美國合眾銀行 (USB) 2011 Q4 法說會逐字稿

Welcome to U.S. Bancorp's fourth quarter 2011 earnings conference call. Following the review of the results by Richard Davis, Chairman, President, and Chief Executive Officer, and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. (Operator Instructions)

This call will be recorded and available for replay beginning today at approximately noon Eastern time through Wednesday, January 25, at 12 o'clock midnight Eastern Time. I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Thank you, Brooke, and good morning to everyone who has joined our call. Richard Davis, Andy Cecere, and Bill Parker are here with me today to review U.S. Bancorp's fourth-quarter and full-year 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 statements assumptions are described on page two of today's presentation, in our press release, and in our Form 10-K and subsequent reports on file with the SEC. I will now turn the call over to Richard.

Thank you, Judy, and good morning everyone. Our company achieved record net income for 2011 driven by record net revenue in the fourth quarter and for the full year. We accomplished this during a very challenging and uncertain economic and regulatory environment.

We are very proud to share our results with you today and I will begin with the highlights on page three of the presentation.

U.S. Bank recorded record net income driven by record total net revenue of $5.1 billion this quarter, which was 8.1% higher than the same quarter of 2010. Excluding the gain noted on the slide, the increase was 4.7%.

Total net revenue was a record, even after excluding the $263 million gain, and was driven by growth in both net interest income and in fee revenue. Total average loans and deposits grew year over year and we realized strong linked quarter total loan growth.

Credit quality continued to improve as net charge-offs declined by 7% and nonperforming assets, excluding covered assets, decreased by 15.2% from the prior quarter.

We continue to generate significant capital each quarter through earnings. Our Tier 1 common equity ratio was 8.6% at December 31, or 8.2% using anticipated Basel III guidelines, while the Tier 1 capital ratio ended the quarter at 10.8%.

We repurchased 6 million shares of common stock this quarter. As a result, we returned 29% of fourth-quarter earnings to our shareholders in the form of dividends and buybacks.

Detailed on slide four are our full-year 2011 highlights. As you can see, we achieved record net income in 2011 of $4.9 billion and EPS of $2.46. Earnings were supported by record total net revenue of $19.1 billion, a 5.3% increase over 2010.

You will also note that our strong capital generation allowed us to further build our capital position throughout the year. We repurchased 22 million shares of common stock in 2011. For the year, in total, we returned 31% of our earnings to shareholders in the form of dividends and buybacks.

The five-quarter trends of our industry-leading performance metrics are shown on the left hand of slide five. Return on average assets in the fourth quarter was 1.62% and return on average common equity was 16.8%. Excluding the impact of this quarter's two significant items, return on average assets and return on average common equity were 1.51% and 15.6%, respectively. For the full year 2011 we achieved a return on average assets of 1.53% and a return on average common equity of 15.8%.

Our net interest margin and efficiency ratio are shown in the slide on the right hand of five. As expected, this quarter's net interest margin of 3.60% was lower than the same quarter of last year and the prior quarter. Andy will discuss the factors that led to this change in just a few minutes.

Our full-year 2011 net interest margin was 3.65% versus 3.88% in 2010. Our efficiency ratio for the full fourth quarter was 52.7% and our full-year 2011 efficiency ratio was 51.8% consistent with our expectation that this ratio will remain in the low 50%s.

Turning to slide five, our capital position remains strong and continues to grow. At December 31 our Tier 1 common ratio under anticipated Basel III guidelines was 8.2%. At 8.2% we are well above the 7% Basel III minimum required and we believe we have adequate cushion to cover our SIFI buffer, which is an estimate at this time, plus a cushion to cover fluctuations in the balance sheet.

Last week we submitted our 2012 comprehensive capital plan to the Federal Reserve. We expect to pass the test and, importantly, receive permission to raise our 2012 dividend and continue our share repurchase program. Raising the dividend remains a top priority for this management team and for our Board of Directors.

As we have indicated in the past, our long-term goal is to return between 60% to 80% of our earnings to shareholders through dividends and buybacks.

Now moving on to slide seven, average total loans outstanding increased by $11.5 billion, or 5.9% year over year and 5.5% adjusted for acquisitions. Linked quarter average total loans grew by 2.4%, a slight acceleration from the 1.7% linked-quarter growth in the third quarter.

Significantly, new loan originations, excluding mortgage production, plus new and renewed commitments total over $49 billion this quarter. This represented a 13% year-over-year increase in new and renewed lending activity and a 7% increase over the prior quarter. Additionally, total revolving corporate and commercial commitments outstanding increased by 21.1% year over year and 7.2% linked quarter, continuing the trend we have seen over the past number of quarters and providing us with added confidence that loans will continue to grow as we move into 2012.

Total average deposits increased by $33 billion, or 17.3%, over the same quarter of last year while total average deposits grew by $7.9 billion on a linked-quarter basis, or 3.7%, with strong growth in corporate trust, consumer banking, and wholesale banking, particularly in non-interest-bearing deposits over both time periods. Our customers continue to hold historically high levels of cash, viewing our bank as a trusted partner in managing their financial needs.

Turning to slide eight, the Company reported record total net revenue in the fourth quarter of $5.1 billion, an increase of 8.1% over the prior year's quarter and 6.4% over the previous quarter.

The growth in revenue can be attributed to both our balance sheet and fee-based business lines as each has benefited from investments in growth initiatives over the past years. In fact, some of the negative impact realized in the fourth quarter from the reductions of the debit interchange revenue, the result of the Durbin Amendment, was offset by growth in the balance sheet and other fee income lines. Again, demonstrating the advantage of our diverse business mix.

Turning to slide nine and credit quality, fourth-quarter total net charge-offs declined by 7% from the third quarter of 2011 while nonperforming assets, excluding covered assets, decreased by 15.2%. This marks the seventh consecutive quarter of improvement in both measures. The ratio of net charge-offs to average loans outstanding was 1.19%, improving from the 1.31% recorded in third quarter.

Turning to slide 10. As the graph on the left illustrates, early- and late-stage delinquencies, excluding covered assets, were relatively stable this quarter with a slight seasonal uptick in the early stage delinquencies. On the right-hand side of slide 10 you can see that the trend in criticized assets continues to show improvement.

Both of these statistics provide us with confidence that net charge-offs and nonperforming assets will trend lower in the first quarter of 2012, although net charge-offs will show a more modest reduction than in recent quarters as the consumer categories continue to improve but at a slower pace as they move closer to stabilization at these lower loss rates. Given the fourth quarter's credit results and the expected improvement going forward, we released $125 million of reserves in the fourth quarter compared with $150 million in the third quarter and $25 million in the fourth quarter of 2010.

I will now turn the call over to Andy.

Thanks, Richard. Slide 11 gives you a view of our fourth quarter and full-year 2011 results versus comparable time periods. Diluted EPS of $0.69 was 40.8% higher than the fourth quarter of 2010 and 7.8% higher than the prior quarter, while full-year 2011 EPS was 42.2% higher than 2010.

Slide 12 lists the key drivers of the Company's fourth-quarter earnings. The 38.6% increase in net income year over year was the result of an 8.1% increase in net revenue and a decrease in the provision for credit losses, partially offset by an 8.5% increase in non-interest expense.

Net income was 6% higher on a linked-quarter basis. This positive variance was the result of a 6.4% increase in net revenue and a favorable variance in the provision for loan losses, both of which more than offset the 8.9% increase in expense.

Slide 13 details the notable items that impacted earnings in the fourth quarter of 2011 and other periods. In the current quarter, total non-interest income included a $263 million litigation settlement gain related to the termination of our merchant processing referral agreement. We also booked $130 million expense accrual related to mortgage servicing and foreclosure related matters. On a net basis these two items increased EPS by $0.05.

The fourth quarter of 2010 included $103 million gain from the sale of our long-term asset management business. This prior year's gain increased EPS by $0.02.

Moving to slide 14, net interest income increased year over year by $174 million, or 7%. The increase was largely driven by the $35.3 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 planned increases in the securities portfolio, growth in average total loans, and a higher cash position at the Federal Reserve.

The net interest margin of 3.60% was 23 basis points lower than the same quarter of last year due to the expected increase in low yielding investment securities in addition to the higher cash balances at the Fed. On a linked-quarter basis net interest income was higher by $49 million as the $8.8 billion increase in average earning assets was partially offset by the 5 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 continued to add liquidity on balance sheet.

The investment securities portfolio at December 31 totaled $70.8 billion. Assuming stable cash balances and the current Basel III liquidity requirements, we expect the investment securities portfolio to increase consistent with our overall balance sheet.

Slide 15 provides you with more detail behind the change in average total loans outstanding. Average total loans grew by 5.9% year over year. Excluding covered loans, which are slowly running off, average total loans increased by 8.5% year over year. As indicated on the chart, the increase in the average total loans was principally due to solid growth in commercial loans and residential mortgages.

Commercial loans grew by a very strong 15.8%. This was the fourth consecutive quarter of year-over-year growth in average commercial loans and the growth rate has improved each and every quarter. On a linked-quarter basis the 2.4% increase in average loans outstanding was also primarily driven by an increase in commercial loans, which grew by 5.6%, and residential real estate loans, which grew by 6.6% primarily due to refinance activity.

Slide 16 provides more detail on the growth in total deposits over the past five quarters. Average total deposits grew by 17.3% year over year. Excluding acquisitions, the growth rate was 11.7%.

On a linked-quarter basis average deposits increased by 3.7%, or approximately 14.8% annualized. Importantly, average low-cost deposits accounted for the majority of the increase on a year-over-year and linked-quarter basis.

Slide 17 offers more details about the changes in noninterest income on the year-over-year and linked-quarter basis. The 9.4% increase in noninterest income in the fourth quarter over the same quarter of last year was driven by the fourth-quarter 2011 merchant settlement gain partially offset by the prior year's gain from our sale of our long-term asset management business, as well as growth in deposits service charges, merchant processing fees, commercial product revenue, and mortgage banking revenue.

These positive variances were partially offset by lower debit card fees due to legislative-related changes to debit card interchange. The impact to this quarter's revenue was $77 million. In addition, non-interest income was affected by lower trust and investment management fees, principally the result of the sale of our asset management business late in 2010.

On a linked-quarter basis non-interest income was higher by $260 million, or 12%. This favorable variance was primarily the result of the merchant settlement gain and higher mortgage banking and merchant processing revenue, partially offset by the reduction in debit card interchange and seasonally lower corporate payments revenue and deposit service charges.

Slide 18 highlights non-interest expense which was higher year over year by $211 million, or 8.5%. The majority of this increase can be attributed to the $130 million expense accrual for mortgaging servicing matters. Higher compensation and benefits expense and an increase in professional services, primarily due to the foreclosure review project, which is expected to be in the run rate for a few more quarters.

On a linked-quarter basis non-interest expense was higher by $220 million, or 8.9%, due to the mortgage servicing accrual, compensation for professional services, and marketing and business development expense.

The tax rate on a taxable equivalent basis was 30.5% in the fourth quarter of 2011, essentially equal to the third quarter of 2011, but higher than the 27.8% in the fourth quarter of 2010. Slide 19 provides updated detail on the Company's mortgage repurchase related expense and the reserve for expected losses on repurchases and make-whole payments.

Our outstanding repurchases and make whole request balances at December 31 was $105 million compared with $115 million at September 30. We expect mortgage repurchase requests to remain fairly stable over the next few quarters.

I will now turn the call back over to Richard.

Thanks, Andy. To conclude our formal remarks, I will turn your attention to slide 20. In summary, it was a very good quarter and it was a very good year. We grew loans, commitments and deposits. We achieved record total net revenue in the quarter and for the year, with growth coming from both our balance sheet and from our fee-based businesses.

Our credit quality continued to improve. Our capital and liquidity positions remained strong. We earned record net income for the year and we achieved industry-leading performance metrics for the quarter and for the year; all this despite the ongoing challenges of an uncertain economic environment, increasing regulatory oversight and cost, improving but still elevated credit costs, and increased competition.

We end the year where we began, in an industry-leading position of strength. We are positioned to win and, in fact, we are stronger than we were a year ago and we are very well-positioned for 2012 and beyond, all for the benefit of our customers, our employees, our communities and our shareholders.

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

(Operator Instructions) Moshe Orenbuch, Credit Suisse.

Great, thanks. Richard, congratulations. You have kind of met the capital target that you have been striving towards, and probably exceeded it. The comments, I mean in your prepared remarks I guess you just kind of reiterated what you had said before. Any kind of additional discussion about the nature of how that process will work and what the timeframe to get to your long-term capital, you know, return targets would be, and how your discussions with the regulators have evolved on that?

Sure. Thanks, Moshe, for the comment and for the question. As you know, the CCAR input was put in earlier this month and we are waiting for our final result no later than March 15. At that point it's rather like last year, which was the first official stress test routine, we want to make sure that we pass.

It does seem like it's a binary process, so we were thoughtful about putting in both our dividend and our share repurchase requests. I would tell you that, while they are on the aggressive side and hopefully will be approved, they are not yet where we want to be at the end of this trip.

Accordingly, whether this becomes a semiannual activity or an annual activity, we are comfortable that we will continue to prove to the regulators that, first of all, our plan and our forecasts are sound based on a very steady history. We also think that our prudent capital management should benefit their willingness to allow us to move forward.

I don't think it's more than another year or two to get to where we want, to that 60% to 80%, but it won't happen in one fell swoop because we simply can't move as quickly as we would like to given some of the constraints placed on the test. But we are comfortable that we will be able to demonstrate the strength of the Company through this next pass and hopefully by March 15.

Great. And just as a follow-up, in terms of the loan growth that you have seen which has been consistent and improving, are there areas of market share gains that you are seeing things that might -- that we can look at into 2012 for that to continue?

In our company, and you hear this everywhere, a lot of the companies are strong; they are getting stronger, particularly corporate America, even in the community and middle market. In saying so you will hear that a lot of the growth is coming from companies doing refinancings.

And while that typically would sound like codeword for just rotating your own book, in the position that we are in where we are continuing to gain market share we are invited to those refinances, many of which we weren't in in the first place. So a lot of our growth is coming from honest-to-God market share improvement by getting bites into other companies that we weren't part of before.

I said last quarter and we are seeing continued, not huge, but a continued benefit from the European banks moving away from their positions in the syndicates where they are being invited for the first time in a position that they used to hold. Or more often being invited to step up in a position that we already had, given that there are less banks in some of these deals. And in more cases than used to be, because of our capital markets capabilities, we are invited now to lead some of these deals and get more business than we had before.

So for us it is market share gain. It's across the board; it's mostly customers that are strong refinancing and we are getting a bigger part of that. It's nothing more magical than that and I wouldn't call out any specific industry or geography that would really hearken a unique perspective at this point in time. It's kind of across the board, slow, steady, and as you would expect in a recovery that is going to take years.

Great. Thanks very much.

Erika Penala, Bank of America.

Good morning. My first question is on capital. Like Moshe mentioned, it's clear that you hit your targets early. And I guess I am wondering how you view yourselves relative to some of your peers once the US interprets some of the Basel III regulations, because we see press reports that are putting some of your closer peers at 8% Basel III on a Tier 1 common basis but that peer would be almost four times your size.

Richard, I know you have been cognizant of growing too fast. Is that going to be an advantage once we have the final interpretations in that because of your size you could hold a lower buffer to your closest peer bank peer?

Well, I think so. Five is a beautiful number and we are a distant five from the four. More importantly, Erika, as you know, we weren't deemed a G-SIFI and I don't think we were even close necessarily based on either our size and certainly not on our complexity.

So my hope is that we can continue to grow like we have, stay under that G-SIFI designation. As you know, the next peer above us, at least at the G-SIFI rule set, was a minimum of 100 basis points additional to the seven. We actually were given zero guidance on that. So in our case we have taken the prudent step of creating our own guesstimate on what our buffer might be when this is all said and done. We have also added, as I indicated in my notes, another buffer based on the balance sheet vagaries of how things move around.

I think we have been extremely conservative and, hopefully, as clarity comes along we will find that we actually have more put away than we need to knowing that we are already well above what we think is a conservative view.

So at the end of the day it's probably an advantage. On the other hand, scale advantage goes to the really big players who have balance sheets that they can leverage for different purposes. So it seems to be an offsetting benefit for those of us who don't have to hold as much and can be a little more nimble as we move forward through this recovery.

Based on sort of the color that you are getting with the CCAR process this year, it sounds like now is not the year or maybe even next year to take advantage of those differences. Meaning you are not going to be able to deploy that excess -- the excess capital positioning doesn't matter near term.

You know, not altogether. I mean we are not going to push the limiting and we are not going to go above the guidelines they gave us. But they gave guidelines for dividends; they gave no guidelines for share buyback. You put those together and you can get a pretty substantial total shareholder return outcome.

The nice thing about buybacks is, if for some reason an opportunity comes along, you can stop those and redeploy it into the opportunity that is present. So I think we won't get the exact mix we want right away because it will take some time for I think the government to feel comfortable for certain companies, particularly on a dividend basis to go to higher levels. But I think in total you will be pleased to see that if we get our permissions we will be moving very closely to our overall goal.

Got it. Thanks for answering my questions.

John McDonald, Sanford Bernstein.

Hi, good morning. Richard, it seems like you left some buyback authorization on the table this year. I wasn't sure if the $50 million was for this year, but just wondering do you have flexibility to do buybacks in the first quarter that are preapproved from last year's CCAR? Just wondering how that works.

Hi, John; this is Andy. Yes, we do. We carried over our authorization both on the Board level into the first quarter given the timing of the CCAR and we also have a remaining authorization from the Federal Reserve approval that goes into the first quarter.

One of the reasons we are a little lower this fourth quarter than last quarter is, as we mentioned, some of the vagaries of the balance sheet. You know the fourth quarter is when we have the pension debit that comes into play, and given the lower discount rate that increased by about $300 million. So we wanted to be sure that we hit our target capital ratio so we modified our buybacks to ensure that, and I think you will see us come back in the market here in the first quarter.

Okay. Then, Andy, on expenses, to what extent is the fourth-quarter expense number a good run rate for the first quarter? I know there was some seasonal items in the fourth quarter. Just wondering what are some of the puts and takes on expenses as you look ahead.

Right. So, John, I would say, first of all, obviously the $130 million mortgage-related servicing matter is a one-time item in nature. Also included in the fourth quarter was just under $40 million related to the consent order. That will likely continue into the first quarter, so that is not so much a one-time event but more of a run rate expense.

Then the first quarter has a little seasonally higher benefit rate but a little lower on the tax-related matters related to our CDC. So those are the gives and takes, but really fourth quarter didn't have a lot of unusual items in it.

Is there any color that you can give on the accrual for the mortgage foreclosure stuff this quarter that you gave?

There is not a lot more color that we can give other than what we talked about, which is it's related to mortgage servicing foreclosure matters and relates to some of the activities that you are reading about.

Okay. Last question from me; seems like the securities purchases have gotten you where you want to be liquidity wise. Did you give a near-term outlook on the NIM? If not, do you have one on the net interest margin?

Yes, so you are right first regarding securities. We increased our securities portfolio $19 billion from a year ago and we are just over -- at an ending balance just over $70 billion. As you know, most of that addition was related to building our LCR ratio which we are going to sort of hold right now until the final rules come out. So the growth in the securities portfolio will be more consistent with our overall balance sheet growth going forward.

Related to margin, the 5 basis point decline from the fourth quarter versus the third was principally due to that securities bill. As we look into the first quarter, we are going to have a relatively stable margin except for our cash position at the Fed which is a little bit higher. So I would expect margin in the first quarter, given the current cash position, to be down 3 to 5 basis points.

But importantly, net interest income will be more stable than that. The margin is impacted by the cash balances, but not the net interest income overall.

Okay. And those cash balances are just growing because of your deposit growth and not having any other alternatives for it?

Right. We have tremendous deposit growth, as you see in the numbers, which is exceeding loan growth. What I will tell you is that we do have debt maturities that occur throughout 2012, but most of those start in the second quarter so we will be able to redeploy that in a different way. But in the first quarter we are likely to have a little higher cash balance at the Fed.

Okay, great. Thank you.

Jon Arfstrom, RBC Capital Markets.

Good morning. Just a quick follow-up on the margin. What are you seeing in the commercial loan yield? It looks like they are down again this quarter but may be not quite as much as the previous quarter. Is that primarily the large corporate growth driven or is there something else driving that?

Jon, this is Andy. The overall margin yield is down more on a year-over-year basis than quarter because of the mix of floating versus fixed rates. What I will tell you, though, is the spread on large corporate loans has stabilized here in the fourth quarter. We did see some decline that occurred in quarters one and two and a little bit in the first half of three, but I would term it stabilization in terms of spreads in the fourth quarter.

So it's possible that that decline will start to abate?

That is correct.

Richard, just a bigger picture question for you. Where -- acquisitions have been very slow in the industry; where is that in terms of your interest list? Do you see any help on an increase in activity and maybe compare and contrast bank versus non-bank in your interests list?

Thanks, Jon. We will start with the latter. Non-bank we are both interested and believe there are opportunities, so that follows the path we have taken for the last three or four years.

Corporate trust businesses continue to come our way, mainly because I think companies without a real scale are saying, why are we in this business? And if we aren't, [really] going to be great at it; the cost of having to invest in it is pretty high. So I think we will see more of those opportunities.

They are very scalable. They are add-ons to what we have in corporate trust. Likewise, payment portfolios, particularly credit card, have come our way, as you know, most recently. There will be more of those opportunities because we have a scalable business and I think we have built a real nice reputation in the business as being a great acquirer and a very seamless transition-capable company. So those will continue.

As it relates to traditional bank deals, there will be -- opportunities will come along and I have always -- my favorite line is an opportunity won't be missed if it comes along. But we are not putting it into our strategy as necessary. So if a small FDIC deal came along, the likes of the New Mexico deal a year ago -- first of all, because we don't have anything in the queue now that would otherwise disrupt it -- we will be interested.

And if we can find a deal that would be small and fits in nicely to our current footprint, we will probably do it if it's at the right price and makes sense. If it doesn't either make sense or look right, we are not going to do it, and if it's out of footprint we are not touching it.

As it relates to the bigger deals, the deals that would be more headline likely, if those opportunities were to come along I think we either have the capital. I know we have the regulator confidence, and I believe the Street would accept a deal if we were to look at something and have a capital raise, but it's not one of our goals. It would just have to be something so undeniably good that you didn't want to pass, that you don't want to overlook, but we are not necessarily expecting it. If it happens, it will be an opportunity we won't miss.

All right. Thank you.

Matt O'Connor, Deutsche Bank.

Andy, just following up on the NIM, as we think out medium and longer term, just keeping the rate environment stable, it seems like you do have some levers on the long-term debt that you mentioned earlier. Some starts to run off in 2Q. But also if I look at the short-term borrowings the rate on that is pretty high, so I am just wondering how you think the mix is going to evolve over time with all this good deposit growth and maybe some run-off of the wholesale borrowing.

So, one, how does that progress? And then, two, obviously the impact of the NIM; what do you expect that to be?

Right. So, Matt, the way I will answer that is if I look at the last 12 months, if I take out the securities build and the cash position, our NIM was relatively stable, almost flat. As we look into the first quarter and we looked at the fourth quarter here I think that same phenomenon holds true.

So the negative next year will be the securities portfolio reinvestment. The positive will be the debt maturities and the coming on at a lower rate, and those two things sort of offset. So as I said in the first quarter, maybe down 3 to 5 basis points principally due to that cash position. We also talked about the fact that loan spreads overall are stabilizing.

Okay, so off the 1Q level relatively stable both 2Q and going forward your best guess at this point?

Yes, I am going to stick to that sort of 90-day outlook. And, again, the 90-day is down 3 to 5 basis points.

Okay. I guess is there anything unusual in your short-term borrowings, that $30 billion or so at a rate of 161 basis points?

Yes, there is, Matt. We have our corporate payment systems rebates which go through that line and that looks -- it causes the rate to look a little higher than it really is.

Okay. And then just separately, the whole merchant lawsuit against Visa and MasterCard over credit card interchange, any thoughts on that or the timeline of progression there?

No -- this is Richard -- not really. I mean this thing is age-old. I think you know as much as I know about how much was put away years ago for potential litigation in Class A shares. At this point we are not aware of anything more than you are and at this point I don't think we make any decisions based on information that is not current.

I guess if there was ever a settlement charge I believe you are carrying your Class B at cost, so you are probably a little better insulated there versus some banks that have sold their shares.

Yes, that would be accurate.

Okay. And the wildcard is obviously the interchange rate if there was ever any [reduction there].

Oh, yes. Yes, that would be a wild card, capital W, right?

Okay. All right, thanks very much.

Brian Foran, Nomura.

Morning. Just on the merchant processing services fees and the acceleration in growth, I know some new business initiatives were referenced but also some accrual reversals. Where do you think the kind of core year-over-year growth trend is going forward relative to the 17% we saw this quarter?

So, Brian, the same-store sales, which is a principal driver of that, was up about just under 4%, 3.8%. Typically, we grow just above same-store sales because of the fact that we are booking and gaining share and booking new merchants. So I would say, if you think about same-store sales at 4%, perhaps a couple points above that in terms of normalized growth rate on an ongoing basis.

And then in cards, you are one of the few who has been able to grow balances recently without giving up on yields, and your yields are actually up a little bit. Is there anything obvious you are doing different than peers -- types of businesses or the offers you are running or some of the acquisitions you have done recently -- that is driving those yields to go up?

It's Richard. It's all of those things. First of all, we are not aggressive acquirers. If you go to your mailbox, you won't see us as often and if you do you won't see these 18-month zero interest rate whatevers. We just don't do that because we want to book sustainable, repeatable kind of clients. So number one.

Number two, our branches have kicked in big time in the last couple of years and become a much more significant part of originations where the relationship now is part of the checking account and the credit and debit relationship. And so those are much higher quality customers and the cost of acquisition is substantially lower.

Then, lastly, you were right, the acquisitions that we pick up. We only pick them up, not for an asset build because we don't need that. It's only because we think it builds on the core capability we have to expand that business line and grow the revenue that we picked up and extend the relationship, not because we just think it's an asset pick up.

So all of those and I think it goes back to our very conservative approach to underwriting. While we will miss volumes and give up what others might go for in the near term, one thing you can count on is we won't be apologizing for it a year or three years from now.

Great, thanks for taking my questions.

Ken Usdin, Jefferies.

Hi, it's actually Ian Foley for Ken. Quick question on the mortgage banking run rate; obviously high this quarter given the refi activity. Any thoughts on what industry volumes reset to and where gain on sale margins go from here?

Well, we did have a strong quarter and part of the reason was the increase in production versus the linked quarter and part of it was the increase on gain on sale.

As we look into the first quarter I would say that we sort of see stable levels. About 70% of the activity in the fourth quarter was related to refinance activity and that is driven by the low rate environment. And that continues as far as we can see here in the first few weeks of January.

Things our strong; I think quarter four was our second-largest quarter in history and 50% over quarter three. Quarter one is typically seasonally lower just because of the weather and the histories that we have all seen, but we expect that nice trend to continue. It's one of our core strengths and we like exactly the amount that we do at the level we do it. It's a good companion to the rest of the loan growth that we have.

Got you. And one quick follow-up on -- I wanted to ask on corporate payments. Year-over-year growth turned negative after a couple good quarters of growth. Wanted to know if there was anything you could offer there.

It's slightly and it's partly because of the government business that we have. Our corporate payments are huge for Corporate America, but they are also very significant for government businesses.

First of all, quarter four is the worst quarter of the four because quarter three is the best. It's the way the annual government calendar works and so that is usual. Slight year over year would be just the fact that there is a gestation right now by all government agencies to be watchful on what they are spending, as you so well know, given what has happened with the potential deficit.

So it's not significant. We don't expect it to get worse or better in either direction very much and the rest of it is just seasonal, so I wouldn't read much into it.

Got you. Thanks, guys.

Betsy Graseck, Morgan Stanley.

Hi, good morning. I just had a couple of questions on the mortgage sourcing matters, the [130] in the quarter. I know you mentioned that it was going to be continuing for the next couple of quarters and the question is two-part.

One is are you implying that we should be baking in $130 million a quarter for the next two or three quarters? And then I am just trying to understand why it's over a couple of quarters as opposed to just being done all at once.

No, Betsy, I am sorry. Here is what is happening, the $130 million it's a one-time event. In addition to the $130 million, in our Professional Services line we have about $38 million of servicing-related expenses related to the consent order. That $38 million will continue, that is a run rate item. The $130 million is not, that is a one-time item.

Got it. Okay.

Yes, thanks for the clarification because I would not want that to be mistaken. We are not putting any of the run rate costs into that reserve. We are simply putting a one-time issue out there for potential matters that we are working on right now with the government agencies and they are not related at all. Really to each other, in fact.

Okay. And the $38 million just goes into the expense line?

It's in there now.

And that is there in 4Q right now?

Exactly.

Okay, great. All right, thanks.

Paul Miller, FBR Capital Markets.

Yes, good morning guys. Just following up on Betsy, can you talk -- can you elaborate a little bit more on potential matters? It seems like this is popping up in a couple other earnings announcements and I think it's confusing the Street exactly what this stuff is.

Yes, no. I mean only because I don't really have that much to offer you. We have estimable and probable beliefs that there will be some discussions between some regulatory agencies and some government agencies on this matter that you know about, which started with the AGs a year ago.

It is accurate that the banks beyond the big five have been invited into the conversations and for that we believe we have something that we need to reserve for. But to the extent that there has been no settlement, there has been no final decision, we don't even know exactly who that would end up being for, I feel comfortable that the amount is a good predictor of putting something behind us. But it's not necessarily intended to be the final answer and it's not necessarily intended to be reflective of having completed any final decisions.

So, not to put words in your mouth, is this to the AG robo-signing lawsuit that they are trying to expand to the top 14 servicers?

It's partly that, Paul. It's related to any of the mortgage activities that you have read about in the last year where it could be AGs, it could be agencies, it could be regulators -- any of whom may want to levy any kind of an assessment against the banks that have been part of that consent order or found outside the consent order to have done anything less than perfect in the mortgage servicing area. And you know we are part of that discussion.

It's not a very substantial thing for us, but we thought appropriate to go ahead and call it now, get the majority of it behind us, mark it into a reserve. Then we will provide some details around it as we get them in the coming quarters.

Okay, so this is not reps and warrants; this is just related to the servicing side of it?

That is correct.

You talked about you had some nice growth on residential lending and you talked a little bit about that is coming from refi activity as you guys are growing market share in the mortgage business. Can you elaborate a little bit more on exactly -- are these all jumbo loans? Are these 30-year fixed-rate loans? Are these 5/1 adjustable loans? What type of parameters are you putting on to the balance sheet for these resi loans?

Yes, this is Bill Parker. There is two main pieces; there is -- about two-thirds of it is jumbos, a lot of it coming through our private client group activity, but another part of it is much smaller refinances that we do out of the branches. Those are very low loan-to-value. Those are fixed rate, primarily fixed-rate loans; generally 15-, 20-year fixed-rate loans. They are shorter amortization loans.

And on the jumbo loans, what type of -- are they usually 30-year, are they 5/1s? What type of rates are you giving on them?

We stay competitive with the market, so the spreads are -- the all-in rates are 4% right now and we do do ARMs there. We do do 30-year fixed so (multiple speakers).

Are they mostly -- are the jumbos mostly ARMs though or is it a mix?

It's a mix.

Thank you very much, gentlemen.

Marty Mosby, Guggenheim.

I had a question about the growth in investment securities. It seems that you are diverting that over to the held-to-maturity instead of putting it in available-for-sale. Is it a product that you are putting over there, or what is your thought process about putting it in that category?

Marty, this is Andy. Most of our security purchases that we have increased over the last year related to the liquidity coverage ratio under Basel III, because we intend to hold those, have been put in the held-to-maturity category. Part of the reason for that is the volatility around the capital ratio does not include held-to-maturity, so we are trying to manage the volatility, and, given the fact that we are going to hold them, we thought that was the prudent place to put them.

So it's a kind of defensive measure for when rates go up you wouldn't have to take the haircut into your common ratio, capital ratios?

Right. Only available-for-sale goes to the Basel III ratio.

Right. And then when you look at loan growth, you are really looking at commercial and industrial and the residential side, which in my mind really reflects the consolidation back within the banking sector. In other words, there is one part of the economy that is working is C&I. You all are positioned to be able to capture more than your fair share of that.

Then on the mortgage side, again, you are being able to retain. So those are the two places that we are seeing some real traction in the economy and a shift back to banking.

That would be fair. You know we do see -- at U.S. Bank I think we are different in this category, small business. We have had amazing growth in the last couple of years, including just this last quarter. Linked-quarter growth was 1%; year over year is 5%. The deposits are almost three times those statistics.

The reason for that, Marty, is small business was an area that we really started to put putting an energy in a couple of years ago. It takes a while to get both the front and the back office reset. The branches are now much more capable calling officers and small business underwriters, and to the extent that we have been able to accomplish that we are taking probably as much or more market share in small business than we are in anything else at the bank, including large corporate.

It doesn't move the needle very much, but for us it's a very important undertow for the kind of future growth that we can expect, especially when small business America starts to pick up and the recovery hits. So you can't really see it in the numbers too much.

Then we are actually -- we are hanging in there pretty steady on autos and home equity and the other consumer loan categories. You can see we are one of the few that ever has absolute growth in those categories. We don't do it on giving up margin; we just underwrite high qualities. And we never underwrote at levels we couldn't continue through the recession because we didn't stretch in the first place.

So I think across the board virtually all of our categories show some form of strength and on a relative basis I think are top of the class.

And just lastly, on your payout ratio you said long-term 60% to 80% range. You kind of then in answering another question said that we might not get to that range. Is it not that you wouldn't get closer to the bottom end of that range at least next year?

So you can do the math, but I have made it clear we have gone to close to the level that we have been permitted to on the dividends in the CCAR, and that would be something below 30%. If I wanted to get to the 60%, I would have to do at least 30 or request that of the buybacks.

And we are in that range, so to the extent that we get permission for that then we will get into the lower end of the range that we have offered. But as I also said in the earlier response that it may not be an exact mix I want, not in one fell swoop. So we will get there over time and I think we will make a good step forward in the next couple months.

Thanks.

Mike Mayo, Credit Agricole.

Hi, this is Chris Spahr on behalf of Mike. I just have a question regarding the consumer banking business line and the efficiency ratio. It's in the low 60%s for a while now and I am just wondering where you think it can go over time as the mortgage expense reduces.

If so, will you be shifting your overall efficiency target from the low 50%s to the mid-40%s where it has been prior to the crisis?

You know, Chris, it's funny. Don't be disappointing me, but we don't ever look at the efficiency ratio as a measure for the consumer bank. It's just an outcome.

You are right in knowing that we put our national consumer business, lending businesses, and our mortgage business in the consumer line, so to the extent that the mortgage costs are higher during this consent order and the cost of compliance that is definitely a nonsustainable activity. I will also remind you the branches are the biggest part of that, and right now a branch doesn't make as much money as it used to unless it can get back to making a lot of loans at really nice margin. It's a big data deposit collector at amazing levels and that is actually an expense to them the way we collect it.

So, overall, I am not surprised it's higher than it has been on the run rate and we actually are quite a big believer that the branches have a role in the future. It might be a slightly adjusted one, but I wouldn't read too much into that except to say that given the moments in time for the reasons I described it's probably looking less efficient. But as a collector of deposits and a creator of credit cards and things that I mentioned earlier it has still got a great deal of value here.

Thank you.

Nancy Bush, NAB Research, LLC.

Good morning, guys. Richard, could you just talk a little bit about your outlook for the payments businesses as a whole? I mean given the sort of slowing global environment we have got right now is that still going to be a growth area for your company and is that going to be a target for acquisitions?

Good question. Yes and yes. As it relates to growth, one of the reasons is because we were primarily a merchant acquirer domestically for a few years. A few years ago we moved into Western Europe in great stead; now we are moving into Eastern Europe, Central America, Mexico, South America.

Those are all actually good moves because those markets, some of them are actually -- have a higher forecast for growth than the ones that we are in. And we are growing substantially in all of those markets, even the old-fashioned ones. So I like the fact that our growth is greater organically than maybe the market share is growing itself, but we get this chance to, I think, grow on a [trebling] basis.

Acquisitions, absolutely. This payment business that we created for acquisitions, this international payments capability, it's really plug-and-play. So when we went into Brazil last year we were literally going in there and in a matter of a couple of weeks we were able to transact for merchants in Brazil in their native currency and be up and running faster than anybody else who came into that kind of expanding world.

On the traditional credit card, both corporate and consumer cards, we still like the business. Absent some big surprise where someone could take away the metrics and value of what it is to be a card issuer, it's a great relationship tool for our customers. They like the rewards programs, which I know we have some of the best cards. We compete very effectively with these mono lines and those who are doing this as a majority of their business.

So we are going to keep growing it; I think we grew our portfolio more than most. If I can't do it organically, I will continue to seek acquisitions in the more traditional credit card.

So we like it across the board. I see it as a cylinder that has been operating at 60% during the recession, but just ready to be revved into things when the world gets better. We will take here; we will take it overseas.

And also, I was going to ask you a question about the sort of changing view of branch banking in the industry right now. You alluded to it in the prior question saying that branches will still have a role, although it may be altered. Can you just talk about that a little bit?

I would be happy to. First of all, the transaction activity in a branch is more likely -- I think we all agree is going to come down. People have, with mobile banking and just changing behaviors, they don't see the need to come into a branch as often as they used to to meet with a teller for a non-consultative activity just to move money across the counter. So that is what starts to change.

But I think we also see an entirely higher value of this guidance giving, consultative role that you have for an investment decision -- a trust, a long-term family trust, an opportunity to buy a home. In this case, with interest rates low you can't see the value of what branches will become.

When rates start to move up again and the traditional old-fashioned CD which just rolls over on its own starts to become less attractive, like it was five or six years ago because there is a less insured alternative in a mutual fund or an annuity that really deserves a lot of conversation and some eyeball-to-eyeball opportunity, boy, branches will kick in big time and we will have all kinds of opportunities for them to become more effective.

So my view of the branch is you shrink the teller line, you increase the privacy areas, you change your hours, you make yourself more available to people when they need to come and talk about something private and personal. You probably have a different staffing composition, but you still have those locations on the corner of Main and Wall, I guess, for people to come in and do what they can't do over the phone and probably for a long time won't want to do online.

Thank you.

Todd Hagerman, Sterne Agee.

Good morning. Just, Andy, a follow-up in terms of the fee outlook and Durbin in particular. You mentioned that there is a number of kind of strengths in term of the fee businesses to help offset that. I am just curious, again kind of follow-up on the previous question on the merchant payments business.

There was commentary in the release surrounding some pricing changes and in part tied to some of the legislative mitigation efforts. I am just curious with that does that mean you are potentially accelerating kind of that 50% offset target that you had previously mentioned?

So that was considered in the 50%, Todd. So just to be specific, $77 million was the impact of Durbin in quarter four. Full-year run rate is just over $300 million; quarter four is the first quarter that reflected it.

We do have some mitigation in there as we have talked about before. I would say we talked about 30% to 50% mitigation and right now we are on the low end. We expect to continue to have different pricing mechanisms to get us closer to that 50% by the end of 2012.

Okay. Is that something, again outside the payments business, but something more along the lines in terms of traditional consumer pricing, product packaging that sort of thing?

Right. I would say the principal mitigation is our Checking With Choice product, which is a product that charges for a checking account but has very clear, clearly articulated methods to not be charged. $6.95 with electronic statements, $8.95 with paper, but there are a number of mechanisms that customers can undertake to not be charged. It's very clear and it has actually proven to be a quite popular product.

Okay, great. Then just unrelated, just in terms of credit on the restructured credit line, I am just curious, Bill, when should we expect to start seeing kind of that inflection point on the restructured line? Just obviously been a very successful program for the Company. I am just curious as we get to the later stages of the cycle when we might start to see that potentially moderate.

You are looking at the troubled debt restructuring?

Correct.

Because of the accounting changes that took place third quarter and then fourth quarter it's probably still going to go up for the next several quarters before it's truly in flex. So I would actually think later in 2012.

But some of the categories -- we are starting to see maybe fewer modifications now on the residential than we did. And that is just because we are getting further and further into the cycle and our delinquencies keep going down.

Right. And is there any impact or opportunity as it relates to kind of the new HARP 2 program that came out? Is that influencing that at all, or is it again kind of the majority the proprietary mod program that the bank has implemented?

Well, the HARP will be primarily on our service portfolio -- our Freddie, Fannie, agency portfolio -- so that won't be in our on-balance-sheet numbers. So the on-balance-sheet is proprietary programs, HAMP programs, that is what we focus on on-balance-sheet.

Great, thanks very much.

Chris Mutascio, Stifel Nicolaus.

Thank you, good morning. Richard, I wonder if you can help me out with a macro question on C&I loan growth, and if you covered this in your opening remarks I apologize.

But some online banks are saying or all online banks are saying somewhat the same thing that line utilization rates really are not improving and we are taking -- the growth we are getting is we are taking share from others. If that were true then it would be a zero-sum game when I look at the H.8 data. In other words, the C&I loan growth and the H.8 data wouldn't show the growth we have seen over the last three to -- two to three quarters.

So where is this coming from? And more importantly, could some of the growth be attributable to customers taking advantage of accelerated depreciation on CapEx before year-end?

Well, the last part is yes for sure and we think that that was present everywhere. I am going to agree with you emphatically. I mean for years I have sat here and before I was even a CEO saying how can everybody be growing market share if it isn't growing that fast.

And the H.8 data sometimes surprises me because I think we have probably the best loan growth and sometimes it sounds like we are right on average. So I think it misses some of the refinances, some of the portfolio sales, and the movement in and out of the system. I think it's a gross number so I don't count on it, by the way, as too much of a proxy. Maybe just a direction on trends.

I will tell you this, though, the C&I loan business is strong because customers are now mature in this recession. They know what they are doing. They have reset their balance sheets. They are hording cash to be prepared. If there is an M&A opportunity it's coming to the bank in the form of a loan or a financing opportunity.

If they are going to do some form of growth, they are going to come to the bank only after they have extended their own deposits. So I have said this before but as long as, Chris, the money in the banks are this high and much of it's coming from corporations and consumers, it's your first proxy that they are not going to use the lines of credit they have.

In our case -- we all do our own definition -- but we measure our wholesale lines of credit, not consumer, and we are as flat as flat could be for the last couple of quarters. We are growing commitments like 11% to 12%, but the reasons we are getting a reduced to flat utilization is because the people we are adding aren't even using the line they are getting at the level at the level that our current book is.

So it's good news when things pop, it's an expected outcome when people are trying to prepare for potentially a future that they didn't want to be surprised again, but it doesn't really put any money in the bank except for the original -- origination fee.

So I think it's okay for you to hear that utilization is down or flat. It's consistent to say that commitments are up, so people are booking more. Those are actually related. But I do think that the H.8 data is a gross number that overestimates some of the activity in the business because I don't think you are seeing that much loan growth altogether, not on the net.

If people are taking advantage of the accelerated depreciation, would you expect C&I loan growth to slow in the first half of 2012 versus the second half of 2011?

As a matter of fact, I think that will. It won't be just for that. It's seasonal anyway, but we have enjoyed a really robust continued trend.

We will continue to grow our loans. It will be something less than this quarter but more like last year in the first quarter, because we don't see that same robustness and I think it has a lot to do with what you just said. But I am not trying to telegraph we won't have growth. I am just telling you that the 2.4% total book was probably a high-water mark for last year and we won't see that again until later this year when the year ages and things become a little more normal.

I am glad for the question because I think it's important. People don't think the lack of loan growth getting bigger and bigger is a consideration that the economy isn't strong. I think the fact that there is loan growth at all says that the economy is doing pretty well. If people are going to put it in cash before they take the banks money, I think that is important to know.

Great, thanks for the color, Richard. Appreciate it.

John Dunn, Meredith Whitney Group.

Good morning. Just one more branch question, if you wouldn't mind. Can you give us a sense of what the profitability of a hybrid branch versus a traditional bank branch would be? And then I think you had in the past referenced 25 to 50 branch openings per year; is that still your outlook?

Yes, yes. I will answer the nonnumeric number. Andy is the smart guy of the two of us.

We are still going to open 25 to 50 net locations. Wholly almost a third of our locations now are what you call hybrid -- they are in corporate sites, they are in grocery stores -- and they have been extremely useful to us. I think people used to think that we were building branches on the cheap. I would like to think we are actually seeing the future, realizing that the transaction part of branches don't need to be the old-fashioned brick and mortar. And that is going to continue.

I will tell you, though, but it's the same thing. It's about half the cost to breakeven on a nontraditional branch than it is to a traditional. It doesn't grow to be as big over 20 years as a traditional, but at the end of the day they both need to make loans to make money for the bank.

They need to be originators of mortgages, credit cards, and old-fashioned auto loans. Those are all starting to come back, but they are not at the levels they were before the recession. So in a relative basis they are both under some form of stress.

The traditional branches will take longer to recover because they have got a bigger expense base, but I am glad that we have both mixes because, based on my answer to Nancy, we are going to need those traditional locations if they are in the right place and the right community for those more traditional questions. Andy, on the financial side (multiple speakers).

Yes, on the financial side, just building on what you said, when both are mature the traditional, because it has more loan activity, is the more profitable but the in-store builds to a breakeven in a more rapid fashion because of the lower investment requirement at time zero.

Thank you very much.

You weren't that much smarter than me.

No.

At this time there are no further questions. I will now turn the conference back to Judy Murphy for closing remarks.

Great. Thank you all for listening to our review of our fourth-quarter results. As usual, if you have any follow-up questions, please feel free to give us a call.

Thanks everybody.

Thank you.

Thank you.

Thank you. This concludes the conference. You may now disconnect.