美國合眾銀行 (USB) 2011 Q3 法說會逐字稿

Welcome to U.S.

Bancorp's third-quarter 2011 conference call.

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

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

(Operator Instructions).

This call will be recorded and available for replay beginning today at approximately noon Eastern time through Wednesday, October 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, Tiffany, and 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 third-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 there are forward-looking statements made today during the call, and they are subject to risks and uncertainties.

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, and good morning everyone and thank you for joining our call.

I would like to begin by saying that I am very proud of our third-quarter results.

Our Company achieved both record earnings and record total net revenue this quarter, along with positive operating leverage year-over-year and linked-quarter, and we accomplished these results while facing the headwinds of a very challenging and uncertain economic environment.

I would like to point out a few of the highlights from our third-quarter earnings, which are detailed on page 3 of the presentation.

U.S.

Bank reported record net income of $1.273 billion for the third quarter of 2011 or $0.64 per diluted common share.

Earnings per share were $0.19 higher than the third quarter of 2010 and $0.04 higher than the prior quarter.

We achieved record total net revenue of $4.8 billion this quarter, which was 4.5% higher than the same quarter of 2010 and 2.2% higher than the second quarter of 2011.

Revenue was driven by growth in both net interest income and fee income.

Total average loans grew year-over-year by 5% or 4.5% excluding acquisitions, and we realized linked-quarter total loan growth of 1.7%.

Once again, we benefited from strong growth in average low-cost deposits with balances increasing by 23.2% over the third quarter of 2010 and 4.7% over the second quarter of 2011.

Credit quality continued to improve as we posted a decline in net charge-offs of 10.4% and a reduction in non-performing assets, excluding covered assets, of 6.9% on a linked-quarter basis.

Our capital position remains strong as we continue to generate significant capital each quarter through earnings.

Our Tier 1 common equity ratio was 8.5% at September 30 or 8.2% using anticipated Basel III guidelines, while the Tier 1 capital ratio ended the quarter at 10.8%.

Finally, we repurchased 13 million shares of common stock during the third quarter.

As a result, we returned 45% of our earnings to shareholders this quarter in the form of dividends and buybacks.

The five-quarter trend of our industry-leading performance metrics are shown on the left-hand of slide four.

Return on average assets in the third quarter was 1.57% and return on average common equity was 16.1%, significantly better than the 1.26% and 12.8% respectively that we reported last year.

Our net interest margin and efficiency ratio are shown in the graph on the right-side of slide 4.

As expected, this quarter's net interest margin of 3.65% was lower than the same quarter of last year and the prior quarter.

And Andy will discuss the factors that led to this change in a few minutes.

As I mentioned at the start, we achieved positive operating leverage on both a year-over-year and linked-quarter basis, leading to an improvement in our third-quarter efficiency ratio.

Our 51.5% efficiency ratio for the third quarter is consistent with our expectation that this ratio will remain in the low 50%'s going forward.

Turning to slide 5.

As I previously noted, our capital position remains strong and continues to grow.

Our Tier 1 common ratio under Basel III guidelines at September 30 was 8.2%, well above the 7% Basel III level required in 2019.

We have not yet received final regulatory guidance as to the amount of capital we will be required to hold as a systemically important financial institution, or SIFI, buffer.

Given our current capital level, however, we are confident that we will be able to meet those guidelines through internal capital generation once they are established.

In the meantime, we will continue to return capital to our shareholders in the form of dividends and buybacks, eventually reaching our goal of returning 60% to 80% of our earnings.

Average total loans outstanding increased by $9.7 billion or 5% year-over-year and 4.5% adjusted for acquisitions.

Significantly, new loan originations, excluding mortgage production, plus new and renewed commitments, total over $46 billion this quarter compared with approximately $37 billion in the third quarter of last year, representing a 25% increase in renewal and new activity.

Specifically, total corporate and commercial commitments outstanding increased by 16.8% year-over-year and 5.8% linked-quarter, indicating we continue to gain customers and marketshare and we are well-positioned to meet the demand for loans once our customers are more confident in investing in their businesses as the economy recovers.

Although you may think of our middle market and large customers when discussing new commitments, the numbers also include our small business lending.

We just announced this week that U.S.

Bank has set a new Company record for SBA loan approvals with a total of $630 million for the SBA fiscal year ending September 30.

This represents a 123% year-over-year increase in loan approvals for our Company.

And SBA loans are just one piece of the small business lending that we do.

In fact, our branches grew non-SBA small business average loans outstanding by over 12% year-over-year.

Total average deposits increased by $32.7 billion or 17.9% over the same quarter of last year.

Total average deposits grew by $6 billion on a linked-quarter basis or 2.9%, with strong growth in corporate trust, Consumer Banking and Wholesale Banking over both time periods.

Our customers continue to hold historically high levels of cash, viewing our bank as a trusted, safe place to turn.

Additionally, we recently published FDIC marketshare data that indicates that our Company grew deposits significantly more than the US market as a whole.

U.S.

Bank grew deposits 15.8% between June 30, 2010 and June 30, of 2011, compared with the 6.8% growth rate for the total US market, confirming that we have definitely increased our overall deposit marketshare.

Turning to slide 7.

The Company reported record total net revenue in the third quarter of $4.8 billion, an increase of 4.5% over the prior-year's quarter and 2.2% over the previous quarter.

The growth in revenue can be attributed to both our balance sheet and fee business lines, all of which have benefited from investments in many growth initiatives made throughout the downturn of the past three years, partially tempered, of course, by the impact of recent legislative and regulatory actions.

Turning to slide 8 and credit quality.

Third-quarter total net charge-offs declined by 10.4% from the second quarter of 2011, while non-performing assets, excluding covered assets, decreased by 6.9%.

This marks the sixth consecutive quarter of improvement in both measures.

Turning to slide 9.

As the graph on the left illustrates, early and late stage delinquencies, excluding covered assets, have continued to improve overall and are actually returning to pre-2008 levels.

On the right-hand side of the slide you can see that the trend in criticized assets was also positive this quarter.

Both of these statistics provide us with assurance that net charge-offs and non-performing assets will trend lower in the fourth quarter.

With those statistics in mind, please turn to slide 10.

You can see that we recorded a provision for credit losses that was 78% of net charge-offs in the third quarter.

This compares with the second quarter when we recorded a provision that was 77% of net charge-offs.

The continued improvement in our credit quality, once again, supported a reduction in the allowance for credit losses.

But the amount of the reserve release was $25 million lower than the previous quarter.

The reduction in the amount of the reserve release reflected the fact that the net charge-offs levels for several consumer loan categories, particularly credit card and auto loans, are beginning to stabilize.

The underlying quality of the wholesale loan book, however, is expected to continue to show incremental improvement in the coming quarters.

I will now turn the call over to Andy.

Thanks, Richard.

I'm going to take just a few minutes to discuss some of the details behind our record third-quarter results.

Slide 11 gives a full view of our third quarter 2011 compared to the prior quarter and the third quarter of 2010.

Diluted EPS of $0.64 was 42.2% higher than the third quarter of 2010 and 6.7% higher than the prior quarter.

Slide 12 lists the key drivers of the Company's third-quarter earnings.

The 40.2% increase in net income year-over-year was the result of a 4.5% increase in net revenue and a decrease in the provision for credit losses, partially offset by a 3.8% increase in noninterest expense year-over-year.

Net income was 5.8% higher on a linked-quarter basis.

This positive variance was the result of a 2.2% increase in net revenue and a favorable variance in the provision for loan losses, both of which were then offset the 2.1% increase in expense quarter-over-quarter.

With the exception of the $150 million reserve release, our third-quarter results did not include any notable income or expense items that would have impacted the comparison of our year-over-year or linked-quarter earnings.

Turning to slide 13.

Net interest income increased year-over-year by $147 million or 5.9%.

The increase was largely driven by the $34.4 billion or 13.6% increase in average earning assets, as well as the benefit from strong growth in low-cost deposits.

The growth in average earning assets was driven by predicted increases in the securities portfolio, a higher cash position at the Federal Reserve, and the increase in average loans.

The net interest margin of 3.65% was lower than the same quarter of last year due to the expected increase in low-yielding investment securities and the higher cash balances at the Fed.

On a linked-quarter basis net interest income was higher by $80 million, the result of an $8.7 billion increase in average earning assets and a 2 basis point decline in the net interest margin.

The net interest margin was lower than the prior quarter due to the expected growth in lower-yielding investment securities as the Company continues to add liquidity on balance sheet.

The investment securities portfolio at September 30 totaled $68.4 billion, and we expect the portfolio to reach $70 billion by year-end.

We also expect to maintain the investment securities portfolio at or around that level for the foreseeable future, given current Basel III liquidity requirements.

Turning to slide 14, you can see more detail behind the change in average total loans outstanding.

Average total loans grew by $9.7 billion or 5% year-over-year.

Excluding covered loans, which are slowly running off, average total loans increased by 7.6% over the third quarter of 2010.

As indicated on the chart, the increase in average total loans was principally driven by solid growth in residential mortgages and total commercial loans, the latter of which grew by a very strong 11.9%.

This was the third consecutive quarter of year-over-year growth in average commercial loans, and the growth has been improving each quarter.

On a linked-quarter basis the 1.7% increase in average loans outstanding was primarily driven by the increase in commercial loans, which grew by 4.6%, as well as residential real estate loans.

Slide 15 tracks the growth in total deposits over the past five quarters.

Average total deposits grew by $32.7 billion or 17.9% year-over-year.

Excluding acquisitions, the growth rate was 13.2%.

On a linked-quarter basis average deposits increased by 2.8% or approximately 11% annualized.

Slide 16 provides more details about the changes in noninterest income on a year-over-year and linked-quarter basis.

Noninterest income in the third quarter of 2011 was 2.9% higher than the third quarter of 2010.

This variance was driven primarily by growth in payments revenue, deposit service charges and commercial products revenue.

These positive variances were partially offset by lower trust and investment management fees, principally the result of the sale of our long-term asset management business late in 2010 and mortgage banking revenue.

On a linked-quarter basis noninterest income was higher by $25 million or 1.2%.

This favorable variance was primarily the result of higher payments revenue, deposit service charges and mortgage banking revenue, partially offset by lower trust and investment management fees.

Deposit service charges benefited this quarter from the rollout of our new checking account redesign, as well as higher transaction volumes, while mortgage banking revenue, which increased by $6 million linked-quarter reflected a strong increase in application volume, partially offset by the unfavorable variance in the net change in the MSR valuation and related hedge.

Recall that the new debit card pricing guidelines went into effect on October 1.

Other than new pricing, we expect to see a reduction in debit fee revenue of approximately $75 million in the fourth quarter related to this pricing change, which is consistent with our previous estimate of a loss of $300 million on a full-year basis based on our current portfolio and growth assumptions.

As we have noted in the past, we expect to mitigate approximately one-third to one-half of the reduction in revenue related to all regulatory changes by modifying our checking account products and pricing, many of the changes to which are in process and partially reflect the numbers this quarter.

We do not, however, have plans at this point to assess a debit card fee.

Slide 17 highlights noninterest expense, which was higher year-over-year by $91 million or 3.8%.

The majority of the increase can be attributed to the higher compensation and benefits expense, occupancy, investments in affordable housing and other tax advantaged products, and an increase in professional services, primarily due to the Foreclosure Review Project.

The expense related to this project, about $25 million per quarter, is expected to be in our run rate for the next few quarters or until the foreclosure review is complete.

On a linked-quarter basis noninterest expense was higher by $51 million or 2.1% due to compensation, professional services and marketing and business development expense.

Finally, the tax rate on a taxable equivalent basis was 30.4% in the third quarter of 2011, equal to the second quarter of 2011, but higher than the 25.9% in the third quarter 2010.

Slide 18 is included to provide updated detail on the Company's mortgage repurchase related expense and the reserve for expected losses on repurchases and make-whole payments.

Note that we do not participate in the private placement securitization market.

We expect mortgage repurchase activity to continue to moderate lower over the next few quarters.

Our standard repurchases and make-whole request balances at September 30 was $115 million, compared with $123 million at June 30.

I will now turn the call back to Richard.

Thank you, Andy.

To conclude our formal remarks, I will call your attention to slide number 19.

To sum it up, we had a very good quarter.

We grew both loans and commitments, and the overall credit quality of our portfolio continued to improve.

We had excellent deposit growth and gained market deposit marketshare.

We grew both our balance sheet and our fee-based revenues and attained record total net revenue.

We realized positive operating leverage and earned record net income.

Our capital and liquidity position remains strong and growing.

And we were able to return 45% of our earnings to our shareholders, and we once again achieved industry-leading performance metrics.

All of this despite the challenges of a difficult and uncertain economic environment, further demonstrating the value of our Company's diversified business model, prudent approach to risk management, and sound growth strategies.

We are a bank and we are proud to be a bank.

On one hand, we are managing our business through a difficult and complex environment, which includes a fragile economy, increasing regulatory oversight, reputation risk and competitive pressures.

On the other hand, we are providing our customers, consumers, small businesses, large corporations, institutions and government entities with the products and services they need to achieve their own financial goals.

We are in this together, and we are proud to strive to do our part, not at the expense of others, but for the benefit of all of our constituents, including customers, employees, communities and shareholders.

Our Company has created momentum by adhering to the disciplined business strategy and investing through the cycle.

We have adapted and will continue to adapt to this changing environment with a focus on the future.

We are positioned to win during a difficult and strong economic time.

This concludes our formal remarks, Andy, Bill, and I would now be happy to answer questions from our audience.

(Operator Instructions).

Ed Najarian, ISI Group.

A couple of quick questions.

Richard, we obviously saw pretty good across-the-board improvement in credit quality, and as well the delinquencies declining more than we are seeing with peers, which I guess is what gave you the confidence for your fourth-quarter statement.

How do you look at that in terms of increasing the pace, or keeping or increasing the pace of reserve recapture from here?

We are seeing a lot of banks that recapture a lot of reserves in prior quarters and are actually slowing that down.

You guys, on the other hand, are speeding that up.

I am just wondering how you are thinking about that in your head.

Thanks.

First of all, we are -- we were last to come into this because our credit quality was better from the beginning and so we probably never hit any kind of a peak.

We are actually are starting to come back down, so I think we will declare last quarter, quarter 2, the quarter before this one, as probably the peak of reserve release at 175.

But you will still continue to see reserve release, because we are not yet at our sustained credit quality levels that we said over the course would be about 1% in total charge-offs.

Having said that, you will note that we have a map that goes along with the development of our total loan loss provision, which includes a forward four-quarter arithmetic around what is happening in consumers, which is actually showing some stability now, reaching that point.

And on commercial it is much more lumpy, and therefore we take it at 90-day increments.

So that is why we are comfortable that the consumer portfolio continues to show improvement with the delinquencies forecasting improvement in total charge-offs.

But that will continue to slide, a soft landing, if you will, into something more steady over the course of time.

But commercial -- commercial real estate are still lumpy and higher than they will be over the course, which also tells me we are not yet where we need to be.

Going further, as I have told you before, we think this is about a 1% net charge-off over the [core company], primarily because we have such a significant credit card portfolio.

And I do predict that we will go below 1% kin total charge-offs before we come back to it as we over-swing as the economy will take us to that point.

I have been pleading with the regulators and the accountants to let us as banks not miss this chance to soften the impact of counter cyclicality, and allow us to determine what our over-the-cycle minimum level of loan loss provisions needs to be.

And don't ask us -- don't force us to go beyond that, so that we all have to start building back loan loss reserves a couple of years from now when we swing back.

I am not getting a whole lot of resonance, by the way, on my plea, but at least I'm still out there asking for it.

But you can see this Company is moving down toward the 1%.

It doesn't happen in one quarter.

You will see the steady pace we have is probably what you could estimate over the next few quarters, and so reserve releases will continue until we hit that point where we think we've got a sustainable level of loan loss reserves.

Okay, thanks.

And then to follow up, you talked about getting to that 60% to 80% total payout ratio in terms of buybacks and dividends.

Is that something -- I know you've got to go through the next round of capital assessments with the Fed, but is that something that you hope to get to as early as next year?

And what is the kind of -- along with that, what is the kind of range of dividend payout ratio you are hoping to get to for next year?

Yes, there is a lot in there, right?

You said it first.

I have to go through all the prescribed gateways to get what we want.

But what we are going to be asking for in our stress test with the CCaR, which will happen at year's end, is an increase to our dividend that stays within our committed 30% to 40% and moves beyond what was last year's first CCaR test of maximum 30%.

But we are going to stick with that 30% to 40% as a range against what we think is a reasonable forecast of earnings for this Company.

And of course, they will put it against the very tedious stress test, which we do ourselves, by the way, and we can withstand a lot of stress.

And on top of that, we will let the other 30% to 40% move, as we do the buybacks, and we will seek additional permission, although Andy will tell you here in a second we have plenty left in our current permissions.

And then what is left over as we put back into the company 20% to 40% in the form of organic investments, which you have all allowed us to do over the last few years, and/or acquisition opportunities that follow the same kind that we've been doing over the last few years.

The only difference between now and what we have said five years ago was it used to be 80% to shareholders and 20% to the Company.

Now we have given it more 30% to 40% of buybacks, 30% to 40% of dividends and 20% to 40% of what could be investments that we don't want to miss through this challenging time.

But I hope to get to 60% to 80% as soon as I can.

And I suspect that if I were left to my own devices I would get there a little faster than I am going to be allowed to, but next year would be a good target and we will see how close we can get.

Andy, you might just cover a little more color on the remaining stuff.

Right, so you know we are at 8.2 Tier 1 common Basel III, and above the level impact that we think we need to be without the specificity of the SIFI yet here.

So, yes, we do expect to get back to that level in 2012, and we still have some buyback capacity remaining here in the fourth quarter.

Okay, thanks.

That is really helpful.

Then just finally, any outlook in terms of the -- short-term outlook in terms of the net interest margin?

Yes, this is Andy again.

So the margin decrease on a linked-quarter basis was entirely due to our securities purchases, and on a year-over-year basis it was entirely due to our securities purchases and the cash position at the Fed.

On a -- you strip those two things out and we were basically flat.

So we expect to continue to have securities purchase here into the fourth quarter getting to that $70 billion, probably in the neighborhood of $3 billion or so.

Simple math is every $1 billion is a basis point.

So I would expect the fourth quarter to be somewhere between 3 and 6 basis points down, but depending on the cash levels and the securities I just talked about.

And, however, I would also say that I would expect net interest income to be up.

Just the same phenomenon you saw this quarter, which was margin was down but net interest income was up.

And then I will add to that a history lesson for everybody, not that you asked for it.

As you recall, about a year ago we were given guidance by our regulators that our capital was quite sufficient and quite strong as it relates to the Basel III levels of total common.

But at the same time we were given a nod that we needed to move up on our liquidity preparation to have this balance sheet more fortress ready.

We have done that, and we are actually quite proud of that.

And I think you heard us ever even indicate it as a problem for this Company to achieve, during which time we have been doing other things.

We are glad we did it.

I think the timing was quite good.

I am glad we are virtually done with that liquidity build.

I think you will see that this is a good, strong balance sheet with much more liquidity than before.

And I am glad we did it in the last year when probably it was more financially beneficial to do than to have to start it now.

So with that as a backdrop, we really positioned ourselves in every single way with belt and suspenders on being a very strong company able to handle any kind of downturn that comes along.

With that we are hoping will get the permissions from the Federal Reserve to be recognized for that and allow us to move forward.

Okay, very helpful.

Thanks, guys.

Brian Foran, Nomura.

Can I ask a couple questions on cards.

I guess, first, there is a lot of concern as the industry starts to grow again yields will get competed down.

And your card book is up.

It looks like it is up a little bit more than normal seasonality, if I'm reading it right.

But your yields are up as well.

And I'm talking on a quarter-over-quarter basis.

Is there anything -- I guess what is driving the yields higher?

You know the yields have a little bit to do with the revolver rate, and then a little but also to do with the reserve for credit there, which is improving on the interest margin.

So when you think about the interest reversals there is a reserve established, and as credit gets better that reserve gets better, so that is a little bit of a factor.

I think if you stripped those two things out the margin would be relatively flat.

I guess going forward is the old 9.2% to 9.3% the run rate or is the new 9.6% the right run rate to think about?

A little bit is going to depend on the revolver rate on a go forward basis, but I expect it to moderate down just a bit because, again, we did see some improvement in that reserve component, that improved the rate this quarter.

Then you referenced the 1% normalized charge-off rate for the Company, which at least when you first presented it back at the investor conference a year ago now, had a 5.5% credit card charge-off rate.

Do you still feel like that is the normal level, or obviously we are going to be below that for a while here, is there some argument that the new normal for cards is lower?

We are certainly not a 5.5% credit card.

Right now you see us in the mid-4%'s in the credit card.

And I think that is probably the kind of sustainable level you can expect.

It will bounce up and down, depending on number of days in the quarter and seasonality of spending trends.

But I think you will see -- of course, all of our portfolios, they are just at the high quality.

We don't have anything but [signed] in our portfolio.

We have some joint issuances with people like Kroger and we have some cobranded cards with some -- REI and others like that.

But they perform very, very well.

So I think you will see us over the course have a 4%-ish kind of a credit card charge-off, but we will continue to grow that book.

And it does so affect the total 1%, because it is a fairly significant part of our total charge-offs, but we think that is the right mix and probably the right quality to go after.

And we are not going to get greedy and try to reach further back and change the underwriting that we have under credit cards as the world gets maybe a little bit better.

We are going to stick with our old knitting.

I will just add.

Remember the 1% was more of a through the credit cycle type number.

So it is not at any given point in time.

And now we at fairly stable unemployment, so that is why we are seeing the good results right now.

(multiple speakers).

(multiple speakers) Bill Parker.

Professor Bill Parker.

If I could ask one last one on the same theme.

Just the overall competitive environment in cards, as well as the data you get to see from a spending perspective in terms of the health of the consumer, how would you characterize both?

I would tell you -- I was looking for Bill -- I thought he was going to answer.

I would tell you that we've got a couple of things that give us insight to the consumer behavior.

First of all, they are husbanding cash on the deposit side, and they are very, very careful using their money on the credit side.

So we expect to see same-store sales be a pretty good proxy for the kind of increase we will have in balance sheet as the season starts to heat up for the holidays, and then they will pay it back down.

People using their cash before they are using ours, so that is why you will see a moderate use of credit cards.

But are insight says that those that are creditworthy are actually pretty comfortable with their ability to use the charge card and to pay it down pretty quickly.

And we don't have anybody in our portfolio that isn't creditworthy, because we didn't have them in the first place.

And anybody who is on the margin they have since charged it off and haven't underwritten anybody new since.

You won't go to your mailbox and see a ton of U.S.

Bank direct mail.

We do a lot of this origination through our direct customer contact through branches and call centers and online.

We deal mostly with customers.

We know we will have other relationships.

And if we do extend it, it is through these partnerships with other, very high-quality companies that we have earned a sense of trust.

You may have seen the other day we introduced a new idea with REI where a customer can go into REI, make application for a credit card online, get approved while they are in the store and use the actual transaction as a credit line.

Those are the kinds of customers we will deal with, but we will only deal with them at a very high credit quality level, so that we are not reaching down to try to grow the balance sheet at the risk of putting some less prime customers on in the future.

So I think you will see.

What you see is we are a nice trajectory.

Everything in our Company is going to be a nice, steady, slow methodical recovery down to that average of 1% credit charge-offs over the course.

And you will see us sit there for quite a while, because we are going to continue to underwrite at that level.

Thanks so much.

John McDonald, Sanford Bernstein.

Richard, maybe just to clarify the commentary about the capital return, last year the Fed said requests for dividend payouts north of 30% would be given extra scrutiny.

Did they give any informal cap last year on like the total return that that should be limited to 50% or anything like that?

You noted that you had done about 45% at this quarter total return.

They did not.

Last year, in fact, buybacks were silent.

The entire issue last year was a maximum 30% for what we included as common and preferred dividends, which as you recall, is why we wanted to leave a little room and then go right to the top.

We haven't gotten any new guidance since then either, but we have had permission to move forward on our buyback plan, which is obvious, because we have been doing it.

So that came inter-test.

And now as the new test comes forward, I don't have any guidance on what they're going to propose, but given that they have let us get up to that 30% on dividends and approved us to do some actions on buybacks -- everything we did this quarter was within permitted bounds and 45% is the result, but it wasn't a target.

It just happened to be what we got to.

So I am hoping that our current performance and our future stress test guidance will give us permission to at least go from this point now forward from 45% and up toward that 60% to 80% that we spoke of with that.

And did those approvals around the buybacks that came subsequent to the dividend approvals, is that a quarterly thing or is that you could do this for the rest of the year?

There was a full-year view, so we had a full-year projected buyback plan consistent with capital ratios that we set out in our plan, and that was approved as part of the overall CCaR.

So what happened, each company did a different -- because the rules were so vague last time, and I will just give you an example.

We put a proviso in our stress test plan that said, if and when we get to a certain capital -- Tier 1 common capital level, without any of us knowing what the SIFI buffer would be, in fact, a year ago I don't think that phrase was even out there yet.

But if we get to this point, then do we have permission to begin the buyback if we never go low that stated level?

And that was the proviso that said yes.

And as it turned out, we actually got at that point sooner than we thought.

And we asked for permission to move sooner than we had originally thought and we got it.

So this is kind of the interim test, but it had to be set up as part of the structure in the first round.

And so a lot to learn, as we will make sure we set a lot of options for us to negotiate with them in the second year once we put out the CCaR in January.

Right, okay, got it.

That is very helpful.

So a question for Andy on the NII.

Outside of the impact of securities purchases, how have you been able to keep the NIM pretty flattish at a high level amid this kind of low and declining rate environment?

What are some of the puts and takes that allow you to do that?

Sure.

So, first of all, the margin on the loan has been relatively stable the last quarter.

We had seen a bit of a decline in quarters [2] compared to prior quarters, but it stabilized a bit.

Second, as we still had some room on the deposit side of the equation across both wholesale and consumer deposit pricing, we have moved down a little bit consistent with the marketplace.

We are still in the middle of the pack, but we had a little room there.

Third is we he continue to have -- we have had and continue to have opportunity in terms of debt maturities and then the reassurance of debt, and we will continue to see that in 2012.

And so all those factors are part of the equation that gets me to that 3 to 6 basis points.

Okay, and then maybe one for the professor.

Bill, what do you make of the flattening out of the home equity delinquencies?

Some other banks are -- sound a little worried about mortgage credit double dipping and turning in home equity, charge-offs may be going up.

Can you give us your view there?

This is -- there is definitely a little seasonal pressure this time of year, so that would be normal.

Ours stayed pretty flat.

We are further and further away from the originations that took place pre-2009 -- or pre-2008, and so we continue to work through whether it is modifications or just attrition of the older portfolios.

So that gives us some confidence that we will continue to see an improvement.

It will be modest going forward, because they are -- obviously with the home prices the way they are there is still a fair amount of pressure on those old vintages, but we have good modification programs that we employ for all the products.

This is Richard.

In the OMG category, don't forget, we had this amazingly high-quality credit portfolio for home equity.

If you look at anything we didn't grow a lot in the first half of 2000 it was home equity.

For our size you had to [take out], where were you guys, because you weren't growing it that fast.

We did it through people we knew.

And our customers are primarily people that we have other relationships with and are second, in many, many cases follow our own first.

And the people when we followed someone else's first they are underwritten at very conservative levels.

So that is -- of all the portfolios, it is probably our best, most pristine portfolio.

In the original stress test of August to April 2009, our numbers were so low in the forward view they asked us to take the next bank's -- the next number because they couldn't model our number being that low.

So it is a point of pride for us that we have really high-quality home equity and our branch originators understand that we will only do those kind of home equities.

So you will see very little volatility and risk as it compares to our peers.

And even with a little bit of pressure on severity from the home price, you still expect the charge-offs to grind down both there and in the first mortgage book too, Bill?

Yes.

Okay, thanks, guys.

Slowly, but surely, yes.

Underwriting comes through in (inaudible).

Thanks.

Betsy Graseck, Morgan Stanley.

Two questions, one on Durbin and then one on commercial real estate.

On Durbin you mentioned that you expect to be able to offset about one-third to one-half of all the regulatory issues including Durbin.

I guess I am just wondering over what time frame, and how much of that is in the run rate -- you mentioned some of it was?

Okay, so let's do our set up here.

We think that those three categories were the Reg E activities, the CARD Act and now Durbin.

And for that total we are expecting to achieve a 30% to 50% recovery.

We are right now at 30%.

That is in our numbers today.

To get to 50% I am going to take all of next year.

And the reason I'm going to do that is because we're not going to rush to judgment.

We are not going to make a mistake here, and we don't have to.

And so right now I'm making something very clear, we will not get that $75 million that we started the quarterly loss for Durbin beginning this month.

We are not going to try to hide it back this quarter, or even in the first quarter of next year.

We will start working our way toward different ways of charging for services that customers are willing to pay for.

We've got a great laboratory of watching a number of banks that have been doing the debit fee and we will learn whether or not that it is -- it allows us to grow assets.

We will find out if customers complain and move, or just complain.

We will take all that in time, and we will make our decision.

But over the course of now to the end of next year we will have achieved 50% of that total cost of loss, but it will take the rest of the year to get the extra 20%.

Okay, and so it is about $1 billion in total for all three.

And so you're talking about that $200 million or so in (multiple speakers).

Yes, yes.

And then on your slide deck you talk about commercial real estate, obviously, with all the other asset classes and n credit quality on page 25.

So I just wanted to see if we could dig in a little bit to how you're managing down the commercial real estate portfolio in terms of the NPLs here?

Obviously, you had a big improvement in construction and COs this quarter.

But when I look at the last couple of quarters the NPL decline in commercial real estate looks like it is coming down pretty similarly, a little less than the charge-offs in that asset class.

Is this just something that you will charge-off, and that is how we are going to get down the NPLs over time, or is there something else going on that could accelerate that?

No, it will stay lumpy going forward, but it is on a overall downward trajectory.

The overall construction book continues to climb.

I think it is 20% approximately year-over-year.

So as the portfolio -- the higher risk construction book continues to attrit, and as we work through the different deals, either we will do loan sales or take the charge-offs and just otherwise resolve the assets.

Okay, and does the current run rate of about $100 million or so decline in NPLs Q-on-Q what you would expect to continue or --?

Well, if you look there is a chart in there, and it is going to be lumpy, but overall it is on a downward trajectory.

Then could you also talk a little bit about the performing TDRs?

You indicated that was due to accounting.

But maybe give us some color whether or not you are dealing with them differently because of the accounting or not?

No, we don't deal with anything differently because of the accounting.

There are two things we did.

Historically we really only looked on the commercial side of those over $5 million, and we tagged them whether they were TDRs or not.

Now we basically go down to zero.

We have basically some formulas we run against the below $5 million to identify TDRs.

And then we use -- we just used internal rates for determining market rate and now we use an external benchmark, which is a little bit higher.

But it doesn't change how we handle customers.

Right, and they are all performing -- you don't have any nonperforming TDRs in this asset class.

Yes, there are definitely nonperforming TDRs too, but those have no impact, because you are already doing a 114, so there is no financial impact at all there.

Got it, okay.

All right, thanks.

Erika Penala, Bank of America Merrill Lynch.

My first question is a follow-up on Ed's question.

You seem very conservative with your tone with regards to reserve release.

But then when you were answering John's question you were very confident in the strength of your underwriting.

I guess is what is missing in the equation in terms of what is driving your conservative -- your conservatism, the continued uncertainty in how the economic recovery plays out?

No, it is the math.

We are at 130 -- what are we at -- 131 and we are going to be at 100 basis points.

So as you start to slide into that new run rate you don't have that much left.

And so I hope we actually get to the point where the reserve release ends.

It is the only thing I don't like about our numbers, because it is not sustainable, repeatable and consistent.

So it will come down just like a nice, slow slide into home plate.

It is just going to be steady and methodical, and eventually our loan losses will equal our charge-offs and we will be back to normal.

I just hope it is actually sooner than later.

Got it.

And just to follow-up on the margin.

We saw an 18 basis point compression on commercial yield.

I guess in terms of looking forward, do you expect a similar level given what you're seeing in the pipeline, given what you're seeing in terms of pricing, or do you think it will be a little bit lower for the [year]?

This is Andy.

That decline is really a function of the decline in rates overall in the marketplace, so when I talk about spreads I am talking about both the rate on the loan as well as the funding cost on that loan, which stabilized a bit in the third quarter.

So on an absolute basis it is down because rates on a relative basis it was down a little bit quarters -- up through quarter 2 and stabilized bit, and right now I see stabilization.

Okay, great.

Thank you.

Paul Miller, Friedman, Billings.

On the mortgage banking side, it is one of these areas I think you have been growing marketshare in, even though it is still relatively small.

But with Bank of America getting out of the correspondent business, is that something you guys are taking a look at?

And, secondly, can you talk a little bit about what type of mortgage loans you're putting on your books?

I didn't know if you answered in the beginning,, but we have been running around this morning, just what type of loans that you are portfolioing?

Right, so first I'm going to answer your second question first.

The loans that represent the majority of the increase are in two categories.

Number one is a product called Smart Refinance, that is originated at our branches.

It is a refinancing product for high-quality core customers that come through the branch.

The second category would be prime jumbo loans originated through our mortgage banking group.

So these are not Freddie- and Fannie-qualified, but again they are high-quality loans.

And then that Smart Refinance, I would note that the term of those is probably in the neighborhood of 15 years or less, so they are not long-term 30-year mortgages.

That is the principal area.

In terms of the mix of businesses and the way we originate from a retail and correspondent basis, I would not see a significant change on that going forward.

On the Smart Refinance, what type of yields are you giving?

Again, I will go from a spread basis, because that is how I think about things, and it is in the neighborhood of 200 plus basis point.

200 plus basis point.

And most of it is 15 years or less.

Yes, 10 to 15, yes.

And on the other issue, on your deposits, a lot of the banks are collecting a lot of deposits out there.

Can you talk about where that is coming from?

Does it mainly coming from retail or through your business relationships?

It is coming everywhere.

So, first on the consumer side of the equation, we have a number of products, Smart Savings and a number of different products that have allowed us to gain marketshare.

Richard talked about that.

You saw the FDIC data that indicated that.

So we are absolutely gaining marketshare on the consumer side of the equation.

On the wholesale, that side of the equation, it is additional cash being held by corporations as they strengthen their balance sheet -- additional marketshare.

And then finally on the corporate trust side of the equation we continue to build that book also, and that is adding to our deposit categories, particularly DDA.

So we are seeing it across all three categories, corporate trust, wholesale as well as retail.

And just on a percentage basis, is it an even mix across, one-third, one-third, one-third, or is wholesale like 56% and then consumer 20%, 30% just on that mix shift?

Yes, so wholesale is the majority of the increase.

And wholesale and corporate trust is the majority of the increase that you see in DDA balances, which is a big piece of the increase, and I would say the remainder is 50-50.

Okay, thanks a lot, gentlemen.

Moshe Orenbuch, Credit Suisse.

I was wondering if you could talk a little bit about given your comments about credit quality, particularly as they stand in contrast to some of the larger banks being a little more conservative, are there areas in which you think you're going to be taking even more marketshare over the course of the next 6 to 12 months from a loan perspective?

Yes, we are taking it now.

You will see it in the wholesale side, and it will be all the way from small business to middle market up to corporate starting backwards.

Corporate Banking, as you know, we are getting over the last few years, since we have really established our national Corporate Banking capabilities, we have been getting a lot more bites of the apple.

We have invited into more syndicated deals.

And now over the last year we are now leading a lot of deals and leading syndications and playing the lead partner for these companies, which is a big step.

Then, as you might have thought through this, the international banks are now not typically showing back up at the same level they were when there is a renewed syndicated deal, and so we are not only invited in, but we are invited up.

And so we're finding a lot of marketshare gain in deeper relationships and more customer -- more position with customers that are really, really impressive like corporate top Fortune 100 kind of customer.

The middle market, they really seem to appreciate the quality of the balance sheet.

They like our top rating.

And those companies are sophisticated enough to know they want to put their money and get their line from a bank that is really safe.

And we have been invited to do more business with them.

And particularly noncredit business has come along with the loans that we have had.

Gone through Bill's good work we have taken higher positions on whole levels for customers that we really feel good about.

And on small business we have been growing that like mostly like anywhere 9% to 12% in origination year-over-year, whether it is SBA or business lines or business loans on the small business side.

And we are getting a lot of new bites of the apple there because the Company's focus on small business in the last two years has been wielding a lot of benefits by changing the course of what used to be a bank that did small business when it was available to leading relationships now with small business and getting all the ancillary deposit and the fee businesses that go along.

So it is going to be anything wholesale.

You're going to see it; it is in our numbers now.

We are going to see it even more in the future.

And I will just recap by saying the opportunity presented by some of the international banks designed to change their posture is going to help a lot in the next year.

Just one other kind of separate question and that is, I think when we have talked in the past there have been some thoughts about acquisitions outside of the banking space and have been very quiet here.

What can you tell us about the environment?

What -- are there conversations, are there things we should be looking for, and what are your areas of focus in that?

And you mean outside of the traditional like --?

Traditional commercial banking, yes.

For us (inaudible) you just quoted corporate trust and payments businesses, and you will see more of what you have seen so far.

We keep looking.

We would love to grow those two businesses.

They are best capital use, or low capital users.

They are great fee businesses.

The cost of entry is almost zero for those who aren't in it, and those of us who are it is a scale business.

So we are not slowing that area at all.

We are not seeing perhaps as many deals to show you, but it is not for lack of looking.

And if I have my way, you will see continued branch and small bank deals, you will see continued corporate trust deals, you'll see portfolio purchases, and you will see opportunities for us in the payment space, which might include more mobile banking activity.

So what you will see is more what you're going to get, and we are going to do our best to keep filling the pipeline with those kind of small deals that come together in a nice way in the end.

Great, thank you.

Jon Arfstrom, RBC Capital Markets.

Just a quick follow-up.

How much of the commercial growth and the growth in commitments is driven by the wholesale and large corporate business?

A big part of it.

And that is probably the reason why I started -- I mentioned to Moshe's question backwards.

Let me just say that as I look at the wholesale -- traditional wholesale, which is the larger middle market corporate and commercial real estate, our line of credit continues to grow.

Our utilization is pretty flat, but it is only, in fact, a little bit down because we keep growing commitments by more and more.

So on a book of about $70 billion of commitments for those large -- larger corporate side, we grew in linked-quarter $4.1 billion in commitments.

So $70 billion going to $74 billion.

The loans themselves went from like 17 to 18 of about $1 billion.

So we continue to have nice growth, 4.6% on that book, linked-quarter on loans, but 5.8% linked-quarter on the same book for commitments.

So that also says people are positioning to continue to be ready for something when they are ready, and we are getting robust business across the board.

I would say if I had to split down the large C -- I mean the large corporate versus the middle market side of it, it would probably be two-thirds, one-third, so it is really happening at the corporate level at the highest level most.

And then just to follow-up on a comment you just made.

You talked earlier also about the confidence of customers and how utilizations were relatively flat, and you think you need confidence to lead the stronger balance growth.

I am just curious if you could give us some maybe qualitative stuff on what your customers are saying and how much of an issue is the confidence question?

So one of the stories of the U.S.

Bank this quarter would be that most of the new opportunities in Wholesale Banking is driven primarily by refinance activities.

And if we were only refinancing our own customers there wouldn't be any balance sheet growth, in fact, there might be margin deterioration.

But the best proxy I have for you is we are bringing in other people's customers and refinancing new credits for us, someone else's credits for them, at rates that are sufficient enough for us based on our cost of funds to be good.

And so the majority of it, it doesn't matter which of the categories I talked about, has a lot to do with refinance activities and coming to us.

They can also be in the form of a refinance and us getting a higher bite of the position, or in fact leading the position.

So by far that is the majority of what we are seeing here, it is really market shift.

Otherwise, it is customers who are either in M&A and we are getting a bigger piece of that, because more often than not our customers are on the M&A side of the transaction.

Or in many other cases we've got good ag businesses, in the Community Bank we've got this small business growth I talked about that kind of fills in the rest of the gap.

Okay, all right, thank you.

It's helpful.

Marty Mosby, Guggenheim.

A question is, when you do your Basel III calculation and you're only taking out from 8.5% to 8.2%, are you giving yourself any credit for the better than performance under credit that you actually can get a positive impact even though a lot of the legislation says we're not supposed to eventually get that, but are you giving yourself any credit for that as you go through that calculation?

No, is the short answer, because that is Basel II.

And our constraint is actually Basel I/III.

Our Basel II numbers are actually higher than our Basel III numbers, so I don't get to use any of that credit.

Okay, and then on what we are seeing in the commercial growth, as we are seeing really less access to market, less competition from alternative providers of this, is part of what we are seeing, especially with your commercial loan growth, just maybe the first sign of what may be a new paradigm for banking that the pie may be smaller, but we are going to get a bigger piece of it as we see business start to come back?

Yes.

(laughter).

I could repeat your answer, but that is exactly what we are saying.

I just think your positioning in the commercial side, that is the first place we are going to see it, because there are refinancing going on, and as they move back into the banking system you're getting the benefit of that.

Eventually that will roll down to the middle market, I guess, and also some of the -- you know, even closer to smaller business.

That is right on.

In fact, what I just told the numbers back to John and Moshe, our utilization of those large customers is like 24%.

And we just keep building more customers and more opens to buy.

When the recovery hits, and it will, I can't even tell you how much we have in terms of opportunity for our loan book to grow without adding one more new customer, because we are adding so many that are positioned eventually to take and use our balance sheet.

It is pretty good stuff.

Thanks.

Ken Usdin, Jefferies.

A follow-up question just on securities yield and deposit pricing.

I know you talked about these expectations for a slight margin compression, but I am just wondering underneath the purchases, first on the security side, the pieces that you're adding for liquidity, can you just give us some color on what is going on underneath in the securities yield, and do you expect that to hold up as you continue to reinvest going forward?

Yes, so we are -- first of all, I should highlight, we ended the quarter at about $67.5 billion, and we mentioned in the notes and in the call that we are going to probably end the year at $70 billion and sort of be in a holding pattern then, because we are going to be very close.

So the level of build is -- that remains is not significant.

So I will start there.

Secondly, from the prepurchase -- from the purchases I would say it is about two-thirds or three-quarters fixed, one-third or one-quarter floating.

And the fixed is probably just around 2% plus and the floating is probably LIBOR plus 1, 35 to 140.

Okay, I have got it.

All right, that is helpful.

Then, secondly, the all-in deposit costs and the all-in liability costs were stickier for you guys relative to a lot of other banks.

I know you talked about the ability to continue repricing the right side of the balance sheet lower.

Can you help us at all think about how much is left either in deposits or what you are doing on the deposit side?

And then also remind us about what you may have benefits from in terms of lowering the long-term debt costs.

I would say a good deal of the deposit pricing opportunities reflected in the third quarter, there might be a little bit more opportunity, but I would not call it significant.

We have between $7 billion and $10 billion rolling off over the next 12 to 15 months on the debt side of the equation that will offer us additional opportunity.

Okay, and is that -- so a lot of banks are talking about the ability to replace the entire deposit complex lower.

Obviously, with your interest checking and money market savings at 14 there is not much more you can go, but can you give us the amount of kind of where your go-to rates are on the CD side and what the rollup of the CD book is, kind of like you just did with the debt book?

The CD book does represent a repricing opportunity, both on new CDs as well as renewals.

But just from -- and you could see the math in terms of the balance sheet and income statement that it is not a significant component of what changes on a month-to-month or quarter-to-quarter basis.

Okay, got it.

Great, thanks for that.

I appreciate it.

Mike Mayo, CLSA.

You have talked a lot about your marketshare expansion in the commercial loans.

But 20% annualized growth in commercial loans, how comfortable are you with the credit quality?

Of the new loans, I guess, there are a couple of home deals in the syndicated loan market this past quarter.

I didn't see your name associated with that.

But you are seeing some signs that everything is not as good as it had been.

So I guess I am asking about the quality of the new loans, what you are seeing in the market overall, and if you plan to continue that pace of expansion?

The quality of new loans is excellent.

So we are very selective about how we go after the large corporate customers.

So these are companies we know well.

We can provide the full suite of services.

And you're right, we don't have any home syndications.

Which geographies are these loans in?

You have been consistent for the last year saying you are expanding, you're going to gain marketshare -- you are.

Is that more in the Midwest; is it the Southeast?

Where is it?

Well, the national corporate, it is a national platform so that is all over the United States.

If you compare back to a few years ago though, it is the out of footprint, because we didn't have it.

And now it is quite robust for us.

But in market we are growing there too, it is just that the net new -- if you could take a couple of year horizon it is really coming outside the 25 states, because of this national -- you know, gone from regional to national corporate bank.

How much of that -- say two-thirds of the growth came from wholesale, how much of that would be international -- I mean, capturing share from the international banks which are all pulling back?

(multiple speakers).

We don't do international, right.

No, no, no.

You know what I mean.

In other words, you had some international banks compete in the US market.

They are pulling back, how much of your growth might be attributed to that?

That has shown up just more recently.

That is (multiple speakers).

That is a more the last couple of months (multiple speakers).

It is our future growth.

It is what I'm going to be talking about in the next few quarters, I think.

And just -- I'm going to repeat the question, just so I know what to tell the people.

They say U.S.

Bancorp had 20% annualized commercial loan growth, you know, why?

Because we are taking more positions, higher positions with customers we have now gotten to know.

We are being invited to syndicated deals for the first time, and for the second time at a much higher level.

And we are growing new customers just the old-fashioned organic way.

Because I have added hundreds of new people in the last few years from a lot of really good banks, with really good skills and really good customers who now work here.

All right, great.

And one last completely separate question.

When you look at home prices through the end of next year what do you plan around, what kind of -- flat, down 2%, down 5%, what do you think?

This is Andy.

We are down 0% to 2%.

Okay, all right, great, thank you.

Matt O'Connor, Deutsche Bank.

NIM obviously held up a lot better than we have seen in other banks.

It seems like you managed the surge in noninterest-bearing deposits better than some.

How sustainable do you think that increase is, that $10 billion increase in noninterest-bearing since it is in the wholesale and corporate trust?

So first of all I think you're right.

Our treasury group works very closely with our consumer group and our wholesale groups in terms of pricing.

And we really try to target those solid customers and really try to work with the customers with different alternatives.

So we are not pushing customers away from the bank at all or charging them.

Second is, I do think that the growth that you are seeing reflects a little bit of the fact that the corporations are very strong right now in terms of their own particular balance sheets, and are not yet choosing to invest those dollars.

So we've probably will see some decline in those over time.

The final factor I would mention is that, as you know, there is unlimited insurance in DDA until the end of 2012.

So certainly in this environment that is a very safe place to put your money, and that may change once the unlimited insurance changes at the end of 2012.

Okay, that is helpful.

And then just totally separate topic, one of the interesting things that is probably going to happen in the next several years is some movement in the payments business in terms of how customers and corporate pay.

You've got obviously these changes in the debit card.

A ton of fees.

You have got mobile payments that is probably going to take off at some point.

There is stubbornly high unemployment, so there is a lot of government transfers.

Can you just talk about -- obviously, you are in a lot of the areas of payment -- can you talk about some of the new products that you have or are working on or some of the themes that you think you'll benefit from over the next -- not necessarily the next six, 12 months, but a little bit longer term maybe?

Yes, but six, 12 months as well.

Two categories here.

One is the consumers and mobile banking, online banking, capabilities are at the top of class.

And I have said a number of things about this Company over the years.

And a few years ago you never said U.S.

Bank and innovation in the same phrase.

And now you should put us at the top of the class, because we have spent a lot of time and energy with that enterprise revenue office and building a whole new set of -- a suite of new ideas and new ways to move money.

Because we are in the business of making money for corporate payments for 20 years, and now we extended that capability.

And I am putting money behind getting amazing talent and amazing skill to get this kind of mobile banking in the top of class, and you will see amazing things over the next couple of quarters.

Back to corporate payments, and the thing we haven't talked about much, but I am so glad we have it, 20 years ago the legacy of this bank started a corporate payments business, which you know is a huge government provider of card-based [key] payments.

It is a huge, kind of sophisticated way of treasury management on steroids, and moving money long before it was going to be popular or paperless.

And all that continues to grow and expand in terms of the capabilities we have.

By the way, the cost of entry there is too high for -- there is only four or five of us in this space.

So this corporate payments world is going to become very robust for us.

Customers are going to get smarter and don't want to move anything that they can't see in a nanosecond.

They don't want it on paper.

They want to have the next new idea.

So [while that] will appeal to consumers, we are going to be able to get even further ahead because of our starting position with our corporate and commercial payments.

So I am totally jazzed about both of those, and I am glad you brought it up.

There is obviously a revenue opportunity from this, but as people use banks differently as banks have to charge customers differently, does that make you think about the expense base differently?

We have seen one bank who was going to be very aggressive in expanding its branch network, talk about maybe toning that down a little bit.

I think you are more complete and haven't had ambitious expansion.

But just as you look out the next couple of years, you're going to be doing business differently and I would think that might mean some reallocation of costs.

Not really.

We kind of like where we are and I think we can handle the small nuances to the way we spend our money.

The branch network is probably going to go to 25 to 50 branches net a year.

And, oh, yes, that is exactly what we have done for the last 10 years, so it is nothing remarkable.

You know we have a disparately large position in what we will call grocery branches and on-site corporate and public location branches in the thank God category, because they are growing well.

They are exactly what customers want, the hybrid between be where I need you to be, but I don't need the same old-fashioned branch with marble columns.

And I will say over the next few years you will see, like everyone else, we are going to take the branches we do have, make sure that they pass the test of being locations for which more than check-cashing occurs, and we will probably remodel them in a way that makes them much more attractive as a point of destination for conversations and private discussions.

But, yes, pretty much what you have seen.

We are not going to make much of a change in course, because we like how it got us here and we don't have anything we need to either retrofit or back out of because of having been too excessive in the last couple of years.

Okay, thank you very much.

Matt Burnell, Wells Fargo Securities.

Just a couple of quick follow-up questions.

Richard, you spent a lot of time over the last couple of quarters talking about the investment bank and the gains that you have seen there.

I'm just curious as to what the trends were in the investment bank this quarter relative to underwriting volumes and things like that.

Obviously, the market has been pretty weak for underwriting, but at least in terms of your line of business numbers it didn't look as if the wholesale banking and commercial real estate numbers were down all that much.

So if you could just provide some color there that would be helpful.

Let me just say, a lot of the businesses I thought you were talking about were our fee business, where we provide the guidance and trust and support to our wholesale clients, which is growing very nicely, especially since it started from zero two years ago.

So for us it is icing on the cake.

And there may be deals that we are not showing you yet, because they either haven't come to market or they didn't come to market yet.

But we are now in conversations and the folks that we have in Charlotte and New York are at the top of people's call list as it relates to providing services for any kind of the underwriting or the high-grade activities.

In many cases that does drive more business on the balance sheet for us, but primarily it is going to be our fee business that you should look at that that really drives the benefit of that.

And I would say it is in inning three as this Company is growing its business and growing a respect and a capability, the talent is already there, we are ready for the phone string, but the market will find us as it continues to heat up.

Andy, you might put some numbers around that.

I would say that from the -- if you look at the commercial product revenue line, which is where the majority of that fee revenue lands, our high-grade bond business, our municipal underwriting business, I think in all cases we are building and taking share and building our -- moving up on the lead tables.

I think you should continue to expect that.

You are correct that the third quarter was down a bit in overall activity, but we were up because we continue to gain share.

And I think once the activity starts to become more robust we are going to move even more in those tables.

And then I might add, lastly, not unlike the conversation we had on the wholesale loan book, this business is going to be benefited by the foreign banks' decision to retreat from some of those participations and some of those levels of involvement.

So this will be another place where we will see, I think, robust benefits next year that are just starting to show up.

That makes sense.

And if I can, just a follow-up question on the commitments.

You mentioned the commitments are growing a little faster than loans.

I am just curious as to the trend and the pricing of commitments, if that has gotten substantially more competitive over the last couple of quarters?

It has kind of flattened out a little bit.

We did see year-over-year pricing come down 25, 30, 40 basis points.

But third quarter basically said it is still an uncertain environment out there, so people are still willing to pay.

And I would add, as this recession gets older, and as people start thinking through what is worth it to them, we are prepared to compete on price.

I have always said that, and I will say it again today.

We are not having to use it as much.

People have more and more value than even I expected them to describe to our ratings and to our balance sheet strength, and probably now our multiyear commitment and following through on things we had promised.

So we are actually not having to spend as much as I am willing to spend to win a high-quality deal, because they are actually coming to us saying, that is a fair price for the quality of our relationship, I will take it.

And then, finally, just a question on the CCaR exam.

Richard, am I correct in assessing the color of your comments relative to the 2012 exam versus 2011 as maybe the regulators being not quite so prescriptive this go around versus last time, maybe because of familiarity with the whole process, but also because we are a bit further away from the challenges of 2008 and 2009?

What you heard was my aspirations that I am right.

Honestly, I don't have any insight except the way they have treated us, and most -- and during the year the way we continue to communicate well.

And my hope is that distinction will be recognized.

I don't have a FactSet, and I really won't know until we do the second.

We don't even have two points to connect.

We have one test and tea leaves to read.

But so far we are prepared to perform well in the test.

And I hope that the teacher will give us the high grade and let us move on to the next class.

Fair enough.

Thank you very much.

Nancy Bush, NAV Research.

I have a small picture question for Bill and a big picture question for you, Richard.

I will ask the small one first.

So the impression is that credit standards have changed dramatically on the consumer side over the last few years.

Could you clarify whether that is indeed true at USB, and maybe give us your average FICO on the consumer side now versus where it was in maybe 2008?

Yes, and I have said this before.

In terms of U.S.

Bank and our underwriting, if you look at our cards or autos, our underwriting really did not change a lot.

In cards you have to make adjustments in a downturn based on region and stuff like that, but basically straight prime books.

The one area that did change, we changed along with the industry, was the 100% financing of a home, which we did some of that in our finance company and we do some of that on our home equity.

So backing away from 100%, we still do 90% home-equity inside of our branch.

So that is the one area where there was a change at U.S.

Bank.

And, obviously, even bigger changes in the industry.

And the average -- we do disclose on our residential mortgage and home equity originations.

They are in a schedule that we hand out.

And those FICOs I think they're in the 760.

Okay.

Richard, the question for you is this.

I think it is recognized in the banking industry that you're one of the CEOs who has pretty good relationships with the regulators, i.e., you are not out there yelling at them or insulting them in public.

So I would ask you, what do you see as the general relationship between the banking industry and its regulators right now?

And do you see in the -- where are we in this whole new regulatory revolution or evolution?

Do you see any new initiatives that are going to be coming down the road at us?

Thanks, Nancy.

That is a big one.

Let me say first of all we have a handful of people that are still in appointed or unconfirmed positions, and that is worth starting at.

Because until the comptroller, the head of the FDIC, are finally confirmed, and until the CFPB is finally appointed, you don't get the same kind of definitive answers, and you don't get the same kind of definitive progress on things when people are watching progress but not necessarily setting a long-term objective.

So I think we are a bit -- I would say I am frustrated by that, because I would like to have a better sense of where the endpoint is so we can all start marching toward that.

But directionally we all know where we are headed.

I would say if you take a look at the Dodd-Frank, you know, 20% of the home activity hasn't even -- has only been slightly accomplished -- 80% even yet to be defined.

If you would look at things like SIFI buffers, we're sitting in wait, wondering what will be called and what the number will be.

We are eager to know whether or not there is going to be a standard coming out of this CCaR test coming up that we just mused about here not knowing.

So the uncertainty is everywhere.

But I also balance it by saying and so it is has been that way for three years.

We have been operating under uncertainty for a long time.

We have been operating under a difficult economic environment for a long time, and so I think the answer to your question is -- nothing is getting more clear or progressing very fast.

But our ability to know understand that it is not thing to happen fast and our willingness to accept the fact that we have to make up some of the answers until there is a final one, is probably much higher.

So I believe that my peers and I are still frustrated at the highest level that we don't have better guidance.

But we are not in most cases frustrated or surprised by it.

We are now managing to kind of a new normal and understanding it will take quite some time.

And on the other hand, until you tell me I can't do something and it is not harmful and it is good for your customers and it seems to be in line with good regulatory behavior, then we are going to do it.

And we will wait and find out if they want us to change that later, but we are not sitting on our hands waiting for guidance on how to run the Company.

We're just trying to be a little more watchful.

So I would say because it is old and it is not that different we are probably more balanced in our view and probably not as surprisingly frustrated as we would otherwise be.

There was an announcement last week or a report that the CFPB is going to start examining mortgage servicers for hidden fees, etc., etc.

Do you expect that you will get targeted in that?

And do you expect that then they're going to go from mortgage servicing to credit cards, etc., etc.?

I don't.

I don't.

I will tell you why.

I think the CFPB is still a long way from being configured.

And in fact, I don't have a CFPB person assigned to me yet.

So we have no CFPB evident at U.S.

Bank.

And so until that time the OCC and others will continue to watch over what will be consumer regulations and we will watch it ourselves.

But I think when it comes to things like mortgage, there are so many other entities looking over that topic it would be surprising if the CFPB picked one of their first things to get in the middle of would be something that someone else is working on.

I think from talking to [Raj Dante], it is clear to me that they are going to stay pure on -- focused on transparency, disclosures, customer clarity, on all products -- it could be mortgage too -- but credit cards and mortgages to start, but it won't be intrusive or redundant to things that are being done in the more provocative sense of servicing rules and foreclosure exams and things like that.

I think they're going to stay pretty pure at first.

But we are really want more than anything is that we want them to appoint someone, so that the non-bank entities can be brought into the same umbrella of oversight that we all share.

And I think that is the most important thing we should look forward to.

Which is why I have always been a supporter of the CFPB, because I think it brings more guidance to a level playing field than it does additional work for those of us already doing it.

Thank you.

John Dunn, Meredith Whitney.

I think in the past you guys downplayed the idea of buying credit card portfolios -- sorry, commercial real estate portfolios.

It seems like maybe you have softened your stance on that.

Is that just because there are a lot of weak players out there and you might be able to get something at a good price?

Has your view changed?

No, we haven't softened our stance.

We typically pretty much don't want to underwrite stuff that big and that important and [not] know where it came from and know our customers.

It is not to say we wouldn't find one we might like, but the more recent deals we saw, we took a quick look and said, not for us and moved right along.

It is critical to us to know who we are doing business with.

That is not the space where you just buy indirect.

And we're not desperate for asset growth.

And I mean that in the nicest way.

We're simply not looking to go buy other assets because we have a balance sheet issue.

We can handle where we are now.

And eventually, gosh, I can't wait until these lines of credit get used and then we are going to be very, very pleased that we didn't over-encumber ourselves with loans we didn't know.

Great, much appreciated.

Thank you.

That was our final question.

Presenters, do you have any closing remarks?

Well, thank you, Tiffany.

I just want to thank everybody for their continued interest.

I am really proud of this quarter.

We have always said we want to focus on consistency, predictability and repeatability -- I call my CPR.

And I think we are getting close to consistent.

I think we are getting close to predictable.

And I certainly think we can keep repeating this kind of clean and non-jaundice performance of just doing business the old-fashioned way.

So I hope that is clear to you, and I appreciate the time you gave us today.

Yes, thank you all for listening.

And please, as always, if you have any follow-up questions give me or Sean O'Connor a call.

Thanks.

This concludes today's conference call.

You may now disconnect.