interest margin.

The increase in average earning assets was primarily acquisition related.

The net interest margin was 24-basis points higher than the third quarter of 2009, primarily due growth in low corp -- cost deposits, lower funding rates and improved credit spreads.

On a linked-quarter basis net income was higher by $68 million, the result of both an increase in average earning assets, slightly-higher margin and day basis.

The net interest margin was higher by just one-basis point over the prior quarter, as lower funding costs were partially offset by the incremental impact of Card Act.

Assuming the current rate environment and yield curve, we expect the net interest margin to decline by five-to-ten basis points in the fourth quarter of 2010 due to the Card Act and lower long-term rates.

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

Average total loans grew by $10.6 billion, or 5.8% year over year.

Excluding acquisitions average total loans declined by 0.4% and as you can see from the chart on the left this decline was driven by 8.7% year-over-year decrease in average commercial loans outstanding.

As Richard pointed out, the reduction in commercial and corporate lending year over year was primarily due to the utilization rate, which has declined from 32% in the third quarter of 2009 to 26% in the current quarter, representing a decrease in excess of $3 billion.

Covered loans, which grew by $9 billion year over year, represent loans acquired through to the FDIC assisted transactions and include Downey PFF and the banking operations of FBOP, the later of which was acquired in October 31st of 2009.

On a linked-quarter basis the 0.7% increase in average loans outstanding was driven by increases in commercial loans, residential mortgage and total retail loans.

Moving to slide 17, you can see the growth in total low-cost core deposits over the past five quarters.

Average total deposits grew by $16.3 billion, or 9.8% year over year, partially due to acquisitions.

Notably, low-cost core deposits, non-interest bearing, interest checking, money market and savings, excluding acquisitions, grew by over 9%.

On a linked-quarter basis average deposits decreased slightly, principally due to corporate institutional customer activity, which was partially offset by low-cost deposits growth in the consumer bank.

Slide 18 represents in more detail the changes in non-interest income on a year-over-year and linked-quarter basis.

Non-interest income in the third quarter of 2010 was $17 million, or 0.8% higher than the third quarter the 2009.

This variance was driven by growth in payments, commercial products and mortgage banking revenue.

These favorable variances were partially offset by lower deposit service charges, which reflected the legislative and bank-developed pricing changes and lower trust and investment management fees.

On a linked-quarter basis non-interest income was flat.

Payments-related revenue grew by 2.5%, driven by seasonally higher transaction volumes, and mortgage banking revenue increased by $67 million, driven by record high production volume, and net securities losses were favorable.

These positive items were offset by reductions in deposit service charges, the result of changes in overdraft policies and pricing, the Visa gain recorded in the second quarter 2010 and a number of smaller variance in the other fee income accounts.

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

Slide 19 highlights non-interest expense, which was higher year over year by $332 million, or 16.2%.

The majority of the increase can be attributed to acquisitions, which accounted for $85 million of the increase; higher compensation and benefits expense, driven by incentives, merit increases and the restoration of the 5% salary reductions taken as part of our cost-savings program in 2009; and additional staffing.

Higher cost related to investments in tax-advantage projects accounted for $22 million of the increase; an increase of professional services expense and technology and communication expense relate to investments and projects; and higher ORE expense, which will remain at the current levels as we aggressively manage the disposition of our ORE properties.

On a linked-quarter basis non-interest expense was higher by just $8 million, or 0.3%.

Finally the tax rate on [a equivilant basis] was 25.9% in the third quarter of 2010, compared to 25% in the second quarter of 2010 and 18.4% in the third quarter of 2009.

Given the heightened focused of mortgage foreclosure and repurchases we have provided more detail on the Company's mortgage repurchase-related expense and the reserve for expected losses on repurchases and make-whole payments on slide 20.

We have also added this information to the supplemental financial data schedule attached to our currently earnings release.

As indicated on the table on the left-hand side of the slide our ending reserve was $147 million at September 30th and the addition to the reserve in the third quarter of 2010 was $70 million.

This $70 million repurchase expense was booked as a contra-revenue item in the mortgage banking fee income line.

Mortgages repurchased and make-whole payments in the third quarter totaled $53 million.

Our Company's conservative credit underwriting culture, as well as our very disciplined loan origination process, has resulted in lower repurchase volumes and expense relative to our peers.

Given the current environment we expect repurchase activity to remain slightly elevated over the next few quarters before beginning to moderate downward, with quarterly repurchase expense of $50 million to $70 million per quarter and annual reserve levels of between $150 million and $175 million.

On slide 21 we have listed the two regulatory changes that have and will have an impact on our results and we wanted to give you a brief update on revenue assumptions related to these changes.

We estimate that overdraft pricing in policy changes have reduced revenue year to date by 2000 -- year-to-date 2010 by approximately $140 million and will reduce revenue by an additional $110 million to $120 million in the fourth quarter, bringing our full-year 2010 estimate to between $250 million and $260 million.

The annual run rate going forward is expected to be $440 million to $480 million.

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

Overall our opt-in rate has been higher than expected, but our pricing changes and lower-than-anticipated number of overdraft incidences keeps us from materially changing our estimates.

The Card Act has reduced total revenue year to date by approximately $100 million and is expected to reduce revenue by approximately $60 million to $80 million in the fourth quarter of 2010.

We expect the total 2010 revenue impact to be in the range of $160 million to $180 million with an annual run rate going forward of approximately $250 million.

Finally, turning to slide 22, an update on the impact of Basel III.

We originally presented this analysis at our investor day in September and we have now updated the numbers as of September 30th and the numbers have not changed materially.

The impact of limits for mortgage servicing rights, deferred tax assets and investment of financial institutions remains at zero.

The impact of the deduction for the pension liability, purchase credit card relationship intangibles and all others equals 38-basis points, while the changes related to our non-core capital elements, or trust preferred, net of replacement capital requirements, is equal to 45-basis points.

All of this translates to a pro forma tier one common equity ratio as of September 30th of 7.2% and a tier one ratio of 9.4%.

On a pro forma basis this puts us above the tier one common equity target of 7%, the Basel III required in the year 2019.

However, two items remain uncertain; first, the implementation timetable of the counter-cyclical component of capital remains uncertain, and second, the systemic [RIF] buffer has yet to be defined.

Regardless, we have the capital we need today and we continue to generate significant capital each and every quarter, so I'm very satisfied that we can manage our capital requirements going forward.

Moving to the right side -- hand side of the slide I would say first that our -- and foremost that our liquidity has never been stronger.

There are still a number of unknowns in regard to how Basel III will be implemented.

Given the strength of our balance sheet and our ability to generate deposits and liquidity we feel any change will be manageable and we have already have a number of initiatives underway to ensure that we are prepared.

I will now turn the call back to Richard.

Thanks, Andy.

To include our formal remarks I turn your attention to slide 23.

On September 15th we held an investor day in New York City.

The theme of the day was "Position to Win." Our presentations highlighted our strong foundation, including our ability to manage credit and risk, our diversified business mix, and our prudent capital management.

We had discussed how we have proven our ability to perform even during one of the most challenging and uncertain economic cycles.

We talked about how we have invested in our business lines and as a result are building profitable scale and growing our market share.

Our third-quarter results fully support our belief that U.S.

Bancorp is operating from a position of strength and remains positioned to win.

We are moving forward with optimism, despite the headwinds of new regulatory and legislative actions and oversight and still an uncertain economy.

We are focused on the future and we're ready and willing to do what we can to support the economic recovery of this country, while sustaining our engaged -- and performance-driven workforce and creating superior value for our shareholders.

That concludes our formal remarks.

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

(Operator Instructions).

You our first question comes from the line of Jon Arfstrom with RBC Capital Markets.

Good morning, Jon.

Good morning.

A couple of questions for you on lending, particularly commercial lending.

Can you talk a little bit about where that growth is coming from?

Is it part of your national initiative, or the small business initiative that you have, just given the nice yield, of where that demand is coming from?

So, Jon, this is Richard.

I'll start and I'll ask Bill Parker to chime in.

We're seeing across the board slowly just a little bit and just about everywhere, so what we're seeing is the qualified customers are now starting to come back in the marketplace.

As you think about it most qualified are the ones who least needed to use our balance sheet to grow their companies and they're starting now to see enough reason to incur some debt and to develop some inventory that are some investments.

So on the corporate banking size you know we've continued to enjoy some growth there but these customers have got a very strong capital market to use, as well, and in some cases they're now using both the capital market and the bank balance sheet and we're starting to see some growth there.

Probably our most important growth comes from the commercial banking middle-market area where we're seeing continued slow but steady increases across the entire geography.

We currently see stress in entertainment and gaming sections, as you would expect, and all of areas where we have appraisals for owner-occupied real estate they continue to reflect decreasing values and there is some continued stress in all of those areas, as you would expect.

Community banking is steady as it always has been and agriculture looks to be very solid this year, with a little overproduction being offset by higher commodity prices.

And finally, small businesses continued to be very strong for us, not only because we're starting to see a new blip in a number of small businesses getting to a point where they're strong enough to incur some debt.

But a couple of years ago we placed a full-court press on becoming more involved in small business lending from traditional to SBA to small ticket leasing and those benefits are starting to yield results by the hundreds of new employees we've put in place and the back offices we created to do a better job of small lending.

So for us it's a lot of a little bit everywhere and a little bit of our good work a few years ago starting to come into fruition.

So, Bill, you might add to that?

Yes, I'll start with small business and it was up about 1% just in the quarter -- second quarter to the third quarter and that's pretty much across the board, whether it was FDA or the loans -- small business loans originated out of our branches.

We've had fairly steady growth in that area the last several quarters.

And then on the corporate middle-market side we have a strong emphasis on meeting credits.

We've been able to successfully gain some market share in those areas, so we've seen pretty good loan demand here in the last quarter.

You had more than one question, Jon?

Yes, just the next question is more of a -- just changing to retail.

Obviously you've highlighted your Reg E issue and we have [Durbin] that will show up at some point, but how do you think about the retail checking product?

Some of your larger competitors have made some changes in terms of the account structure and just curious what your thinking is.

Is it higher minimums, is it monthly fees?

How do you get paid for your retail branch network?

Thank you, Jon.

First of all, to our competitors go for it.

We're going to wait and I think I said this last time.

We, I think, have the luxury and we've earned the position to watch and learn.

I have no idea what the customers going to want in this next range and I'm not going to say we're going to get it all back without knowing what that means.

We have to have a value proposition and we have to have a relationship that's got more than a transaction account attached to it.

We're building all those preparations but I'll tell you I think it's going to be a monthly service charge but I think it's going to be for more than just the standard checking account.

I think people will be able to offset any of these charges by having deeper relationships and different value transactions with the Company but I am not going to move on that quickly.

We're going to -- I think I said this last time.

We'll withhold some near-term earnings by not jumping into this very early and by taking a little longer to learn what the right answer is, perhaps take some market share while people adjusting more quickly, figure out the right answer and then we'll deliver something to you all when we have a better idea of what this next generation of checking pricing looks like.

Okay, thank you.

Your next question comes from Ed Najarian with ISI Group.

Hi, Ed, how you --?

Good morning guys.

I was just wondering if I could flip you back to page 21 and I guess I just didn't quite understand exactly what you were saying on that page in terms of the impact.

If you could just go through that quickly one more time?

Sure, this is the regulatory environment, Ed?

Yes.

Yes.

So, both Card Act and the overdraft Reg E changes have been slowly impacting us more and more each and every quarter of 2010.

I would say we are getting to the full run rate in the fourth quarter so we were not a full run rate in the third quarter and certainly not in the first half of the year.

So that $110 million, $120 million represents the full run rate and four times that amount is what you see for next year.

The full run rate of the negative revenue impact on a pretax basis?

That is correct, Ed, and that is correct for both the overdraft and the Card Act impact and Card Act is both in fee income and in net interest margin.

Right, okay.

So this is revenue -- sort of a lost revenue estimate on a pretax basis based on these regulatory actions?

That is correct.

In other words to think, it's quarter (inaudible) finally hitting stride, multiply it by four and you're kind of there without the mitigating discussion that we had with Jon a minute ago.

Okay.

And then next question would be with respect to the net interest margin outlook for the fourth quarter down to five-to-ten basis points, obviously we saw good stability and good net interest income growth this quarter.

You indicated it was the low rate backdrop.

Could you put you put a little more color around that and would you expect it to stabilize subsequent to 4Q, or is this the beginning of a bit of a NIM compression trend?

Well, there are two key factors that are driving the fourth quarter.

One is what you just asked about, which is the full impact of Card Act on our credit card rates and yields in the fourth quarter will be fully baked, so to speak, and that's going to cause a bit of that compression.

The second item, as you know [LON] rates are down versus where we were in the first half of the year and that has a negative impact on both our securities portfolio and other earning assets.

So those are the two key drivers, those are what's causing the five-to-ten basis point decline in the fourth quarter.

Depending upon what happens with LON rates in 2011 I don't know how that will look, but as we see today and what the yield curve looks like today that's what the impact is.

If it doesn't change a lot the impact will be relatively stable, if the yield curve changes it'll adjust.

We are not trying to guess beyond quarter four, we're just trying to show what moves.

Right, but when you say be relatively stable and if the interest rate remain stable you may get down to that level but not -- potentially not compress a lot further than that, or when you say relatively stable you mean ongoing down at that pace?

Yes.

You know, Ed, we've been fairly consistent in trying to look our 90 days because there are so many moving parts with margin.

I would say relatively stable given what I know today about the yield curve and about rates, but there a lot of moving parts there and we'll be sure to update you every quarter like we've been doing.

Okay, and then last question.

Obviously very strong mortgage origination revenue this quarter.

Do you care to make any comments on your outlook for mortgage utilization volume or revenue?

Sure.

So, Ed, we had about $16.5 billion of production, a record quarter, over $20 billion of apps, so another records, so it was a tremendous quarter given the low rate environment.

The hedge was neutral so that we didn't benefit at all from the hedge and if you compare it on a year-over-year basis a year ago we actually made about $67 million on that.

I would expect the third quarter to be down somewhat -- I mean it should be in the fourth quarter it'd be down somewhat just given the seasonality the mortgage business.

Okay, great.

Thank you very much.

You bet.

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

Good morning, John.

Hi, good morning, guys.

Andy, just on expenses if you could comment -- given outlook on expenses if we think ex the FDIC expense increase that you discussed coming on next year, is this quarter a good run rate on expenses?

Do you have any -- there were kind of puts and takes that you mentioned going forward that we should think about on expenses?

Right.

So, John, we talked a little bit about this last quarter and I said the third quarter was a pretty good run rate -- or second quarter was a pretty good run rate for the third quarter and it ended up being that way.

We were up $8 million so I would say that we have most of the components included.

I think a couple of the unknowns are certainly, as you mention, the FDIC expense and you saw yesterday that the three-basis point increase is no longer part of the equation, but the equation is still uncertain and the exact rates are still uncertain, so that 's a factor.

The fourth quarter is seasonally higher with our CDC, or tax credit-related expense so that'll be up a little bit but I don't see any other material changes.

Okay.

And Richard, you touched on the reserve the release -- or lack of reserve release compared to some of the peers.

Just any more color on what factors will drive whether U.S.

Bank has any recapture of reserves over the next couple quarters as credit continues to improve?

Yes, John, as I have said all the other quarters it's a lot more math than it is art so we let the math dictate where we are and I have to say that if we continue to see a progression in our delinquency improvement and our nonperforming assets we will probably see a reserve release in the future quarters.

As I also said about a year ago, if we end up doing the that it's because we failed in our ability to predict perfectly and that would be the case, but I don't think we would (inaudible) be in this situation today.

We don't ever put it away with the goal of getting it back later, we simply put it away based on the math of what we see in the current day., As Bill would say, particularly consumer loans are based on a four-quarter full review, commercial loans are little more lumpy and more individual based on the company, and in both cases they're coming down.

But I also want to make sure that we end this cycle with very, very strong reserve levels -- adequate and strong reserve levels for our loan losses as we go into the improving scenarios.

So I think that if we keep following the math like we have you'll start to see some reserve recapture but it won't be significant and it wasn't intentional.

Okay, great.

Thank you.

Yes, thanks.

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

Hi, Betsy.

Hi.

Question just on the liability management side and we talked about NIM in compression and what could happen if one of the curves come down, but maybe if you could give us some color as to how you are handling the liability side opportunities to bring down your cost of funding there and maybe just speak a little bit to the possibility yes or no of trust redemption?

So a couple things.

We issued two -- we had two debt issuances in the last few months, both at the lowest rate ever issued by a bank holding company in the US, a five-year pay (inaudible) and three year and I will tell you that we don't have a lot more issuance planned for the remainder of the year and we don't have a lot rolling off in 2011.

Secondly, we have a growing deposits, as you've seen.

Low-cost core retail deposits, which is helpful in terms of our funding costs.

And we will have the second component, or the second half of the [IPS] transaction that occurs late first quarter early second quarter 2011.

Those are the key components.

We're watching on the further redemption in terms of the rules around what counts as capital but we have no plans to do an early exchange right now.

And, Betsy, it's Richard, let me just -- I have instructed our team to be aggressive on deposit gathering, so while you're hearing that there's going to be dearth of loan growth I actually believe that we're going to continue to grow based on market share grab.

I'm going to make that assumption and therefore we're going to keep growing our deposits and I think whichever bank ends this downturn, goes into the recovery with the customers, with the most deposits, especially core deposits, will end up winning the next cycle.

So we're not backing down, we have the ability to be aggressive in deposit pricing based on relationships and we're doing across the board.

And to the degree the loan growth is not as significant as the funding side it does give you some room to bring down some of the higher cost that you've got on your balance sheet?

And I think also, Betsy, it may lead us to build our securities portfolio a bit, not material but a bit as we continue to build our liquidity coverage ratio and the strength in our liquidity on balance sheet.

All right, thank you.

Sure, thanks.

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

Good morning guys.

Hi, Nancy.

I realize that asking a question will be exercise in futility, but I just ask it anyway.

Go for it.

Okay, a dividend question.

You had said that you would like to pay this dividend -- or grow the dividend at the first possible opportunity, [Jamie Divands] has said the same thing, [Dick Rohandan] has said don't expect anything in 2011.

Do you have any sense, Richard, of whether the regulators are going to sign off on the resumption of dividend growth wholesale for the industry as they did with the press, or are they going to look at a company by company and maybe allow some in 2011 and postpone the rest until later?

Okay.

So this -- you set it up and I'll confirm.

This is just my opinion and based on the data I collect.

I think that it'll be the latter -- or the former.

I think they're going to allow banks individually with permission to move forward on dividend resumption and/or stock buybacks.

Here's my current -- in my head the timeline looks like this.

G20 heads of state meet the end of November.

They confirm what the finance ministers have said all along.

They confirm the capital levels then they leave to the domestic local domains to decide what kind of systemic important capital buffer there may be and other things that each country may want to add.

Once and when our government and our fed and treasury have decided what that is for our banks I think they'll continue to pursue this stress testing that we've all been under and that we've all been pursuing for quite some time, along with our capital plans and our liquidity plans.

And if and when we can attach all of those acceptable actions to their requirements and we meet the test of the capital levels then I think banks as they find themselves satisfying those measures will get up.

And I think -- I hope that's the case because I would hate if we have to wait for the lowest common denominator and I also think it would be prudent for a lot of reasons for the recovery of this economy to allow banks' significant dividend payors to give their shareholders what they've been waiting for a long time.

So I'm going to stick with what I believe because it serves us well to believe that will be the case and we're operating on the basis that each of us will get out as we have permission and as we have earned it and we're working hard to earn it.

Secondly, could you just -- I'm assuming you are were at the dinner with Elizabeth Warren on the topic of how she's going to structure her Bureau going forward, et cetera.

Do you have any greater insight into how that's going to occur and what we should be looking at in terms of timing for product requirements, et cetera?

Yes, it's the same as this thing I gave a second ago and, in fact, I introduced her at that dinner at my role at the round table and had breakfast with her the morning of and I'm quite comfortable that her first -- most important activity as she builds the agency -- as you know she's not running it -- is to focus almost exclusively on disclosures, transparency and simplicity.

She's made that clear to everybody that night, she's made it clear to a few of use even since then.

So first and foremost, the Consumer Protection Bureau as it's beginning to become an agency is going to focus on clarity and simplicity of transparent communications and disclosures.

We all welcome that, by the way, because we need a safe harbor to help us create these more simplified user to understand protocols when, in fact, we have so many issues on the legal side that if we don't put everything in the 25-page document we'll find ourselves in harm's way.

So I'm looking forward to that as her first effort.

I think as you probably know what I know the responsibility for that agency to be up and running isn't until mid 2011 at which point I believe they'll have their key players and they'll have the key mandates, which will then follow some of the rule making that we're all going to be eager to get.

I think that's a mid 2011 so little will come out of it beyond disclosures in the next quarters.

That is my thought.

Thank you.

Yes.

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

Good morning, Matt.

Hi, guys.

I just wanted to get your take on the mortgage origination business at this point.

You've got a pretty good track record when it comes to this and during the bubble years you weren't a big player and that helped you avoid a lot of the issues others are facing, or have faced and are facing now, and then you've been gaining share in the last couple of years, which I think has proved to be pretty profitable.

So a lot of the noise out there relates to previous origination but there's just in general a lot of uncertainty in terms of the processes going forward and what spreads will look like, and I'm just wondering what your take is on the business overall and remind us how you think about retail versus wholesale channels?

Okay, I'll go first and Andy can talk about spread.

This is Richard.

We like the business as much as we did a couple of years ago when we decided to [stay off] and more than double our investment in it.

You know we were in the high teens as an originator and servicer a couple of years ago and now we're four or five -- five or six.

Sadly it's not just because we're so amazing, it's because so many between us have moved on or consolidated so it's a little both.

What I like about it, though, is we haven't left our old-fashioned approach of doing it very, very close to the customer.

We have six locations across the country where we take care of our brokerage business.

They're in large centers, which are handled by very, very capable people and when we added to our business we didn't add any new locations, we didn't add any new capabilities, we just added more people under the current management to do twice as much work.

So I'm very comfortable with our approach.

It's a low-cost approach.

We have our largest centers in places like Oshkosh, Wisconsin, and Nevada, Missouri, and Owensboro, Kentucky.

So we have a great workforce and a great cost of doing business and we're just going to continue to grow at those points.

Right now we're operating, as you know, on a significantly-higher refi market than origination market.

That will serve all of us well to keep people busy for a while but I think that when the recovery finally attaches itself in probably a couple of years from now on the mortgage side you'll start to see the old-fashioned originations outtake to refinances and we'll be ready for that, as well.

The mix can be a little bit different based on refi versus origination but we're prepared for both of those.

And then, Matt, we also have a pretty good wholesale business and we've not gotten out of all the broker businesses because we weren't in any broker businesses we didn't like.

Some of our peers are moving away from that and like everything else we are staying with the old-fashioned way of the way we did it in the first place and wholesale does have a pretty good volume stream that kind of mitigates some of the peaks and flows of what would otherwise have otherwise tapped into the retail side, although the margins are a little bit skinnier.

So we're a very blended, very basic mortgage business just bigger than we were before and, frankly, we're going to keep investing in it because we think that, again, at the recovery point whoever has the most critical mass where their customers are not being outsourced to anybody else to accomplish those needs are going to be better off.

That is the kind of growth side.

Andy, you might talk about the mar --.

Yes, about on the margin side.

Matt, again, retail margins are probably a little a higher than what would be normal in this environment, maybe $125 million to $150 million.

They probably will moderate a bit, may $100 million to $125 million, but it'll still be a very profitable and well-run business for us.

Okay.

Just as a follow-up here I guess as I think about this servicing side of the business, does that need to be repriced given just the general higher risk and what seems to be the higher cost of the overall responsibility in that business?

I think as we tried to demonstrate with the numbers and the additional disclosure we provided we actually have very nominal increases in costs there because we've run the business very well.

We've been very prudent in our underwriting and in our processes and the putbacks that we have relative to the size of our book is actually quite small and manageable, So we're very comfortable with the profitability and the way we're pricing right now.

Well, let me put it another way.

The cost of servicing for most of your competitors has gone up quite a bit so I would think they need to find a way to trying to price that overtime so there could be some benefit for you.

Just in general feels like the servicing business for the industry wasn't priced for what we're seeing now in terms the cost and the burden.

I don't disagree with you and I don't disagree with the fact that that may be a benefit to us given our -- the way we run the business.

Yes, I'm glad you included that because I think it's actually a net positive that we continue to stick to our knitting.

So if we're going to see it as a positive to a neutral.

Okay, thank you.

Thanks, Matt.

Thanks, Matt.

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

Hi, Heather.

Hi, good morning.

I understand you guys don't want to make any guidance forecast going into 2011 but can you at least give us a sense for maybe the dollar value of securities that are coming due in 2011 and what kinds of the reinvestment risks you're seeing currently?

Heather, so the way I'd answer that question is I would expect our securities book net to grow a few billion dollars in 2011, so nothing significantly material.

Around a 50 -- $49 billion, $50 billion books is going to grow a few billion dollars.

We're putting on -- the majority of what we're putting on are floaters versus fixed, and as I talked about that five-to-ten basis points going into next quarter that's part of the reason for the decline.

But it will not have a significant material impact on neither the balance sheet nor the net interest margin as we see it today for 2011.

So you don't think that the existing portfolio poses much reinvestment risk given where tenders are today?

Well, it does post some reinvestment risk but given the size of what's rolling off versus what we're putting on it doesn't equate to a large number for 2011.

And what's rolling off is not rolling off at substantially higher yields than what you can find in the marketplace today?

Oh, it is, Heather, as you know, but, again, given the level of the roll-off and what we're reinvesting the math there just doesn't create a huge difference.

I see, so you're just making it up in volume?

Yes.

Got it.

Okay, thank you.

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

Hi, Paul.

Yes, thank you, how you guys doing?

On increased loan demand there's been some stories out there and I think the Fed released a report saying that for the first time they've seen banks ease their credit standards.

Can you add some color on that?

Have you eased your credit standards, which has increased the -- increased your loan demand out there, which helped to grow your balance sheet this quarter?

I'll let Bill answer, but absolutely no.

Go ahead, Bill.

(LAUGHTER) Knock yourself out.

Our underwriting standards haven't changed since ten years ago, but I think when they cite things like that what they're talking about is when you go into the down cycle what used to be maybe a five-year revolvers for investment-grade credit collapsed back to one-year and three-year revolvers, now they're going back out to five years.

That's some of the things they're talking about when they talk about that "easing." So it's not --

Oh, okay.

-- or us it's not an underwriting issue.

Hey, Paul, it's Richard.

I also think that you will see -- because the regulators are so keen on watching for quality I think the only thing you might see is pricing issues, whereas some are going to be hungrier and take some risk on either pricing or maybe even whole levels.

But the regulators are very much on top of this.

And by the way we're all welcoming that because we'd rather that they were giving us currency back and late fee back.

So I think you'll find any changes or adjustments will come in pricing much less than an underwriting.

Because you hear a lot of stories about people that need credit can't get credit and people that don't need credit have all the credit in the world.

I'm just wondering is -- and we're starting to see people always talk about loan growth and this is the first we've seen it.

Is that -- is things now loosening up a little bit in the world, including you guys, not necessarily underwriting standards but much more willing to lend out there?

So it's not -- we're not changing lending standards.

I don't think the industry's changing it's willingness to lend either.

I think it's a slow but predicted outcome that some of the customers have restructured the way they live, both consumers, small businesses and large corporate.

They're now becoming more qualified because they've done all the heavy lifting of getting themselves back in shape to now incur more debt and we're more attracted to them because they don't have those kinds of risks.

So it's really more that, more qualified people and those who became more qualified by their good effort for the last couple years.

A long recession is something we're all trying to figure out how live within and among, but it's helped us get more clarity around those who early actions and they're now getting more prepared for a better future.

Okay.

Thank you very much, gentlemen.

Yes, thanks, Paul.

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

Hi, Mike.

Good morning.

First on Basel III, are you running Basel II right now and how many more quarters until you get off running parallel, assuming you are on parallel?

Mike, we are running Basel I and reporting on Basel I today.

We would enter a parallel run in 2011.

The numbers I'd given you is a BASEL I with Basel III rules applied.

When you think about Basel II with Basel III rules applied they actually would be better than the ratios I showed you of 90-to-100 basis points.

So if you run parallel on 2011 maybe if all goes right in 2012 you could get off running parallel?

That is the typical plan for the parallel run is four quarters, correct.

And Mike, we begin January 1 of 2011, so we're -- remember we weren't $250 billion at the beginning of the volatile activity so we have to opt in a few years ago when we hit the $250 billion so we're ready to roll on January 1.

Okay.

And as far as the eventual target you said you needed to make sure that you knew what the rules were, which makes sense, but would that mean you have to be until the US decides of what the minimum ratios are, which could be another year or so?

It doesn't -- I guess the answer's better whatever the Fed decides, right, so the Fed will -- along with the treasury will decide what the US answer will be to all of the requirements in Basel and once they decide what qualifies in terms of where the buffers went in, where the systemic important companies would be charged, that's what I'm waiting for.

So I'm not even trying to figure out what America's going to do, I just waited for the American response to whatever the G20 says and counting on people like the treasury and the Feds to be thoughtful enough to let the banks that have shown and proven themselves to be ready to be do that to get on and move on with their dividends.

Okay.

And then separately loan utilization I guess 26%, that;s still the all-time low, isn't it?

As long as we recorded it, it is, yes.

Thank you.

So on one hand we have an all-time low on loan utilization, on other hand you're growing loans little bit more?

Right.

And we've been hearing those from -- everyone's kind of cautiously optimistic.

Would you call yourself still cautiously optimistic or is the real deal?

We're getting loan growth back and it's going to take off?

Well, I'm definitely cautiously optimistic because I do think we're starting to think the first glimmer.

Now one quarter doesn't a trend make but, boy, it's a lot better than having the continued decreases.

For us a fattening utilization is exceptionally exciting because of our loan utilization.

Remember, we just do wholesale so a lot of banks have high utilization levels, it's been credit cards and consumer and all that.

This is wholesale for us.

Just in absolute dollar, as Andy mentioned in the call, we're down $3 billion on wholesale commitment adjustments.

Just the same outstanding's being used less.

So if those commitments start to kick in that's on top of the growth that you're seeing today because as you said, we're not getting it from utilization, we're getting it from old-fashioned new customers and new growth.

So we're actually quite optimistic that this can't get much lower and it will be the first thing we'll see as a consistent behavior of people starting to use our balance sheet again over themselves to try to fund everything.

And then just one last question, a more general question.

So your revenue growth target is 7% to 8%, what would you need in the environment before you could achieve that sort of revenue growth target?

In other words I imagine ten-year rates at wherever it is now, 2.55%, is not going to do it.

What kind of normal environment would you need before you could realistically say you might be able to get that sort of revenue growth?

I think you said -- Mike, this is Andy.

I think you said it correctly, it'd be a normal economic environment, so a normal GDP growth, maybe 3% to 4%.

Normal long-term rates normally you'll curve in and, finally, normal levels of unemployment back down to the eights.

So this isn't the environment that we're going to achieve that because we're now seeing a long growth because yields are -- the (inaudible) is very low but when we get to that normal environment, same-store sales spend, all of those things get back to normal economic levels that's when we should achieve that.

Just this one quick follow up there.

If you have 4% GDP growth for over the long term how do you get from 4% GDP growth to 7% to 8% GDP growth?

By a couple things, pricing and taking share.

Okay, thank you.

Sure.

Thanks, Mike.

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

Hi, David.

Hey, good morning.

Just really a follow up to Matt's question on (inaudible) and I guess more specifically the servicing.

If the bulk of your market share came relative to recent phenomena would it be fair to assume that the vintages and the servicing portfolio are relatively recent rather than driven by 2005, 2006 period and just wondered if you could provide any comment on exposure to private label servicing, if there is any?

Okay, second question first.

No exposure to private label.

Our vintages have actually -- are pretty steady stream if you think about it.

We've been growing throughout the years.

As Richard mentioned, one of the reasons we've moved up in the rankings is because some people are no longer on the list.

So I wouldn't say we have a heavy weighted one way or the other, it's fairly linear.

Okay, great.

Thank you.

Sure.

Thanks, David.

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

Hi, Matt.

Hi, Matt.

Good morning, guys, just a couple questions.

On slide 29 taking a look at the home equity delinquencies, they're up a little bit quarter over quarter.

Is there any color you can provide on that or was that largely expected?

Yes, believe it or not there is seasonal patterns to the home equity and the seasonal increase this year was down substantially from last year and the prior year, so it's been trending down.

So very comfortable with the outlook there.

All right.

Specials that they had -- it's one of our best portfolios and when this thing's all over we'll look back and we'll herald fewer portfolios and the quality of our home equity portfolio and we'll also give it a bit of a pass because it's at a very low level and I think the movement is pretty small.

If we saw an upward trend over a couple quarters I might start to worry but I think it has passed the 100 -- there's a high watermark test and you're going to see it steady out here out here for a while.

Okay, and then just a second question on net interest margin.

What assumption are you all embedding in your assumption for fourth-quarter NIM in terms of loan growth?

Similar to what you see here in the third quarter.

Okay.

So basically no new ramp-up in loan growth?

Correct.

Okay, super.

Thanks very much, guys.

You bet.

Thank you.

Thanks, Matt.

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

Good morning, Meredith.

Good morning.

I have a little bit of an unorthodox question.

When I go and speak to the much smaller banks -- it would below the radar screen for any type of acquisition -- they obviously are very challenged by the cost of regulatory burdens and wondering what opportunities you have as a bankers bank?

What you can do for the smaller community banks and how that may provide a growth opportunity for you that doesn't -- you're not seeing that you're -- you're in between so you're seen as more of a friend than necessarily a large competitor?

I like that question.

We have got over 2,000 banks that we are the bank to in a number of significant ways and what we're doing now is we're trying to go back to them and talk to them about their cost structures and telling them that if they want to give us their credit card portfolio and let us private-label that, if they wanted to give us their corporate payment business and give them something they don't have, if they want to hand off to some of our corresponding banking capabilities we can help them reduce their cost structure.

We can take the scale we enjoy and both of us can do better by performing something like that.

Also, servicing ATM machines we're finding a of interest.

So if I was a small bank I'd say, look, if I'm going to make it and I want to get my cost structure down I'm going to have to go with somewhere I might have not gone before and let someone I trust do that for me on a white-label basis and therefore I can go out and have some of this stress on the revenue side until I can get the other end of the recession.

So actually it's a quite -- you're very -- it's not unorthodox, it's a great question and we see it as very positive.

I thought you were headed to small banks being available for sale and this is actually, in our case, more attractive because it's got a long an permanent approach to it.

Sure.

And is that something that we'd be able to see the growth structure?

Is that something that's going to be material to earnings?

That can be a growth channel that's going to be meaningful to investors?

The corresponding banking business for us is very big and because it's already big it doesn't move a lot in terms of volume to show it, but to the extent that that -- that's a really good idea.

I think I'll introduce something in our next presentation to give you guys a sense of where it is today and then looking at that as measure to track, because I'm expecting that to be one of our growth initiatives, as you just said it, so we'll add that.

Okay, terrific.

Thanks so much.

Thanks, Meredith.

At this time I'll turn the call over to management for any closing remarks.

Thank you all for listening to our review of the quarterly results and, please if you have any follow-up questions feel free to call us in investor relations.

And this is Richard.

Let me thank you for your attention to call.

We are standing ready anytime you have any questions.

We are transparent, you know that, and we're only hesitating sometimes because the environment we're in would cause us to make mistakes by trying to guess too far forward.

But I think you've just heard a very consistent, predictable, repeatable story and as much as it may not be that exciting because it doesn't have a lot of unexpected outcomes it is one that we're proud of and we're excited to tell the story.

So any time give us a call.

Thank you.

Thank you.

Thanks.

This concludes today's U.S.

Bancorp's third-quarter 2010 earnings conference call.

You may now disconnect.