美國合眾銀行 (USB) 2011 Q1 法說會逐字稿

Welcome to the U.S.

Bancorp first-quarter 2011 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 11 a.m.

Eastern Standard Time through Wednesday, April 26, at 12 o'clock midnight Eastern time.

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

Bancorp.

Good morning to everyone who has joined our call.

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

Bancorp's first-quarter 2011 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 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.

Good morning, everyone, and thank you for joining us.

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

U.S.

Bank reported net income of $1.046 billion for the first quarter of 2011 or $0.52 per diluted common share.

Our earnings were $0.18 higher than the same quarter of last year and $0.03 higher than the fourth quarter of 2010.

Included in this quarter's results was a gain related to the acquisition of the First Community Bank of New Mexico that positively impacted earnings per diluted common share by $0.02.

We achieved total net revenue of $4.5 billion this quarter, which represented a 4.6% increase over the same quarter of 2010 but a 4.3% decline from the prior quarter, which primarily reflected our company's normal first-quarter seasonality.

Total average loans grew by -- year-over-year by 2.4% or 2.1% excluding acquisitions.

Importantly, for the third quarter in a row we achieved linked-quarter loan growth as total loans grew by 1.1% over the fourth quarter or 0.7% adjusted for acquisitions.

Deposit growth was exceptionally strong this quarter with average low-cost deposit balances increasing by 15.3% year over year and 6.7% linked quarter.

Excluding acquisitions, the year-over-year growth rate was a strong 10.2% and the linked-quarter growth was 2.1%.

As expected, credit quality improved as net charge-offs declined by 14.1% and non-performing assets, excluding covered assets of the First Community Bank of New Mexico acquisition, which you may recall did not include a loss share agreement, declined by 4.7% from the fourth quarter.

Further, this improvement in our credit quality supported a reduction in the allowance for credit losses and the Company recorded a provision for credit losses that was $50 million less than the net charge-offs in the first 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 8.2% and 10.8%, respectively, at quarter's end.

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

Return on average assets in the first quarter was 1.38% and return on average common equity was 14.5%.

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

As expected, this quarter's net interest margin of 3.69% was lower than the same quarter last year and the prior quarter, and Andy will discuss the factors that led to this change in a few minutes.

Our first-quarter efficiency ratio was 51.1%, lower than the prior quarter but above the same quarter of last year.

We remain the best among our peers in terms of efficiency and see this ratio continuing to average in the low 50%s, reflecting both revenue growth and costs associated with ongoing investments as well as the impact of recent legislative and regulatory actions on our revenue and on our expense.

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

In fact, our Tier 1 common ratio under Basel III guidelines at March 31 was 7.7%, well above the 7% Basel III level required in 2019.

Turning to slide 6, we were pleased to announce the long anticipated increase in our dividend on March 18 after receiving word from the regulators that they did not object to our proposed increase for other capital actions.

We announced a 150% increase in our dividend, raising the annual rate from $0.20 to $0.50.

In addition, the Board of Directors authorized a 50 million share repurchase program.

We believe the ability to buy back stock is important, allowing flexibility and returning capital to shareholders over time.

In 2011, however, buybacks are not expected to be meaningful until the final Basel III guidelines are established later this year.

Moving to slide seven.

Average total loans outstanding increased by $4.7 billion or 2.4% year over year and in total new loan originations, excluding mortgage production, plus new and renewed commitments were over $35 billion this quarter compared with approximately $27 billion in the first quarter of last year, representing a 28% increase in new activity.

Importantly, total corporate and commercial commitments outstanding increased by 9.6% year over year and 2.3% linked quarter, positioning us to quickly fulfill our customers' lending needs as confidence returns and the recovery takes a firm hold.

Total average deposits increased by $21.8 billion or 11.9% over the same quarter of last year.

As you can see from the slide, a portion of that increase came from acquisitions, most notably the December acquisition of securitization trust business.

Total average deposits grew by $14 billion on a linked-quarter basis, or 7.4%, primarily due to higher corporate trust balances, which included the impact of the securitization trust business, as well as growth in Consumer and Small Business Banking and the Wholesale and Commercial Real Estate business lines.

Turning to slide 8, the Company reported total net revenue in the first quarter of $4.5 billion.

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

This was a record first quarter in terms of total revenue for our company, demonstrating the positive impact that the investments we have made over the past few years are having on our results.

Turning to slide 9 and credit quality, first quarter total net charge-offs of $805 million were 14.1% lower than the fourth quarter of 2010.

Non-performing assets, excluding covered assets and assets acquired through the recent First Community Bank of New Mexico transaction, decreased by $159 million or 4.7%.

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

On slide 10, the graph on the left shows continued improvement in the early- and late-stage delinquencies, excluding covered assets, in the first quarter.

On the right-hand side of slide 10, the trends in criticized assets again gives us another indication that we have reached the inflection point in credit quality.

Accordingly, we expect the level of both net charge-offs and non-performing assets, excluding covered assets, to trend lower in the second quarter of 2011.

Turning to slide 11, you can see that for the second time since this credit cycle began we recorded a provision for credit losses less than the total net charge-offs.

Specifically, we released $50 million of reserves.

This compares with the provision for credit losses that was less than charge-offs by $25 million in the fourth quarter while an incremental provision equal to approximately 15% of net charge-offs, or $175 million, was recorded in the first quarter of last year.

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

Before turning the call over to Andy, I wanted to make a few comments about the recent intra-agency review of foreclosure policies and practices.

Let me say first that our company sets a very high standard for fair and ethical business practices.

We are a relatively small participant in the mortgage servicing market, approximately 2%, and have long been committed to sound modification and foreclosure practices.

Any recommendations by our regulators for improvements to our processes are, however, taken very seriously and we are committed to working with the regulators to quickly resolve any outstanding issues.

We have always regarded foreclosures as a last resort as we make every attempt to keep our customers in their houses through home retention programs.

In fact, our home retention programs in 2010 outpaced new foreclosures by 50%.

Moreover, our 60-day redefault rate, a measure of loan modification effectiveness, is significantly lower than industry average.

I would also note that we continue to have sufficient financial staffing and managerial resources to ensure the proper administration of our foreclosure processes, as this was confirmed by the fact that no resource deficiency was cited by the regulators in the recent horizontal review.

We will continue to support our customers during these challenging economic times and we stand ready to assist them.

I will now turn the call over to Andy.

Thanks, Richard.

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

I turn your attention to slide 12 which gives a full view of our first-quarter 2011 results compared to the fourth quarter and first quarter 2010.

Earnings per diluted common share of $0.52 were 52.9% higher than the first quarter of 2010 and 6.1% higher than the prior quarter.

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

The $377 million, or 56.4%, increase in net income year over year was primarily the result of a $198 million, or 4.6%, increase in net revenue and a $555 million decrease in the provision for credit losses, which include a $225 million favorable change in excess provision expense as we move from building reserves to releasing reserves.

These favorable changes in total net revenue and the provision were partially offset by $178 million, or 8.3%, increase in non-interest expense year over year.

Net income was $72 million or 7.4% higher on a linked-quarter basis, $171 million or 6.9% decrease in total expense, and a favorable variance of $157 million in a provision for loan losses more than offset the 4.3% decrease in total net revenue quarter over quarter.

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

The significant items called out for the first quarter of 2011 were a $400 - $46 million bargain purchase gain related to the recent purchase of First Community Bank from the FDIC, $5 million in net securities losses, and a $50 million reserve release.

The fourth quarter of 2010 included a gain of $103 million, 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 first quarter of 2010 are also highlighted on slide 14 and include a $34 million security losses and $175 million incremental provision expense.

Turning to slide 15, net interest income increased year over year by $104 million or 4.3%, primarily due to a $25.1 billion or 10.1% increase in average earning assets and the benefit of strong growth in low-cost deposits.

The increase in average earning assets was driven by expected growth in the securities portfolio and a higher cash position at the Federal Reserve, as well as growth in average loans and loans held for sale.

The net interest margin of 3.69% was lower than the net interest margin in the same quarter of last year, primarily due to the expected increase in lower yielding investment securities as the Company brought more liquidity on balance sheet in addition to an exceptional and unexpected growth in deposits, which led to higher-than-anticipated cash position at the Federal Reserve.

On a linked-quarter basis net interest income was higher by $8 million, the result of a $14.1 billion increase in average earning assets offset by a 14 basis point decline in net interest margin.

The net interest margin was lower than the prior quarter, again due to the expected growth in lower-yielding investment securities and the higher cash position at the Fed.

Assuming the current rate environment and yield curve, we expect that the net interest margin will decline in the second quarter by amount similar to the decline we experienced in the last two quarters as we continue to add to our securities portfolio.

I would emphasize, however, that the anticipated reduction in net interest margin will continue to be neutral to net interest income and the bottom line, as the decline in net interest margin is offset by an increase in average earning assets.

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

Average total loans grew by $4.7 billion or 2.4% year over year.

Excluding acquisitions, average total loans increased by 2.1% and, as you can see from the chart on the left, this increase was principally driven by strong growth in residential mortgages and a 3% increase in commercial loans, which was the first year-over-year growth in average commercial loans since the second-quarter of 2009.

Importantly, commercial lending and commitments grew year over year.

On a linked-quarter basis the 1.1% increase in average loans outstandings, or 0.7% excluding acquisitions, was driven by increases in commercial, commercial real estate, and residential real estate lending reflecting a continued, modest demand for new loans.

Average consumer loans decreased slightly on a linked-quarter basis as the decline in average credit card, home equity, and second mortgages and other retail lending were slightly offset by growth in auto leasing and lending where we continue to experience incremental growth each quarter.

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

Average total deposits grew by $21.8 billion or 11.9% year over year, significantly low-cost deposits -- non-interest-bearing, interest checking, money market, and savings -- grew by 15.3%.

On a linked-quarter basis average deposits increased by 7.4% while average low-cost deposits increased by 6.7%, principally due to corporate trusts and the recent acquisition as well as growth in Wholesale Banking, Commercial Real Estate, and the consumer and small business banking business lines.

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

Non-interest income in the first quarter of 2011 was $94 million or 4.9% higher than the first quarter of 2010.

This variance was driven by growth in payments and commercial product revenue and a favorable change in net securities losses and the First Community Bank gain.

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

On a linked-quarter basis non-interest income was lower by $210 million or 9.5%.

This unfavorable variance was primarily the result of seasonally lower payments revenue, a reduction in trust and investment management fees, the net result of the sale of our long-term asset management business to Nuveen partially offset by the December purchase of a securitization trust administration business, and lower mortgage banking revenue, which declined by $51 million.

Primarily due to a reduction in application volume partially offset by a favorable change in the MSR valuation and an unfavorable change related to a few significant items which are detailed in the chart at the bottom of slide 18.

Side 19 highlights non-interest expense which was higher year over year by $178 million or 8.3%, the majority of the increase can be attributed to higher benefits expense due to an increase in pension costs and higher staffing levels.

Higher compensation, driven by incentives and commissions, additional staffing for branch expansion, and business line initiatives, and merit increases, and an increase in professional services, marketing, and business development expense and occupancy, primarily related to investments, projects, and other business line expansion activities.

Slightly offsetting these increases was a reduction in other intangible expense or run-off.

On a linked-quarter basis, non-interest expense was lower by $171 million or 6.9% due to lower compensation expense specifically related to incentives and commissions, seasonally lower professional services, and marketing and business development expense, and seasonally lower investments in affordable housing and other tax-advantaged projects.

Offsetting these favorable variants was an increase in benefits expense attributed to the higher pension costs and a seasonal increase in payroll taxes.

Finally, the tax rate on a tax equivalent basis was 29% in the first quarter of 2011 compared with 27.8% in the fourth quarter of 2010 and 24.2% in the first quarter of 2010.

Slide 20 provides updated detail on the Company's mortgage purchase related expense and the 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 repurchase volumes and expense relative to our peers.

Recall that we did not participate in the private placement securitization market.

Our company originates conforming loans, about 95% of which are sold to the GICs.

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.

I will now turn to call back to Richard.

Thanks, Andy.

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

Our annual meeting is scheduled for later today in St.

Louis.

I look forward to reviewing our 2010 results with our shareholders and demonstrating how our strong performance over the last year and the last three years and, finally, the last five years places us at the top of our peer group and confirms the strength of our company's financial position and diversified business model.

More importantly, I will talk about the future and the momentum we have created by continuing to invest through the cycle, including investments in our core branch banking footprint and in technology to enhance productivity and service, investments in new products and services, and in our global presence.

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

We are also prepared to lend our voice and our energy to defend reasonable rules and policies that protect the safety and soundness of the banking industry while protecting the investment of our shareholders.

We are now looking forward toward the future.

We have a clear focus and a clear mission, and we are ready to embrace the opportunities ahead.

Opportunities to serve our customers, further improve current processes, deepen our franchise, and build upon our reputation as a trusted provider of financial products and services.

U.S.

Bank is positioned to continue to perform and to win for our customers, for our employees, our communities, and most importantly for our shareholders.

That concludes our formal remarks.

Andy, Bill, and I would be now happy to take questions from our audience.

(Operator Instructions) John McDonald, Sanford Bernstein.

Good morning, guys.

Andy, was wondering if you could just repeat the guidance about the process of moving liquidity on to the balance sheet, the amount of securities that you would be adding should look similar to this quarter did you say?

And then the impact on the optics of the net interest margin, could you just repeat that?

Sure, I would be happy to, John.

So let's immediately first rehighlight what occurred in the first quarter.

We increased our securities portfolio by about $6 billion, as we expected to do and as we talked about last quarter.

In addition, as you probably know, there is a tremendous amount of liquidity in the marketplace and our customers, both wholesale and retail, have tremendously increase their deposit balances with U.S.

Bank which resulted in a long cash position of about $7 billion at the Fed this quarter.

Those two things resulted in our decline in net interest margin, about half and half.

As we go into the second quarter, I would expect us to continue to build our securities portfolio in the neighborhood of about $5 billion, plus or minus, which will impact margin.

Again in that 8 to 10 basis points category.

I do not expect a continuation or an increase in the long cash position, but at the same time I don't expect it to moderate much.

So going forward I would expect a decline in the low 360, right around 360 range for margin in the second quarter.

John, this is Richard.

As a reminder to everybody, and I appreciate you leading with that question, I think last quarter we may have confused some folks by talking about the NIM coming down but not reminding that the total balance sheet grows.

So these activities are neutral, if not slightly positive, to our net interest income.

And it's important that you know we are not harming the Company's earnings by taking these actions to improve our liquidity.

Right, we see that.

We see that in this quarter's results, right.

You have got NII growth.

Yes, we did and in spite of the fact that there are two fewer days in the first quarter versus the fourth, which costs us about $30 million.

So, yes, our margin income continues to grow even though net interest margin rate declines.

Okay.

And what would be the duration of this process, Andy?

Will it extend beyond the second quarter?

The securities purchases we expect to continue on through the remainder of this year, John.

Again, as we build on balance sheet liquidity in conjunction with the LCR ratio.

So that dynamic neutral to NII, but impacting the optics of the NIM should continue through the third and fourth quarters?

Correct.

Okay.

And could you give us some broader thoughts, it sounds like on the commercial side you got a little bit better loan demand, where you were on utilizations, and just your sense of where we are on the loan growth recovery curve here?

This is Richard, John.

It's still measured, slow, and slightly positive, but there is nothing remarkable about it.

I think we have seen the economy slow a bit in the second half of the first quarter.

When we last had a question in a public forum to talk to all of you things are actually not quite as positive as we thought they would be at the middle of the quarter.

You will recall that in those six or eight weeks since we last talked a lot has happened.

The GDP has come down from a 3 to 3.5 to more of a forecast of 2 to 2.5, the supply chain disruptions from Japan, oil prices, and just continued confidence not being quite where it needs to be hasn't stopped things.

It hasn't reversed things, but it hasn't created any additional momentum, even with the seasonality included.

So what we are seeing is actually our commitments are up 2% linked quarter for the wholesale businesses but our usage is still down even 1% from there.

So we have people that we are continuing to bank that are ready to use their line but they are demonstrating that even when they have the availability of credit they are not using it.

And likewise, as we have talked in times before, the first measure of our customers using their confidence to grow and to invest in things would be their use of their own demand deposits and they are not using those either.

As Andy said, we are at record high levels so we will see the demand deposits continue to be high until they start to use it.

Then the line of credit will be used and then eventually new loan originations will be more robust.

So for us it's slow, steady, measured, slightly positive, but not strong by any means.

And I do think it's fragile.

So it's something we have to watch very closely in the second quarter where we expect seasonality and all kinds of other normal things to occur.

We will know that in a couple of weeks whether or not we are off to a decent 2011.

Okay.

Then just a question on capital deployment.

You mention that your Basel III numbers are already ahead of where you need to be in 2019, yet you have got a conservative approach on the buybacks.

Is that a regulatory preference, Richard, or just a U.S.

Bank being conservative kind of preference?

It's a regulatory preference because I might actually be more aggressive.

The fact is that during the capital assessment plan -- as you know, it was a pass/fail test and you didn't really get feedback along the way.

So we made it very clear that we were not going to take any risks to impair our ability to move first and forward with some dividend action and eventually buybacks.

So in our one-year forward, two-year forward capital assessment plan for which the first year they used as the assessment for capital actions, we stayed below the 30%, as you know, forward year for dividends.

And we placed a number in there based on a buffer for capital and a time period upon which we would begin our buybacks.

All of which were very conservative, all of which were regulatory driven.

Each of which are still positive toward the shareholders, but not where we want to be eventually and were it left to our own devices it would have been more aggressive.

Okay, thank you.

Thanks, John.

Ed Najarian, ISI Group.

Good morning, guys.

Actually, John asked two of my questions, but let me just ask you a little more detail in terms of the securities buying can you give us a sense of -- obviously you are going to end the year with a heck of a lot more investment securities than you started the year and you were even buying in 4Q as well.

How can we get a sense that this is going to be match funded and that we are not going to be taking on more interest rate risk as rates rise with a much larger securities portfolio?

Is it real short duration, is it floating?

What are you buying?

It seems like a lot of it's funded with deposits which could actually go away if rates start rising so just trying to get a sense of that a little bit.

Sure, Ed, this is Andy.

So it is match funded, we are not taking any additional interest rate risk.

One of the ways you will see that is from our interest rate risk position that we will publish in the Q every quarter, but I can assure you that we are not taking additional interest rate risk.

About half of it's floating, half of it's fixed.

It's a duration less than two years and we are being very careful about what we are putting on with the intention of not taking additional interest rate risk.

And as you have mentioned, we will probably end the year somewhere in the neighborhood of 70 or so in our securities portfolio.

Okay.

And no duration extension or anything in a rising rate environment?

No, we are staying very short on these purchases just for the purpose that you mentioned, which is to keep it interest rate risk neutral.

Okay.

And then I guess just a quick follow-up I guess to John's question with respect to the buyback.

It seems like, given where your Basel III Tier 1 common ratio is at 7.7% and with some stock price weakness of late with all the banks it would be a great time to be buying the stock.

Clearly, even if the Basel standards come in higher than we think or the systemic risk buffer is higher than we think, you guys are building capital very rapidly.

So I think, Richard, what you are saying is you feel like your hands are a little tied based on what you ask for and how you ask for it within the capital planning process?

Is that what you are saying in terms of the buyback?

Well, no, we have permission to proceed with the buybacks so my hands aren't tied.

My level of amount and speed might have been different.

But the fact is, you already mentioned it, we are also waiting for the SIFI buffer which might be systemically important to financial institutions; some number yet to be developed, but what I understand will be known in the next couple of months.

That will help inform all of us what -- on top of the 7% we all need to hold, what will be the SIFI buffer.

And then U.S.

Bank intends to hold a buffer, a small buffer, above that just for the vagaries of the denominator and the movement of some of the balance sheet.

So that number for us is, at this point, a guesstimate in our plan.

And with that guesstimate, which we won't disclose, but we will be able to move forward with buybacks we also are kind of sitting to see where that number comes in to see how well we guesstimated that number.

I think in a couple of months we will have much more clarity around that, Ed, and then we will be able to move forward.

I would love very much to take some of that capital that we are building and use for that purpose, but as long as we have patiently waited to get to this point I am not going to take any actions until I have all the final facts and that is probably just a quarter away.

At which point then we will be more clear on our timing and our amount.

Okay, but I guess it sort of begs the question, given how fast you are building capital, even if that SIFI buffer is bigger than you suspect and bigger than maybe we are all suspecting, it seems like USB is already pretty far in the lead and would be building capital faster.

So doesn't seem like you would be required to be at that level right away, you could build into that SIFI buffer yet the market might be giving you an opportunity to buy back stock at a nice price currently.

So just wondering why you are not sort of taking advantage of that.

Okay, I understand.

So we don't -- the clarity that you may think we have we don't.

So while your argument and your logic makes sense, the test was pass/fail.

There was no sense of let me ask you this or could we try that.

And so it's not so much waiting for the SIFI buffer, it's the fact that the test was a one-year test, forward view, all or nothing, in or out, and at this point that is all the information that we have.

Now as we learned more, especially with the SIFI buffer, we will be going back in asking for permissions to adjust perhaps what we put in the first round.

But until which time we have that idea, you are right on all counts.

We are growing capital quite well.

We can get to a point where we can set whatever level we want to be at and from that point we can buy back stock or do other actions, capital actions, that will keep it at that number or above.

But as long as patiently as we waited to get to this point, 2.5 years, I want to get it right.

I don't want to take any risks and I don't want to push any levels of test when we haven't been given those permissions.

So I don't think we are far off from that.

I think it won't change that we are building capital strongly and it won't change our options and our ability to move quickly, and I am prepared to, but I think we are just one step from getting a little more clarification on the final part of the test.

Okay.

And then just one last quick one.

Andy, if you don't get the kind of deposit growth you anticipate over the next few quarters will you still be buying a significant amount of additional securities or is that predicated on the idea that you are going to continue to get this kind of deposit growth?

No, two independent events, Ed.

We continue to buy securities.

Our deposit growth has been phenomenal the last quarter and really that has led to our long cash position, which is separate and distinct from the security purchase.

So we will buy securities regardless and the liquidity is sufficient, overly strong in fact, to accommodate that.

Okay, thank you very much.

Chris Kotowski, Oppenheimer & Co.

I had some of the same questions but I was wondering about on your Wealth Management disclosure on page 11 of the services, is that drop in Wealth Management revenues -- is that purely the Nuveen transaction?

It is, Chris.

It's 100%, over 100%, the Nuveen transaction with a little bit of core growth and some addition from the Bank of America Corporate Trust acquisition.

But the whole decline is due to Nuveen.

Okay.

And then on the slide with the non-performers, nine in the conference call, do I read that the FCB acquisition added $287 million to your non-performing base or your decline in the NPAs would have been $287 million without it?

The decline without it was 4.7%, so adding the $287 million then put us up.

So we did add $287 million of non-performing assets from the acquisition.

Okay, so that was the add.

Okay.

Then I guess just in general, can you talk -- if there is a geographic pattern to the recovery that you are experiencing or are the trends that we see here in aggregate are they kind of broadly dispersed through all the geographies that you operate in?

Yes, I was going to say first and then I will have Bill answer, geography isn't so much noteworthy in this recovery.

It's more product type and customer type.

Things like Ag continue to be strong but it depends on whether the consumer products or entertainment and gaming, whether these are companies that are looking for consumer-derived products that start higher up in the food chain.

So for us it's more product type and keeping Commercial Real Estate off to the side which I will have Bill talk about.

Geography for us, and we are a national company, isn't really very noteworthy but we are seeing product types.

And as you might know, Chris, the strong companies are really showing themselves because they positioned themselves earlier in this recession to be ready.

As a matter of fact they got themselves ready, they are loan worthy, and still in many cases they are not taking actions because they are still not to that point.

So they are ready to move but they are just on the precipice of having the confidence to do it.

So geography is the one thing we don't really see any evidence, but we see a number of other things that will have Bill talk about.

The one area geography is coming into play is on real estate and the coastal regions, with the exception of Florida, are stronger.

I mean especially California.

The closer to the coast you are the stronger the markets are, both residential and commercial.

Some of the East Coast markets are stronger too, but that is pretty much limited to the real estate markets as opposed to just sort of general economic activity.

Then the one property type that is pretty strong now is the multifamily, and I think that is a reflection of how the residential markets are somewhat stalled.

Okay, thank you.

Matt O'Connor, Deutsche Bank.

Just a few clarification questions here.

I guess the first is if we look at your credit card spending volumes year over year, maybe I missed it, but do you disclose that still?

We can.

In terms of same-store sales?

So, Matt, our same-store sales numbers, which is the key driver of our merchant or acquirer activity, same-store sales were up 4.6% year over year here in the first quarter, which is down from the fourth quarter, which was about 5.5%, 5.4%, but up from a year ago which was just about 3.5%.

So we are seeing -- as Richard described the economy overall that is what we are seeing in spend.

Better than last year but down a bit from the fourth quarter of this year.

Matt, I will tell you the same-store sales of that 4.6%, a high percentage of that is T&E is up in quarter one by corporate spend particularly.

Retail is up about 3%.

So it's a little in between those two.

So we are seeing the companies, particularly airlines and hotels, being the higher percentage of T&E spend in quarter one, and based on our portfolio that is what is driving a good percentage of that.

Not unlike I said earlier, the second half of the quarter seems to be slowing from what we thought we might be seeing as a trend in the first half.

It's not coming to a screeching halt; it's just starting to taper down a bit as people move into quarter two.

Okay.

Then just separately, with credit continuing to improve, unlike other banks you have not drawn down your loan loss reserves as much.

And I am wondering if there is more drawdown or the pace of drawdown will accelerate in the next couple of quarters versus what we saw in the first quarter?

Well, I will tell you what, based on what you saw the first quarter, if we continue to see the improvement that we are seeing, we will continue to release reserves at levels probably equal to, if not slightly higher, than you just saw.

But as I said like a year ago, if that is the case then we just didn't do a very good job going on the way up, because we simply didn't know when this thing would peak and when it would come back down.

Let me also say, however, that once we get to a place where credit quality accelerates like a roller coaster does at the end of the fall this credit quality is going to get to a point that it is better than sustainable.

You think about most banks have not been originating any risky credits at all in the last couple of years.

By the time the current customers are either recovered or gone, credit quality across the board is going to be excessively positive and it will be here too.

My point in telling you this is there will be a certain level that we will set for ourselves no matter what the rule set may be that our loan loss provisions will remain high enough to account for over-the-cycle kind of losses.

Not at any one point to be exactly to the number that you see, because I do not want to have loan loss reserves back down to a low unsustainable levels when things get so good.

I want to have them available for when we get to the point over the cycle that I think will be more normalized.

And we have said for this company that we think it's probably about 1% charge-offs annualized over that long cycle for this company.

We are at 1.65% right now, so we are still on our way to one.

I think we will pass through 1% and we will eventually come back to it.

And so later in future quarters, while we will do some reserve releases, it won't be lock step with exactly what the performance of the portfolio because that is not going to be sustainable over the long run.

And then just lastly, if I may, as we look at the expense growth year over year of about 8% there is obviously some deal impact.

I think last quarter you talked about 5% to 6% expense growth as kind of a more normal run rate.

Is that a fair growth rate year over year and then going forward is that you were expecting as well?

Yes, I think, Matt, that is a fair growth rate year over year.

The other point here the first quarter versus a year ago, we do have about a $50 million increase in pension expense that is reset once a year when we reset our pension assumptions.

And that is a factor in the first quarter which will remain more level throughout the year accounting for payroll taxes and the like.

Okay.

All right, thank you very much.

Brian Foran, Nomura.

I guess on the pre-provision, outlook for pre-provision earnings growing this year relative to last that you had given on the last conference call, in light of 1Q generally positive results and your comments about the go-forward deceleration in the economy, are you more or less confident in the ability to grow pre-provision year over year?

Again, I think what we said, Brian, was accounting for the significant items, for example the Nuveen gain, that we are confident and that hasn't changed.

And then on -- the other point you had given on last call was revenue recapture from reg reform, the ability to recapture about 50% of lost revenue.

There again are you more or less confident and maybe what are some of the products?

Is it mostly just about instilling fees on existing products or is it more traction with alternative products, like prepaid cards and checking account advances and the like?

Well, you just gave me the answer so, yes, it's both.

We are going to continue to look at our pricing schemes to make sure that they are fair and that they are market favored.

We are going to continue to involve ourselves in some of these more innovative products, both card products and what we will call mobile banking alternatives.

And I think, Brian, if anybody has followed it, you have.

We are a different company, you know.

We don't sell one product anymore; we don't deal with one customer at a time on one product at a time.

We are much more relationship focused.

That is yielding amazing amounts of benefits.

During the recession the flight to quality, which we don't use the term loosely, has brought a number of customers and their entire relationship to our company during this transition.

So those are the things, including the pricing and the product development, that give me reason to believe that at least 50% of the lost revenue will be accomplished by these new changes.

I will add that this is pre-Durbin.

We don't have Durbin yet in our numbers.

We have given you the sizing for what that could be.

Being as close as anyone is to the activities under Durbin, you know it's still a 50/50 call on whether or not we are going to end up having the kind of severe loss of income that is currently proposed.

And if that is the case then we will have to go back and evaluate our product sets and exactly how we will be pricing for what will now be debit products that are currently part of our checking products.

But unless and until that happens we are going to wait and see.

We are just a few months away from getting a better sense of that, because no matter what happens by the deadline the Fed has in July we will know the answer one way or the other.

And by the next time we all speak we will have much better clarity on whether the Durbin amendment is a negative or a wait-and-see activity for this company.

We have not decided how we would recover those losses at this point.

Okay, thank you.

Mike Mayo, CLSA.

Good morning.

So I have two columns when it relates to loan growth, one are your negative comments and then some positive trends.

I am trying to reconcile the two.

You said the second half of the first quarter was weaker, loan utilization is still kind of flat, and record high corporate deposits means you don't have a lot of loan growth.

On the other hand, you had, if I am doing this correctly, 2.4% linked-quarter growth in commercial loans, and also, when I look at loan syndications year over year, your deal volume has doubled.

So is this all market share or market expansion and none with the economy, or -- if you can reconcile those two?

Sure, this is Richard.

First, it's not very good because it's not good enough for us.

We really expected ourselves to be growing at that 1.5% to 2% linked quarter that we had in quarter four, so we are just disappointed that we are not keeping at that pace.

We are still very pleased that it's positive at all.

Let me remind you that when I talked about commercial credit commitments they are up 2%, but they are not using them.

So for me it's a proxy, if I were an investor I would, gosh, if these deposits that you guys are growing are proxies for new customers, that these commitments that you are growing, whether they are being used or not, are proxies for future loan usage that is what I want you to hear.

But we don't have anything to show for it right now on the loan balance sheet.

And so loan balance sheet growing on an adjusted 0.7% linked-quarter that is wholly insufficient, as far as I am concerned, given the kind of money we have here that we can deploy back into loans.

But we are setting everything up for that moment when people finally decide to pull the string and use their lines of credit or use their own deposits or get a new loan.

So I intend to tell you that we are quite pleased with our performance against our peers in an environment where I think the overall loan growth is shrinking.

I love the fact that we are positioning ourselves for a really good future when all this starts to come around, but I am not satisfied that 0.7% adjusted linked loan growth is a very good outcome when we have this kind of earnings opportunity sitting under our nose.

I will tell you, however, though there is no temptation, none, to change our underwriting criteria in order to adjust those outcomes because that would be a mistake that we would live with many, many quarters and years from now.

But I have said before, we will take the permissions with good relationships to be competitive on price, because we can afford to and because relationships are easier to be more aggressive in pricing.

And we will continue to do that as that is part of what it means to protect customers and grow market share.

Last quarter you said you were going a little more out of footprint.

Can you give us the status of that?

Yes.

As I said last quarter, I have meant for the last year or so we have been out of footprint.

Our Commercial Real Estate is now national, our corporate banking is wholly national, and we are seeing a great deal of benefit from that.

Maybe as much in the out-of-footprint as we are in the in-footprint because we have been invited into so many new relationships.

I think our branding, our national advertising has brought people to think of us for the first time in the other 25 states.

I know that our flight to quality, particularly at the level of CFO and controller of large companies has said I need another bank in my stable of partners.

I want to bring you in and see how you perform.

So we are getting a lot of growth from new entrants and new relationships, which for us is long-term very, very valuable because that will be some relationships we can count on that we didn't have a few years ago.

And can I just get a little more color on the syndicated loans?

I am not sure if [Dealogic] is the perfect source, but that has your year over year syndicated loan volume having doubled.

You are not alone, but it would be great to get more color.

How much of the syndicated loan deals translated into higher commercial loan balances?

Probably not a lot in the balances based on we have seen in utilization, but clearly we are much more actively involved in that market.

We have built out the capital markets capabilities in our bank and with the national corporate strategy we have been able to bring a much better product set to clients and new prospects.

So it has been great for fee income generation, probably less so on loan balance, but hopefully that will come.

You know, Mike, the one thing that we -- we love our position as the fifth-largest commercial bank.

There is a lot of reasons I love being there, but the one area we have to watch for is that we don't have the balance sheet size that the top four do so we have to be very competitive as it relates to hold levels in syndication.

What we have found is if you can get in at a very meaningful level, Tier 1 or Tier 2, with our capital markets capabilities and our other products, like our single point and other capabilities that we have in corporate cards, we have been invited in to other products at the level that Tier 1 typically enjoys.

So the perfect spot for us is to be a competitive, meaningful partner in a syndication but get the other business and develop a relationship depth that we have never had before we had all these capabilities.

So you are right to see us much more visible on the tables.

You will see our syndication activity much higher.

What you can't see yet is how much other business is coming from that, which is what I have promised you all based on the investments you have permitted us to make in the last couple of years in the corporate banking and in the payment space.

Then lastly, you are -- I guess the one CEO to say very clearly the second half the first quarter has gotten weaker.

Is that simply you and your firm's macroanalysis or are you seeing something on the ground that is really weaker?

Well, it's not a whole lot different than -- whatever we have showed you today is the same assessments I am using, so you can look at the same data and disagree.

But the only thing you can't see is what our thinking was in the middle of quarter one.

We saw trajectories in what we thought would be line and loan usage and what we thought would be in deposit levels starting to be used for growth.

Instead, based on our expectations, none of those happened at the same level.

Loan and line usage wasn't as robust, deposit levels were exceptionally higher, people are putting more away than we thought, and, as I described at the top of the call, I think you would agree that there was some worldwide unprecedented events that all came together in the second half of quarter one.

I am not surprised about the reaction by our customers.

They are being very careful, they are being very safe.

That doesn't mean they are not going to eventually do it, it just means they are not doing it as fast as we had thought.

So it's not gloom and doom, it's just based on our rather positive expectations they are not quite as positive.

But they are measured and they are slow and they are predictable, and for me they are painlessly slow.

All right, thank you.

Nancy Bush, NAB Research LLC.

Good morning, guys.

Two questions here.

Richard, could you just talk to us a little bit about the consent order from the Fed?

To the outside observers it was a fairly broad brush assessment.

If you could just talk about your own situation, what they found, and what you agree with or what you see as the deficiencies and what you have done to correct them.

Thanks, Nancy.

I appreciate the question.

So the consent order, as you know, was the result of the 14 bank horizontal review last quarter four.

And in their findings they discovered what I will call a number of technical deficiencies in the way banks, including we, performed some of the perfected liens and some of the activities and modifications.

I am happy to report, as I hope you heard in my opening comments, that we were one of the very few, one of only two companies, that were not found to be deficient in our resources applied toward modifications and foreclosures, which means we don't have a large staffing number to give you here on this call.

In fact, very technically we have added 48 people just to have a better point of contact.

So it's not a financial issue for us.

What it is though, it's a case for us to -- the bar has raised on things like using attorneys in other states for the purpose of pursuing the foreclosure legalities.

And in our case we did not have them through the vendor program, which we actually didn't think we needed to, and so we will now put them through a vendor program.

For us it's going to be mostly form well over substance, but where we need to do a better job of documenting our activities we will.

Beyond that for this company it's really nothing more than that as much as I am respectful of it.

We are going to do our level best to be the first out because I think our remedies are quite reasonable.

But I will tell you as well, you won't hear us talk about another large amount of money put away for either litigation or for putbacks.

As Andy mentioned in his part of the call, we will remind you that 95% of the loans we originate are either -- sold to Freddie or Fannie or the GSEs.

The other 5% either comes through us keeping on balance sheet like some of our jumbo mortgages or maybe part of acquisitions that we brought on which are fully covered assets.

So we don't have a large putback risk for those private securitizations that might be coming back towards us.

And likewise, and somewhat connected, we don't have a large litigation -- we don't have any litigation right now to speak of, so we have nothing probable or estimable to put into any kind of reserves.

So with 2% of the servicing market, even though we are the sixth-largest, we see this as a very important activity to improve the quality of our foreclosure modifications.

We actually were not found to have any foreclosures that were incorrect, no fees incorrectly assessed.

We simply didn't dot all the Is and cross all the Ts to the new level of expectation and we will do that going forward.

So for me it's a very important audit and it has with it necessary steps for which we have created our special Board committee.

We will pursue those with aggression and we will do it with respect.

But I am looking forward to getting past it and I think you will find very little to come from that finding as it relates to changes in our behaviors and certainly not changes to our financials.

Let me end, we are not part of the five companies that are apparently working with the attorneys generals on finalizing what will be the new mortgage foreclosure protocols, nor are we looking at how those final decisions on any kind of a penalty, civil money penalty may be.

So we sit and wait and are watching to see what comes from that.

We don't know exactly how that will affect our company, but assuming in the best or worst case it's somehow equal to our market share it's something that we can handle.

It will be a one-time event and something we can explain to all of you very easily.

And I have a similar sort of big issue question.

I am sure you are familiar with the Jamie Dimon/Dick Durbin smack down that seems to be going on.

One of Senator Durbin's concerns or statements that I am sort of sympathetic to is the banks are talking a lot about raising fees.

Clearly in some quarters this is being seen as a, quote, threat.

If you have to recoup Durbin revenues how are you going to present this to your customers so that it is not seen that way?

There just seems to be a rising public anger about some of this stuff.

Yes, Nancy, let me give you my sense.

I will add a step in between.

Durbin, I think his intention was good and his intention was to make sure that customers aren't harmed by paying unnecessarily fees of any type for any transaction at point of sale.

I don't think he was trying to decide whether it was banks or merchants, he just wanted it to go back to consumers.

Had the Fed in their first pass provided an answer that was close to what would have been the cost of doing business for us to cover debit activities, including the stand-in for guarantees and the immediate credit and all the things that you know, there wouldn't be a discussion here.

Durbin's interpretation, as done by the Fed, would have been something we would have probably agree that was fair and equitable and we would have moved forward.

But at $0.12 to be wholly -- 20%, 25% of what the real number is under anybody's measure that was unexpected.

And so I think what we are trying to say as much -- not to Durbin as much as we are to the Fed and those who will make the final decision, is go back, review all the facts.

Take the time to figure out what it really costs a bank to provide the kind of immediate credit and the transaction guarantees that occur for both the merchant and the consumer at the point of sale.

Let us give you some feedback on that and you make your final decision.

And if after all of that the number is deemed to be whatever and we think it's fair and equitable, even if it's not exactly at the cost of doing business, I think that would change the outcome that we all feel.

But should the Fed decide to still come forward on July 21 with $0.12 for at least large banks that will be so wholly insufficient for our shareholders we are going to have to play that very delicate walk between taking care of our shareholders and taking care of our customers.

And I will let our customers know that the cost of providing those guarantees have a value and it will either show itself up in the form of a service charge or, in many cases, customers can offset the service charge by the relationship value that they have in other things.

I won't hesitate to make it a -- I won't make it a threat, but I won't make it a secret.

And what will be sad about this is there will be a number of customers on the edges, the less-banked that will now become unbanked.

Sadly, because of the way the rules are coming down, the unbanked will fall into an area that so far, with all the things that Dodd-Frank wanted, still is silent to any activities of overseeing companies that are not part of the banking industry.

So I worry about the unintended consequences but we are not going to play threat.

We are not going to put our customers in the middle of the dogfight.

And I have actually quite a bit of confidence that somehow between the Congress and the Fed that $0.12 will be rendered to be a much more reasonable number and any outcomes that we need to talk about here will be, in fact, invisible and will just move forward.

Thank you.

Matt Burnell, Wells Fargo Securities.

Good morning, guys.

Just a question on the commercial lending and maybe some trends that you are seeing in the capital markets business that you have alluded to a little bit earlier today.

Middle-market loans in terms of average loan balances were up quarter over quarter, national corporate was up a little bit quarter over quarter from your supplement.

I am just curious if because of your position in some of these larger deals you are continuing to see momentum in the capital market side of things, taking advantage of being able to bring some of these companies to market?

In terms of debt markets?

Correct.

Yes.

Well, we clearly are.

I mean, two or three years ago we really didn't have much in the way of capital market activities.

Now we have got a robust syndication desk along with our high-grade underwriting platform, so we -- two products that we just really were not strong at, or didn't even exist two to three years ago.

So for our middle-market customers, our end-market, middle-market customers that is a whole new product set that we are delivering.

And for our national corporate platform it gets back to being able to participate at the higher levels and up-tiering in these national corporate markets.

Matt, it's Richard.

As you might guess, the timing was fortuitous and sometimes it's good to be lucky than it is smart.

But to build this during the down market and to now have companies that are starting to look for growth and eventually in some cases M&A activities and more sophisticated solutions, boy, to have it all on and ready to go at this time has been just perfectly suited for us.

And as I mentioned earlier, becoming national now and not just being regional we have invited ourselves in to providing just guidance.

In many cases, the guidance alone, the way we have talked to the customers, the way we have connected with the CFOs or the CEOs has changed the way they feel about a bank that can be a partner.

And in many cases we won the business just on the audition.

But in terms of the last couple of quarters rather than the last two or three years are you seeing an improvement in the momentum in that business, or has the market been relatively flat for that type of activity within U.S.

Bank?

No, in the last couple quarters it has been -- we have seen good demand in those spaces.

Matt, it's a little hard to tell because we are such -- our base is so low.

In other words, we are just growing like crazy.

We are adding people; we have got all kinds of new customers.

It's a little bit of both.

We are seeing the market receptive to this kind.

As you see, the corporate bank, the corporate customers are more likely to be healthier and looking for opportunities, capital market solutions, but we are also growing like crazy just because we are invited to more conversations.

So I would say it's probably 50/50.

It's half of us and half of what the market is providing in terms of interest.

Richard, just a quick clarification on your comments in terms of the mortgage market and what is going on with some of the negotiations between the banks and other parties.

Presuming your comments related to market share were focused on any number of items, but I just want to clarify that your comments particularly related to potential principal reductions on home equity loans or other mortgages.

You think that that is going to be relatively less of an issue for you than for some of the other competitors?

Matt, I will tell you what, I don't even know that it's going to be principal reduction.

I think that would be a big mistake, by the way.

Absolutely, of all the things to work on, that is not one of them.

But let's just say that there is some super fund that is created by the larger banks in order to provide some relief for the foreclosure process and to help kind of change the future outcome.

I believe that we will be part of that once and when those decisions are made.

But at a 2% market share and even something less than that as it relates to the percentage of loans that are, say, foreclosed, I think the number will be -- no matter how big the pool is I think there will be a smaller number for us, something that is quite manageable.

For us you will see we simply don't have -- in the DNA of the last few years we don't have a lot of customers that were either underwritten or placed into harm's way based on some of our activities.

So I think that the current actions, as Nancy asked about the foreclosure review, were all having independent reviews of the last couple of years of our modification and foreclosures.

I think they will be deemed to be quite positive and quite good.

If there is any remuneration, it will be small.

If there is a large fund of money, based on our market share and the quality of our findings, I think it will also be reasonable and something that we can isolate as a one-time event, explain it to all of you, and move forward.

Thanks very much, guys.

Operator, is that our last call?

We have reached the allotted time for questions.

Are there any closing remarks?

Judy?

Yes, thank you all for listening to our first-quarter 2011 conference call.

If you do have any follow-up questions or need hard copies of the call presentation or press release, please give the Investor Relations department a call.

Thank you very much.

Thanks, everybody.

Thank you.

This concludes today's U.S.

Bancorp first-quarter 2011 earnings conference call.

You may now disconnect.