美國合眾銀行 (USB) 2010 Q4 法說會逐字稿

Welcome to U.S.

Bancorp's fourth-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, January 26 at 12 o'clock midnight Eastern time.

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

Bancorp.

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

Richard Davis, Andrew Cecere and Bill Parker are here with me today to review U.S.

Bancorp's fourth-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 assumption are described on page 2 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.

Thank you for joining us.

I would like to begin on page 3 of the presentation and point out a few of the highlights from our fourth-quarter results.

U.S.

Bancorp reported net income of $974 million for the fourth quarter of 2010 or $0.49 per diluted common share.

Earnings were $0.19 higher than the same quarter of last year and $0.04 higher than the third quarter of 2010.

Included in this quarter's results were a few significant items that positively impacted earnings per diluted common share by $0.03.

We will discuss them more in detail later on the call.

We achieved record total net revenue of $4.7 billion in the fourth quarter.

This represented a 7.9% increase over the same quarter of 2009 and a 2.9% increase over the prior quarter.

Total average loans grew year over year by 2%, about half of which can be attributed to recent acquisitions.

Importantly, for the second quarter in a row, we achieved linked-quarter loan growth as total average loans grew by 1.5% over the third quarter, the majority of which represented organic growth as this growth occurred despite a slight reduction of wholesale line utilization.

We achieved a strong 9.5% growth year over year in average low-cost deposits, and 6.4% growth unannualized on a linked-quarter basis.

The low-cost categories include non-interest-bearing, interest checking, money market, and savings accounts, and represent a solid and growing core customer base.

As expected, credit quality improved as the net charge-offs and nonperforming assets, excluding covered assets, declined by 5.8% and 6%, respectively, from the third quarter.

Further, this improvement supported the reduction in the allowance for credit losses as the Company recorded a provision for credit losses that was $25 million less than the net charge-offs in the fourth quarter.

Our Company continues to generate significant capital each quarter and our capital position remains strong with the Tier 1 common and Tier 1 capital ratios increasing to 7.8% and 10.5%, respectively, at December 31.

Slide 4 displays our consistent performance metrics over the past five quarters.

Return on average assets in the fourth quarter was 1.31%, and return on average common equity was 13.7%.

The five-quarter trends of our net interest margin and efficiency ratio are shown in the graph on the right-hand side of slide 4.

This quarter's net interest margin of 3.83% was equal to the net interest margin in the fourth quarter of 2009, and as we predicted, was lower than the previous quarter's net interest margin of 3.91%.

Our fourth-quarter efficiency ratio was 52.5%, slightly higher than the prior quarter and above the same quarter of last year.

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

Turning to slide 5, as previously noted, our capital position remains strong and continues to grow.

In fact, our Tier 1 common ratio under the Basel III guidelines at December 31 was 7.3%, above the 7% Basel III level required in 2019.

We will continue to generate significant capital through earnings each quarter going forward, even if the economy, which is now showing more signs of a recovery, begins to slow.

As I have said before, our Company can support a dividend increase for our shareholders while still meeting or exceeding any new capital requirements that may be forthcoming.

Increasing the dividend remains a top priority for our management team and the Board of Directors.

And, as you know, we're one of 19 large banks that was required to submit a Comprehensive Capital Plan to the Federal Reserve System.

We've submitted our plan and we expect to receive a response in late March.

Moving on to slide 6, average total loans outstanding increased by $3.9 billion or 2% year over year.

As noted on the slide, excluding acquisitions, total average loans grew by 0.9% year over year, as the commitment utilization rate of our commercial and corporate borrowers declined from 30% in the fourth quarter of 2009 to 26% in the fourth quarter of last year.

The decline in the utilization rate was significant enough to offset much of the new loan origination business we experienced over the past year.

On a linked quarter basis, however, total average loans increased by 1.5%, as the demand for new loans from credit-worthy borrowers was more than enough to offset a nominal decrease in the average utilization rate on commercial commitments.

In fact, we recorded an increase in average commercial loans outstanding quarter over quarter.

This is the second quarter in a row that we have shown linked-quarter increases, something we haven't seen since the fourth quarter of 2008.

In total, new loan originations, excluding mortgage production, plus new and renewed commitments, total approximately $46 billion in the fourth quarter, about $8 billion higher than the previous quarter's total and the highest level recorded since before the fourth quarter of 2008.

New lending activity for the full year of 2010, excluding mortgage production, was over $147 billion, approximately 14% higher than 2009.

Total average deposits increased by $9.4 billion or 5.2% over the same quarter of last year.

As you can see from the slide, a very small portion of that increase came from acquisitions.

Total average deposits also grew by $7.6 billion on a linked-quarter basis, primarily due to higher corporate trust and institutional deposits as well as growth in the consumer and small business area.

On December 30, we acquired approximately $8 billion in deposits related to the acquisition of a securitization trust administration business.

This acquisition had a minimal impact on this quarter's average balances, but will have a positive impact on the first quarter of 2011.

Turning to slide 7, the Company reported record total net revenue in the fourth quarter of $4.7 billion.

The increase in revenue year over year was driven by earning asset growth, strength in our fee-based businesses, organic growth initiatives and acquisitions, muted somewhat by the impact of recent legislative actions.

Turning to slide 8 and credit quality, fourth-quarter total net charge-offs of $937 million were 5.8% lower than the third quarter of 2010.

Nonperforming assets, excluding covered assets, decreased by $212 million or 6%.

As you can see from the graphs, this represents the third consecutive quarter of declining net charge-offs and nonperforming assets, giving us further confidence that these trends will continue.

On slide 9, the graph on the left shows continuing improvement in late stage delinquencies, excluding covered assets, in the fourth quarter and a slight increase in early stage delinquencies, primarily driven by commercial real estate loans, a category that continues to be under stress.

On the right-hand side of slide 9, the continuing favorable trend in criticized assets again gives us further indication 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 trend lower in the first quarter of 2011.

Turning to slide 10, you can see that for the first time since this credit cycle began, we recorded a provision for credit losses less than the total net charge-offs.

Specifically, we released $25 million of reserves.

Comparatively, the provision for credit losses equaled net charge-offs in the third quarter while an incremental provision equal to approximately 25% of net charge-offs was recorded in the fourth quarter of 2009.

The reserve release was primarily driven by improvement in credit quality of the commercial and retail loan portfolios.

I will now turn the call over to Andy.

Thanks, Richard.

I will take a few minutes to provide you with more details about the results by turning our attention to slide 11, which gives the full view of the fourth quarter of 2010 results compared to those recorded in the third quarter of 2010 and the fourth quarter of 2009.

Earnings per diluted common share were $0.49 for the fourth quarter of 2010, $0.04 higher than the prior quarter and $0.19 higher than the fourth quarter of 2009.

The key drivers of the Company's fourth-quarter results are detailed on slide 12.

The $372 million or 61.8% increase in net income year over year was primarily the result of a 7.9% increase in net revenue and a $476 million decrease in the provision for credit losses, which included the $303 million favorable change in excess provision expense.

These favorable changes in total net revenue and the provision were partially offset by an 11.5% increase in non-interest expense year over year.

Net income was $66 million or 7.3% higher on a linked-quarter basis.

A 2.9% growth in total net revenue and a favorable variance of $83 million and the provision for loan losses more than offset the 4.2% increase in non-interest expense quarter over quarter.

A summary of the significant items that impact the comparison of our fourth-quarter results to prior periods are detailed on slide 13.

The significant items called out for the fourth quarter of 2010 were $103 million gain, equal to $41 million after tax, related to the exchange of the long-term asset management business of FAF Advisors for an equity interest in Nuveen Investments; net securities losses of $14 million; and a $25 million reserve release.

The two significant items impacting the fourth quarter of 2009 are also highlighted on slide 13 and include $158 million of security losses and a $278 million incremental provision expense.

Turning to slide 14, net interest income increased year over year by $139 million or 5.9% due to a $14.5 billion increase in average earning assets.

The increase in average earning assets was driven by growth in the securities portfolio, loans held for sale, loans and acquisitions.

The net interest margin of 3.83% was equal to the net interest margin in the fourth quarter of 2009, primarily due to lower funding costs offset by growth in lower yielding assets, particularly residential mortgages and investment securities as we build our on-balance sheet liquidity and the impact of CARD Act.

On a linked-quarter basis, net interest income was higher by $22 million, the result of a $7.9 billion increase in average earning assets, offset by an 8 basis point decline in net interest margin.

The net interest margin was lower than the prior quarter due to the growth in lower yielding assets and the impact of CARD Act.

Assuming the current rate environment and yield curve, we expect net interest margin will decline in the first quarter by an amount similar to the decline we experienced between the third and fourth quarters as we continue to add to our securities portfolio.

Slide 15 provides you with more detail on the change in average total loans outstanding.

Average total loans grew by $3.9 billion or 2% year over year.

Excluding acquisitions, average total loans increased by 0.9%.

And, as you can see from the chart on the left, this increase was principally driven by a 15.8% increase in residential mortgages, partially offset by a 4.5% year-over-year decline in average commercial loans outstanding.

As Richard pointed out, the reduction in wholesale lending year over year was primarily due to the lower commitment utilization by our commercial customers, which has declined from 30% in the fourth quarter of 2009 to 26% in the current quarter, representing a decrease of approximately $2.7 billion of outstandings.

On a linked-quarter basis, the 1.5% increase in average loans outstanding was driven by increases in all major loan categories as the demand for credit from both our new and existing business and consumer customers continues to trend higher.

Moving to slide 16, you can see the growth in total low-cost core deposits over the past five quarters.

Average total deposits grew by $9.5 billion or 5.2% year over year.

Significantly, low-cost core deposits, non-interest-bearing interest checking, money market and savings grew by 9.5%.

On a linked-quarter basis, average deposits increased by 4.2% while average low-cost deposits increased by 6.4%, principally due to corporate trust and broker-dealer activity, as well as growth in consumer and small business banking business line.

Slide 17 represents in more detail the changes in non-interest income on a year-over-year and linked-quarter basis.

Non-interest income in the fourth quarter of 2010 was $206 million or 10.2% higher than the fourth quarter of 2009.

This variance was driven by growth in payments, commercial products and mortgage banking revenue and the positive change in net securities losses, as well as the FAF Nuveen transaction gain.

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

On a linked-quarter basis, non-interest income was higher by $112 million or 5.3%.

This positive variance was primarily the result of higher trust and investment management fees, commercial product fees, payments-related revenue and other income, which was higher principally due to the FAF Nuveen gain on sale and a gain on the Company's investment in Visa Inc.

Offsetting these positive variances were mortgage banking revenue, which declined by $60 million, primarily due to a reduction in application volume and lower deposit service charges reflecting the impact of legislative changes.

As we have discussed in the past, legislative changes have and will continue to impact revenue going forward.

We have estimated that the impact of Reg E, along with the bank-initiated pricing and policy changes on our deposit service charge revenue, without mitigating actions would be approximately $440 million to $480 million on a full run-rate basis.

The Durbin amendment and the recently issued guidelines for debit card interchange proposed by the federal reserve will also have an impact on our revenue going forward.

Our Company's debit and prepaid card interchange revenue in 2010 was approximately $515 million.

The proposed changes to debit card interchange as they currently stand, would reduce that revenue by approximately 75% beginning in the second half of 2011.

We estimate that in 2011 and 2012, our Company will recapture approximately half of the revenue lost from the changes in both demand deposit service charges and debit interchange through product feature and pricing changes.

Slide 18 highlights non-interest expense, which was higher year over year by $257 million or 11.5%.

The majority of the increase can be attributed to higher compensation and benefits driven by incentives and commissions, additional staffing for branch expansion and business line initiatives, as well as merit increases; an increase in professional service expense and technology and communication expense related to investment in projects and acquisitions, which accounted for approximately $25 million of the increase.

On a linked-quarter basis, non-interest expense was higher by $100 million or 4.2% due to an increase in compensation related to additional staffing and commissions, higher professional services expense related to technology projects and some seasonality and seasonally higher investments in affordable housing and other tax-advantaged projects.

Finally, the tax rate on a taxable equivalent basis was 27.8% in the fourth quarter 2010 compared with 25.9% in the third quarter 2010 and 20.8% in the fourth quarter of 2009.

Slide 19 provides updated detail on the Company's mortgage repurchase related expense and reserve for expected losses on repurchases and make-whole payments.

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

Given the current environment, we expect mortgage 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.

Before leaving the mortgage topic, I would like to turn to slide 20 and review US Bank's role as trustee for residential mortgage-backed securities.

We are one of the largest corporate trustees in the US, so our name has and will continue to come up in news reports regarding foreclosures on mortgages held in securitizations for which we are the appointed trusty.

As trustee, US Bank is not the originator, owner or servicer of these loans, nor is it the sponsor or depositor for the securitization trust.

Our role is to follow very specific administrative duties as outlined in the documents that established the trust.

As trustee, US Bank does not have a role in the servicing of the mortgages that are used as collateral on the trust.

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

We do not hire or direct the lawyers that bring foreclosure disputes to court.

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

We are named in these suits simply because we hold the security interest in mortgage in our name as trustee for the securitization trust.

It is important for all of our constituents to know that the actions of the servicers and the court's decisions have no financial impact on our Company, nor do they imply that we have in any way not fulfilled our responsibilities as trustee.

However, these incorrect portrayals of our roles and responsibilities as a corporate trustee create reputation risk, and we are fully prepared to defend the accuracy of our actions and to educate the media about the role of corporate trust custodians and trustees.

I will now turn the call back to Richard.

Thanks, Andy.

To conclude our formal remarks, I will turn your attention to slide 21.

2010 was a year filled with challenges for all of us in the banking industry.

The industry faced and has yet to fully absorb unprecedented legislative and regulatory changes, an uncertain and slow-to-recover economy, and the need to regain the public's confidence and trust.

Despite this environment, US Bank's performance this quarter and in 2010 was strong.

For US Bank, it was a year filled with opportunities, opportunities to acquire new customers, to improve our processes, to expand our franchise, and to build upon our reputation as a trusted provider of financial products and services.

We are larger and stronger than we were at the beginning of the year, and at the beginning of this cycle.

We are well prepared to adapt to the changing legislative, regulatory and economic environment.

We have a strong foundation in place.

We have a proven track record of success.

We have launched many new initiatives and made the strategic investments necessary to provide our customers with the highest quality experience and to maintain our highly engaged employee base.

U.S.

Bancorp is positioned to win and perform for the benefit of our customers, our employees, our communities, and, importantly, for our shareholders.

That concludes our formal remarks.

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

Betsy Graseck, Morgan Stanley.

Good morning.

Basic question around the balance sheet and moving the balance sheet into a little bit more of an efficient set of earning assets, getting the loan growth up, you outlined significant increase in commitments.

Could you just talk through how you are hoping to change those commitments into lines?

Because in this low interest rate environment, that seems like what you need in order to get the NIM up a little bit.

This is Richard.

You know, I don't know that we know how to incentivize people to draw on their line except the first and most important step is to get them the line.

So I think in the order of things, I'm not surprised that people are either husbanding deposits or getting credit lines for their options that they're going to need as things start to change.

And you're seeing some of the larger corporations now moving into more M&A and acquisition space.

So I think it makes sense to me that the commitments are moving up.

I'm looking forward to the day that the usage will move up, and as you heard us say, it's at record lows now on the wholesale side down and actually just slightly below 26%.

But Betsy, I think that in order of things, if we just keep becoming more important to more of our customers and be invited to more of these credit positions that we're now seeing and hold the open-to-buy larger and larger, eventually, based on the needs of our customers, I think we will benefit from having seen the usage go up.

That will just be a bonus when part of this starts to happen.

And the fact that we're still growing with that going in the other direction I think reflects the fact we are getting some market share growth.

Could you just give us a sense of how typical it is to have commitment, have an increase in commitments as a borrower, have an increase in commitments, but not take action on those commitments over the course of a year's time frame?

Yes.

So first of all, it's kind of like the -- it's the corollary to just holding more core deposits, right?

So if you're just composite rich, and you see that now, everyone is just holding on to their balance sheet for their options and their choices, even if it's not efficient for them to do that.

If in fact they want to have an additional level of safety and comfort, they will take an extension line of credit, which they will pay for.

The issue is, as and over the course of time it becomes more expensive to hold an unused line of credit, that might be the next thing we will see, where people start to use it because they've got to get value for it or they will stop having either the need or pay for the cost of having the abundance of caution by having the open-to-buy which they may never use.

Now, Bill, I've gone as far as I can in terms of behaviors.

You want to add to that from the credit side?

Yes, I just, I mean, I think coming through this recession, people are looking to have fortress balance sheets, so they are very interested in having sources of capital for when the economy really begins to move.

Betsy, I'll add one more thing.

We also track the percentage of customers who don't use it at all, zero usage.

And that's just shy of 50%, which is also a record high as usage of 20% is record low.

So there are at least half of our customers that are using our balance sheet as an alternative option without having any use of that line.

It's just interesting because clearly, drawing -- or having more commitments during the stress periods of cycle made a lot of sense at this stage.

I'm wondering if it's any indication of interest by your customers to actually begin to invest.

And with some of the tax policies that went through recently and accelerated depreciation, did that spark any incremental commitment generation?

Betsy, this is Andy.

I think as Bill described, there is signs of a recovery.

Companies are preparing for further investment and taking out lines and having that ready and available as one of those actions for preparedness.

Okay, super.

All right.

Thank you.

Ed Najarian, ISI Group.

A question with respect to growing the securities portfolio, so you grew it, it looks on an average basis by about $2 billion this quarter and indicated you are going to continue to grow it in the first quarter.

So I guess two questions; number one, maybe you could provide us a sense of how much you expect to grow the securities portfolio looking out maybe in 2011?

And then secondarily, what types of securities are you buying in terms of a type and duration?

And can you give us a sense of how you are managing that interest-rate risk?

Thanks.

Ed, I'm going to give that to Andy.

This is Richard, but let me talk about motivation first.

Some of our most important actions as management is to protect the shareholders.

And in doing so, we were very careful of this cycle not to introduce more capital than the Company needed, and to not balloon the balance sheet any more than we needed to.

And in both cases, we're trying to be as precise as we can by not overreaching.

In capital, I think you would agree we have a sufficiently strong capital base and a great growth -- quarterly growth of capital.

On the liquidity side, as we start looking at the capital assessments and the requirements being placed on us, we wanted to respond to what I think -- what needed to be a high higher, more liquid balance sheet on balance sheet, and yet not having done it ahead of time and wishing we hadn't.

So you're watching us now move back into a, more kind of the median space of banks that have appropriate liquidity at their beck and call.

And what Andy and I are doing now is starting to build that up carefully and slowly over the course of time and still waiting for more guidance so that we don't overreach and have an excessively large balance sheet like we didn't want to do with capital.

So, you're seeing that process, and it is a journey and it is going to be a 2011 event.

And now let me give it to Andy to answer the specific questions you gave.

Sure.

So, Ed, first, let me tell you our liquidity has never been stronger.

We have tremendous loan borrowing capacity.

And what we are doing is to put some of that loan borrowing capacity on the balance sheet to meet some of the requirements of the liquidity coverage ratio.

So that's why we're doing this.

Further, I will tell you that the assets that we are putting on the balance sheet are partly Ginny Mae securities and partly [Treasury] securities, so they have zero impact to risk weighted assets.

I will also tell you that I have zero or very close to zero impact in net interest income.

What they will do, however, is lower the margin a bit, and that's what you're seeing -- that you saw this quarter and you will see next quarter.

We would expect to add a few, $3 billion to $5 billion of securities per quarter this year to again meet some of the requirements under the liquidity coverage ratio.

But again, I will highlight no impact to net interest income and no impact to risk-weighted assets.

So in that regard, you would say they're pretty well match funded with longer duration liabilities and that's why they're not really providing much incremental NII?

Yes, that's correct.

We're putting those on in an interest-rate neutral sense, not increasing nor decreasing our sensitivity position.

Okay, great.

Thank you.

Jon Arfstrom, RBC Capital Markets.

A question for you, Andy, your comment on the potential to recapture half of the lost revenue on Durbin and Reg E, did I hear that correctly?

That is correct.

Okay.

Can you talk a little bit about what you are planning to do in that regard and how maybe your philosophy on retail banking might have changed a bit as this has all come through?

I will start, then I'll hand it to Richard.

First of all, let me be clear that, remember, our Reg E legislative changes and pricing impacts are in the neighborhood of $450 million.

And our impact to the Durbin, as currently highlighted, would be about 75% of revenues, so just over $400 million.

So the combination of both of those, we would expect to recapture approximately half through a combination of a number of action plans, including changes to our checking account pricing, changes to our merchant pricing, changes to our debit interchange, reduction in rewards, perhaps a fee.

We have a number of action items in place that will do that and we'll be introducing those throughout 2011 to offset some of the impacts we talked about.

So John, let me add to that.

It's Richard.

First of all, I said up until the last call that we will be a laggard in taking actions, the kind that Andy mentioned, because of our strong position and because we wanted to watch and see what happens to the marketplace.

I'm going to update that and tell you we're not going to be a late follower any more.

We're going to be right in the game.

And I will tell you why.

The decision by the Fed to respond to the Congress's question that was asked of them for the Durbin amendment at 12 basis points maximum is so sufficiently and absolutely below the cost of doing business, we no longer have the luxury of waiting, not for our shareholders anyway.

Just so you know, I think US Bank Elavon is probably the low-cost provider in that space, and we can talk about that another time.

But for us it's anywhere from 40 to 50 basis points for those transactions, which includes proving the transaction, the card, embossing the card, sending the card, managing the relationship, paying for the fraud, all those things, all of which, by the way, were not part of the question that the Congress asked the Fed to answer.

So as I take a sidebar here, many of us in the industry are going to be going back, working with the Congress to explain to them what the unintended consequences will be of this decision.

But also we're going to go back and ask them to ask a better question.

I think the Fed did a great question job of answering the question they were asked, but the question was wrong and it was incomplete.

And that's why you have this disconnect between getting recaptured at least the cost of doing business.

All that said means that we, as a bank, will no longer lag.

We will see sometime in the early, middle part of this year, our own actions and making sure that we have fair pricing for checking products, which are part of what debit includes.

We'll be working behind the scenes to see if we can't get a better answer out of both the Congress and the Fed.

And to answer your most important question, the long-term ramifications of branch banking are now in question.

We're not closing any branches.

We have over 3,000.

You know we are the most likely purveyor of nontraditional branches in the industry now with about 1,000 of those 3,000 in corporate sites, universities, airports and grocery stores.

Those are definitely going to make more sense now than they ever did based on their cost of operation.

But a more traditional brick-and-mortar branch on the corner of a very expensive parcel of a shopping center that's not being built anymore, those are going to be rethought.

I can't wait to see the transcript on that -- as we evaluate really what is the break-even of a branch when it's not just a deposit gatherer and a loan maker, but it's also a fee provider.

And I think that is the question that the industry should stop and pause to evaluate.

And we won't have those answers until later this year, when we see both what the competition does and what our consumers are willing to accept as a price to have a checking account, a debit card, or some of the ancillary products that go along with it.

Okay.

Just one follow-up from a competitive point of view, does it make you nervous at all to be in the middle of the pack?

Or do you expect competitors to really react in a similar fashion as you're talking?

Yes, I don't think, in the scheme of things, there won't be a middle of the pack.

It's all going to happen this year, and I don't think a few months doesn't matter.

What we will all learn is what each other is doing.

We'll watch our own customers' tolerance.

I was actually hoping that we would have a couple of quarters to watch everybody else's actions and then learn from them on the other side to see if it was sending business our way or to see where their tolerance was.

I no longer want to take that luxury because I think that's now taking risk.

But we will be right in the game.

We won't be behind or below.

And what you will see is banks coming up with different ways of characterizing the cost of a checking account, all of which will be slightly different variants, but they will, at the end of the day, be, debit card is no longer a free product.

There will no longer be rewards to speak of because it's certainly a loss leader.

And debit belongs to checking, so checking will now need to have some level of cost recovery to provide the service that we've all been providing for years.

So I think the paradigm will change quickly.

It will be this year, and I don't think there will be many behind or ahead because it just simply won't be that long of a window.

All right, thank you.

David George, Baird.

Good morning.

Thanks for taking the question; a follow-up on the margin commentary and your comments toward the first-quarter margin.

How much of the 8 basis points decline is kind of the remixing of the balance sheet towards resi mortgage and a little bit more securities?

And how much is just strict kind of loan price competition?

Because if you look at both commercial and retail yields on the loan side are under a little bit of pressure sequentially, so just trying to get a sense as to price competition, what's happening in the market and how are loans spreads today versus three, six and nine months ago.

Thanks.

David, this is Andy.

I would say the great majority of that decline as due to the securities component of what we talked about.

While loan spreads are not as strong as they were perhaps six months ago, they are still significantly stronger than they were two years ago, and we are seeing some moderation in those loan spreads and new originations, but not at significant levels.

So I would say the great majority is due to the securities portfolio addition.

Okay, thanks.

That's helpful.

I appreciate it.

John McDonald, Sanford Bernstein.

Good morning.

One quick follow-up on the margin, to David's question.

So, Andy, understanding that these securities purchases will not have an affect on NII, just on the margin object, if you're buying $3 billion to $5 billion or so per quarter, will that continue to have each quarter that effect on the margin sequentially in the second and third quarter?

Yes, John, it will, in the neighborhood of 5 to 8 basis points a quarter.

Okay.

Richard, a question on the capital management.

Just on the dividend amount, could you just remind us, would you like to move right up to a 30%-type payout ratio on the dividend?

And what's your sense of the higher bar that the Fed might require for payouts higher than 30%?

And then, just between buybacks and dividends, is the old 80% payout still a reasonable target for you guys on kind of total capital management?

All right, John, thanks.

First of all, I just want out the gate; this is me sitting in the pit, being held, waiting and waiting, and I want to get back on the track.

So, we're going to stay below the 30%, not very far, but we leave ourselves room, because there's also the cost of preferred dividends and some other things.

So our goal is to be somewhere in that 25% to 30% range, and expecting that that will meet with the favor of the Fed because we don't want to push any limits or envelopes.

There's no reason to; just let us move forward.

And so I think that's more likely what most of the companies should do, and we have gotten very little -- we've got no guidance on what it would be required to go over 30%.

And this management team isn't going to press those -- test those limits.

Secondly, as 80% was an old phraseology we used, that 75% to 80% of our returns would be given back to the shareholders in the form of dividends and in buybacks, and that is still accurate.

As you know, we won't get there right away because of the limitation that we just spoke of as part.

And then the buybacks of course will have some equally limited expectation I think as people slowly recover and get back to something normal.

But whatever normal is, you can expect us to be back to the same normal of returning 75% to 80% of what we make to the shareholders, leaving the rest to us to reinvest and to grow the Company.

Great.

And maybe you or Bill could share some thoughts, even at a high level, on the credit improvement cycle and what you think you might see in terms of the pace of improvement, at least relative between various loan categories.

Bill?

Yes, on the commercial, so, excluding commercial real estate, but the general commercial corporate, doing very strong, seeing continued improvement across the board there.

Commercial real estate, I just have to characterize as still extremely stressed.

I think it will remain extremely stressed for another 12 to 18 months.

There has been a little sign of life in multifamily product, medical office product, so there is some demand out there, but obviously residential construction is not coming back anytime soon.

On the consumer side, other than residential mortgages, the consumer performance continues to get better.

And so as long as unemployment improves slightly or at least stays stable, that's good news for the consumer side.

Okay.

Thank you.

Matt Burnell, Wells Fargo Securities.

Good morning, just a couple of quick questions.

In terms of the very solid loan growth that you've shown not only on a year-over-year basis, but what appears to be maybe a slight acceleration of loan growth in fourth quarter, is there a specific geography where that's occurring?

Or is that occurring largely on roughly an equal basis across the franchise?

All right, so Matt, that's your first question.

I will stop there.

It's across the board.

And it's partly because we have added our number of people doing loans, making loans across the board.

All parts of our business, we've been investing in for the last couple years.

And I know that's kind of a hollow promise to all of you when there was nothing to show for it, but it's starting to show up now, from the very top and large corporate where we are invited now to participate in a number of new syndicated deals and/or lead a certain number of deals which we didn't lead before, all the way down to small business and having literally added 50% more small-business originators in the last year and a half at a time that's just perfectly positioned for us to go after the strengthening small business.

I will also say that the loan growth is coming across more areas than it did a few quarters ago.

Two quarters ago, I would have told you that corporate customers, large corporate, were the strongest.

They had already done their good work at restructuring their balance sheet and their earnings based on the recovery or the recession's length.

They had capital markets alternatives, and we saw them first.

Last quarter, I would have brought in, and I did bring in, middle market is starting to show some signs of strength.

And the fact is that they don't have the capital markets as often so banks were getting the benefit of that.

Now I'll extend it and say that middle market across from large cities to community as well as small business.

From the SBA to the small ticket leasing to just traditional C&I small business are all showing equally strengthening capability and making themselves more worthwhile for a bank to make loans to.

So it's not just across the types of loans or geography.

It's also because we have more people in all those places where you see stronger customers.

Okay.

And then a quick follow-up on the mortgage banking trends, I'm presuming, given the relatively strong growth in the mortgage banking revenues -- or quarter over quarter, they were relatively weak despite solid growth in the origination volume.

Should we expect continued declines into the first quarter in mortgage banking revenue?

Right.

So Matt, this is Andy.

What drives -- as you know, what drives the mortgage revenue is net application volume.

And net application volume is actually down on a linked-quarter basis in the neighborhood of 30%.

We would expect that to continue to trend down moderately into the first and second quarter of 2011.

But you still stand by your earlier statement that you think you're taking market share in that specific business?

We are absolutely.

I mean what drove application volume down for us, as all of our competitors, was a high rate scenario or high rate environment in the month of December, so -- and that still is the case.

And seasonality too.

This is the time of year where originations are slow.

But I think you will see on a relative basis we will continue to keep if not extend our growing market position.

Okay, thank you.

Matt O'Connor, Deutsche Bank.

I guess my first question is on the underlying expense growth, you've done a good job at stripping out some of the revenue items, but I think on the expenses, the growth is being distorted from both acquisitions, some of the tax credits.

And I'm just trying to get a sense of maybe what a more normal run rate is or what the run rate has been versus the call it 11%, 12% year over year on a reported basis.

Right, Matt, and you're absolutely right.

The fourth quarter seasonally is higher and also has the impact of the tax credit amortization being significantly higher than any other quarter of the year.

I would say on a normal run rate basis, our expense growth is more in the neighborhood of 5% to 6%.

Okay.

And as you look into next year, I can appreciate there's some regulatory headwinds, but do you think you'll be able to start exceeding some of the expense growth?

I guess what I'm getting at is there's been a lot of investment in the business, and I think it's very clear from some of the metrics that you are getting share in a number of areas.

But at some point, we can just see it filter down in the revenue and obviously the operating leverage.

I'm just trying to get a sense of when we might start seeing that a little more transparent.

Yes, and Matt, I think that's a 2012 moment in time.

Even 2011.

We peaked, in 2010, just looking at this year, we peaked in our capital investments.

We peaked in what will be the cumulative depreciation effect of all these investments we made in the last few years.

I think you know we had a lot of catch-up to do from everything from just basic technology to customer research and data, to things like mobile banking and things.

We've invested in all those things.

They're all coming to fruition this year.

And the cost of them will start to be cumulative in 2011.

Because we're not having those large investments ahead of us, that will start to trim back down.

So that's actually a fairly big part of our expense delta and certainly what's taken us from where we used to be years ago to where we are today.

But I also expect at the same time this remuneration that we will figure out on how to offset some of the headwinds of legislative.

We're at the worst moment now as we could be.

Everything has been levied against us.

We haven't had time or the ability to solve all of that in some other forms of fees and charges, so I think that will also help.

And then finally this year, just so you know, the Bank in 2010 performed much better than we thought it would, not just on loan losses and loan provision, but overall, we exceeded virtually every performance metric that we had expected in an awfully difficult year.

As part of that, the incentive plans for the nearly 20,000 employees who get paid on an annual basis for performance of the Company and of their own line of business, those incentives are higher than they have been in the last two years.

So there's a meaningful difference in 2010 for incentive compensation for the people who work on the front line for having done a very good job.

And that's significantly higher than it was in 2009 and even higher than it was in 2008.

So if we continue to do well, that will be in there, but we will also have the offsets like we had this year.

If not, then the incentive compensation will come back down, and that will be a muting effect.

So, we don't mean to be anything less transparent about our expenses than we are on revenue, so I'm glad for the question, but I think Andy said it best, 5% to 6% over the long term.

And you can count us to be in the low 50% efficiency.

I promised you it was never a target, but it kind of is now because you need to know we're not headed to 52.5% on our way to 55%.

But I also must tell you we're not headed to 52% back down to 48%.

We're probably going to be right around that 50% to low 50%s.

It seems to be the right place for us to have enough to invest and keep investing in new revenues so that we can start being received by you guys as a revenue company with expense controls as opposed to expense company with flat revenue.

Okay, that's helpful color.

And then just separately if I may, we've seen a couple of acquisitions out there priced probably a little bit higher than what many people would have expected.

And I guess just how do you think about acquisition opportunities within the traditional bank space going forward, opportunities for your Company and what pricing might look like and some of the markets you are interested in?

Yes.

So, opportunities are a good word because I've said it before, we won't let an opportunity be missed.

If there is a good deal out there at the right price, we will be part of that.

And if we get it, we will be satisfied and you won't be writing about how we overpaid.

That's a fact.

On the other hand, if we don't get a deal because we needed to overpay to get it, then I hope you will appreciate that discipline, because we don't need anything as an acquisition to make this Company stronger and better because we're on our way to that just doing what we're doing.

So having said that, we will look for opportunities in all spaces including traditional bank spaces.

I think there will be some.

We will be in those.

We'll be looking at them.

We will price them to be exactly right for ourselves, but we will not get greedy and try to price them if we think we're in a pricing war just to win one because that will be a mistake that this management team is not going to make.

And I would rather you were disappointed we didn't win something than to be disappointed that we won it at the wrong price.

But we won't hesitate to look.

It's just not a core strategy.

M&A doesn't change our future.

It just has to be a deal that makes it stronger than it was without it.

Okay.

All right, thank you very much.

Paul Miller, FBR Capital Markets.

Thank you.

Most of my -- that was my question about the M&A -- what was your view about the M&A and you're overpaying.

But the second question is, and this is a much minor question, is that your cash went up almost $10 billion followed -- mainly driven I guess because your deposits were up so strong.

Is there a point that you're growing your deposits too fast to put it to work effectively?

You highlighted a good point, Paul.

What happened there was towards the last few days of December, we closed on our Corporate Trust acquisition.

And in conjunction with that, we had about $8 billion of deposits come in the house immediately.

And what that will do for us is allow us to continue to build out the left-hand side of the balance sheet in terms of both our securities portfolio and our loans, but it's purely timing.

So it was a phenomenon of the year end and will be rectified in the first quarter.

Let me add to the broader question, Paul.

We're not at a point yet where we think that we are so deposit-rich that we cannot afford to go after and grow our loan book.

I mean it's quite the opposite.

I will welcome all the loan growth we can and I'm expecting it, not only because we are doing well, but as to my first question to Betsy, I think when the economy turns and those lines of credit start to get used, we'll be really glad we are core deposit funded.

And we just don't see a scenario where we have a circumstance where we're worried about the balance sheet getting out of balance because deposits are too fast or too strong.

That will be, I think -- the bank with the strongest core deposits going into the recovery will be the strongest bank, period.

Okay.

Thank you very much, gentlemen.

Brian Foran, Nomura.

I guess if I put everything you said together for both you and the industry, is it fair to say pre-provision earnings growth is going to be difficult, maybe impossible in 2011, just given all the confluence of reg reform and higher expenses and asset yields resetting down.

And to the extent there's earnings growth, it's going to be credit driven, and then 2012 is the year where hopefully we get to hand off back from credit driven to pre-provision driven?

So Brian, no, absolutely no.

That's not what I meant at all.

I think that might be more of an industry byline, but for us, PPI provision is going to grow; it has been growing.

We're going to expect probably significantly less credit reserve recapture than you guys do.

If it happens, it will happen because the [map] is there, not because we're going to try to curry favor with higher numbers; it will just happen because our credit quality just keeps getting better.

But PPI, god, we expect that to grow quite a bit this year.

Our balance sheet will grow.

Our margins may shrink, but as Andy said, it's not a function of losing money, so we will still have the loan growth at good spreads growing; deposit growth at core levels is a great core funding.

Our fees are going to be quite strong because we're a lot more than just a retail bank.

We've got a lot of payments and a lot of corporate trust and wholesale new businesses in the wholesale bank that are generating fees.

So I'm quite emboldened that -- I want you to think of us as one of the most close to normal operating companies, separate the finality of the last of credit quality getting better, of any bank you're following.

And I think PPI for us will be the way you will determine whether or not we are the real deal, and it has to be this year.

It can't be 2012.

And just to be clear, pre-pre grows even when you factor in Durbin in the back half of the year?

It does.

It does.

And then a follow-up.

You've talked a little bit about the Brazil and India payments JVs in the past.

I guess for those of us who don't know those markets well, should we think about this something that supports the overall growth rate of the payments business?

Or are those big enough opportunities that this could be a level change in the total revenues and earnings of the payments business over the next couple years?

Great question.

It's the former because they won't be slow to start.

So the JV in Brazil, as I think we told you when we did it, won't really start to coin money for us until the second year and beyond.

And so that -- and it's going to a level, even in a few years, that will be significant to the payments group, but not huge to the Bank.

It will just be another contributor to our global payments.

India, as we've said before, we've got this block-down commitment to be the partner with the bank, State Bank of India, eventually to be the bank that works with them on the processing side of all merchant acquiring.

But India will move slowly, so this will be very, very long in coming.

That's probably a 2012 start with a few years (technical difficulty) to get some benefit.

So both of those are indications that we intend to continue to extend globally, but neither of those will grow near as much as just the core European, Central America, Mexico, and domestic payments that we have today.

It will just be nice add-ons, so they're not going to affect or move numbers for a couple of years.

All right.

I was hoping for an investor day in Brazil.

There you go.

Well, you never know.

That would be fun too, so maybe one day.

Thank you.

Mike Mayo, CLSA.

Good morning.

I wanted to follow up on the loan growth and the loan commitments.

So first, what was the wholesale line utilization in the third quarter?

You said it was 26% this quarter.

It was 26.5% in the third quarter, 26.1% this quarter, Mike.

Okay.

And that would be calculated off the base of the $82 billion of wholesale loans?

Closer to $66 billion.

Both revolving loans, (multiple speakers) yes.

(multiple speakers)

Yes, not loans.

Okay.

And that number, guys, was in quarter four of last year.

Do you have the sheet in front of you?

Well, 28.8%.

28.8%.

So, Mike, that's 2.5% on almost $70 billion.

Right.

And then, what's the dollar amount of the loan commitments in the fourth quarter versus the third quarter?

For the revolving, it went up about $2 billion; it went up from about $65 billion to $67.5 billion.

So that would be loan commitments?

(multiple speakers) correct, yes.

Commitments that are used for revolving purposes.

So just under 4%, Mike, linked quarter.

And, so what I'm trying to reconcile is you had the 1.5% linked-quarter wholesale loan growth, and then --

Total loan growth.

Total loan growth.

Total loans?

Yes, they're funded loans; they're term loans.

That includes retail.

Yes.

So there's just a slice of it -- the wholesale only, lines of credit only; not credit card, not consumer, none of that.

Right.

So that's up.

Then the loan utilization is down.

So, why is that?

Are you giving commitment to new borrowers, or what's going on there?

Yes, both.

So, probably the best way to think about this is we've got, on the corporate side, all this investment we've been making.

We're now in a lot of deals we weren't in before.

So you're a Fortune 100 company, you want to renew your line, you want three or four banks in the credit.

We weren't in it at all a few years ago.

We're now one of those banks.

And those particularly strong companies just have a line of credit for the availability.

They typically don't draw on it.

Then you get to the middle market and we've increased the number of middle-market lenders substantially.

We've gone now national more than we did before, where we have availability to customers who have needs outside of our footprint, and we're getting those lines of credit but not necessarily usage.

And then finally, if you look at our community bank, which is also present in here, we continue to be very strong in those 1,000 branches where we have community customers who are actually more likely to use their line than most, but also invited them because the small community banks they've been relying on have been now in some form of stress and in fact have not been lending or they've been reducing their line capability, so we are inviting them to those deals too.

So we're kind of a barbell where we've been invited into the large deals and into the very small deals that we were neither part of in the past.

So if it works, then the line of credit is a proxy for eventually outstanding use of the credit.

But we agree that having it outstanding until it's used is of small value, but it's better than the other direction.

I don't want to put words in your mouth.

I just wanted to see if you can validate what I think I hear you saying.

So loan demand is not improving based on the utilization of existing loans, but you are expanding your footprint to some Fortune 100 companies and outside I think your traditional footprint.

Is that fair?

So loan demand is probably at the national level not growing.

But by the fact that we've got more commitments and growth for the lines or loans that are present here, means we are growing in this shrinking environment, so I think we must be taking market share.

That's kind of my hypothesis theory.

But I don't think it would be right to say that loan demand has gone up.

But the willingness for customers to want to engage in an open line of credit and because they are more qualified than they were, and because they want to be abundantly cautious, that is a fact.

Okay, that's helpful.

And then, to what degree are you seeing a substitution to the capital markets?

You're seeing bond issuance going gangbusters when you don't have this loan demand going up at the bank level.

I mean, clearly, that's part of it.

The -- we've opened our capital markets.

We get to participate in those underwritings now, but that's -- for the investment-grade companies, obviously, a great substitute for bank loans.

And I will comment one thing on the demand, with the pickup in M&A activity that we've seen a little bit more in the latter half of the year, that generates loan demand that's generally funded, so not under a revolver.

So there is a little bit of loan demand that's coming through on the wholesale side on the funded side for M&A activity.

Might be part bank debt, part bonds.

All right, thank you.

Chris Gamaitoni, Compass Point.

Thanks for taking my call.

Do you guys have any interest in expanding into other types of fee businesses or adding on to current fee businesses?

Just looking at M&A and that area and if there's any concentration you might be moving forward in?

So, nothing new, but I like to be deeper in everything we are in, so what you see is what we like.

Our last effort by partnering with Nuveen was probably a reflection of the fact we wanted to keep the Bank fairly simple.

We don't have an investment bank and we don't now have the asset management at that level.

We're not an insurance distributor or insurance creator, and we don't get into businesses we don't understand well, but we get better in the ones we're in.

So Chris, I would say that you will see more and more acquisition opportunity that's nontraditional in corporate trust and in the payments business.

And when I say payments, I don't mean just card business.

I mean mobile banking and some of the more innovative things that you're starting to read about because I think that will indicate an innovative company and one that can bring things to its customers earlier to market.

So you will see that kind of stuff and traditional bank, but nothing new.

There's no space right now that we think we have uncovered.

There's nothing we're doing now that we don't want to be doing.

In fact, I don't think we've ever been more exacting to having the composition of earnings and revenue from the different places than we are right now.

So if you like what we see, we're in a good position.

We just like to be better at all of it.

All right, thanks.

And as far as on the credit side, are there any specific regions or MSAs or sub-MSAs where you're seeing particular weakness on the residential mortgage side or the commercial real estate side?

Yes, it is -- I mean it is more regionally or really MSA based now.

And for us, the markets we're in, clearly the most stressed remain the Southwest, so Las Vegas, in and around Las Vegas, both on the investor and residential side.

Some of the markets in California, generally the further you are from the coast, so you get in the high desert or some of the Central Valley markets are still very weak.

All right.

And then, on the trust side, we just saw -- we saw a student from Wells Fargo on EMC mortgage requesting files; that was yesterday.

I know you're not -- you act only as trustee.

I was wondering if you receive those types of requests, how many are proceeding?

And just who bears the legal expense for that type of issue?

Is that you or the trust?

We do not bear the legal expense.

Some of the rulings that you are seeing from the courts, again, we are in those as named only because we are the trustee.

As we talked about in the script of the call, we do not hire the lawyers.

We do not bear legal expense.

We do not bear the financial risk.

We are not responsible for the foreclosure activity.

We have a very specific role that we think we fulfill very well.

And unfortunately, right now, that is not completely understood.

It's complicated; I will give you that.

But our role is very limited and we do not bear the financial risk.

I wasn't talking about on the foreclosure side.

I meant more as a trustee for private label where an investor instructs the trustee to issue a request for loan files?

Yes, our role under private label is very similar to what I just described.

So again, we have a very limited, specific role that we fulfill.

And to the extent there is expense related to that role, it is either borne by the servicer or the trust itself.

It would be built into the contract in the beginning as our duties and remuneration for handling the requirements of the trust.

Thank you.

That's all I have.

I appreciate it.

Thanks, Chris.

Thank you.

I will now turn the conference back over to the presenters for closing remarks.

Well, thank you, everybody.

Thanks for staying past the hour.

We're always at your beck and call if you have any further questions.

I think what I'd like to just say that is, in following up on one of the last questions, I think we're getting to a pretty normalized predictable pattern here where you can appreciate the revenue contributors, the expense discipline, the economy that will recover, will only help all of that.

And our improvement in credit quality is now getting closer and closer and we hope it will be over the long term.

So we are not through this cycle yet, but I don't see any reason to think we will falter at this stage, but to continue a slow, methodical report, repeat back to something more normal.

And our number one goal really is to get the dividend started again and begin to show the investors that we intend to give them back what they've earned over these years.

We're looking forward to having that to talk about at the next call.

So, Judy?

Thank you.

Thank you all for listening to our review of the fourth quarter.

And please, as always, give us a call if you have additional questions.

Thank you, Brooke.

Thank you.

This concludes the conference.

You may now disconnect.