美國合眾銀行 (USB) 2012 Q2 法說會逐字稿

Welcome to U.S. Bancorp's second-quarter 2012 earnings conference call.

Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer, and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session.

(Operator Instructions).

This call will be recorded and available for replay beginning today at approximately noon Eastern Time through Wednesday, July 25 at midnight.

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

Please go ahead.

Thank you, Holly, 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 second-quarter 2012 results and to answer your questions.

Richard and Andy will be referencing a slide presentation during their prepared remarks.

A copy of the site presentation, as well as our earnings release and supplemental analyst schedules, are available on our website at USBank.com.

I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty.

Factors that could materially change our current forward-looking assumptions are described on page 2 of today's presentation, in our press release and in our Form 10-K and subsequent filings on file with the SEC.

I will now turn the call over to Richard.

Thanks, Judy, and good morning, everyone.

We are very pleased to share our record quarterly results with you this morning and I begin with the highlights on page 3 of our presentation.

U.S. Bancorp reported record net income of $1.4 billion for the second quarter of 2012, or $0.71 per diluted common share.

Total net revenue was higher by 8.1% over the same quarter of 2011 driven by 6.6% growth in net interest income and 9.7% growth in fee revenue.

As importantly, we achieved positive operating leverage on both a year-over-year and linked-quarter basis.

The total average loans grew year over year and linked-quarter by 7.7% and 1.9% respectively and we experienced strong loan growth in total average deposits -- strong growth in total average deposits of 10.5% over the prior year and 1.3% linked-quarter.

Credit quality continued to improve as net charge-offs declined by 8.9% from the prior quarter and nonperforming assets decreased in total by 6.9% or 12.3% including covered assets.

We generated significant capital this quarter through earnings and ended the quarter with a Basel I Tier 1 Common equity ratio of 8.8% and a Tier 1 capital ratio of 10.7%.

We repurchased 13 million shares of common stock during the second quarter bringing our year to date share buyback total to 29 million shares.

Since the beginning of the year we have returned 62% of our earnings to shareholders through dividends and share repurchases.

Trends in our industry leading performance metrics are shown on slide 4. Return on average assets in the second quarter was 1.67% and return on average common equity was 16.5%.

Our company's long-term goal is to achieve a normalized ROA in the range of 1.6% to 1.9% and an ROE between 16% and 19%, both performance ratios are within the respective ranges.

Our net interest margin and efficiency ratio are shown on the graph on the right side of slide 4. This quarter's net interest margin of 3.58% was 9 basis points lower than the same quarter of last year and, as expected, a few basis points lower than the end of prior quarter and Andy will discuss the margin in more detail in a few minutes.

Our efficiency ratio for the second quarter was 51.1%, lower than both the prior year and previous quarter and we expect this ratio will remain in the low 50%.

Turning to slide 5, the company reported total net revenue in the second quarter of $5.1 billion, an increase of 8.1% over the prior year's quarter and 2.8% higher than the previous quarter.

The company's net revenue benefited from growth in both our balance sheet and fee-based business lines and Mortgage Banking and payments were particularly strong this quarter.

Our growth in average London deposit balances is shown on slide 6. Average total loans outstanding increased by $15.3 billion or 7.7% year over year.

As expected, linked-quarter growth in average total loans accelerated slightly from the previous quarter as balances grew 1.9% compared with the first quarter's linked quarter growth of 1.5%.

Excluding covered loans [or run-off] portfolio average total loans grew by 10% year-over-year and 2.4% linked-quarter.

The increase in average loans outstanding was primarily due once again to strong growth in commercial loans which grew by 23.2% year over year and 6% over the prior quarter.

Residential real estate loans also showed strong growth, 19.6% over the same quarter of last year and 3.5% over the prior quarter.

Consumer lending was more muted with the exception of auto loans and leases which have been -- shown solid growth for a number of quarters.

We continue to originate and renew new loans and lines for our customers.

New originations, excluding Mortgage Production, plus new renewed commitments totaled over $45.5 billion this quarter.

Total revolving corporate and commercial commitments outstanding increased year over year by 24.3% and 3.7% on a linked-quarter basis, while utilization remained fairly consistent at approximately 25%.

This increase in commitments, coupled with the quarter's strong commercial loan growth, indicates that we're continuing to gain market share.

Total average deposits increased by $21.9 billion or 10.5% over the same quarter of last year while total average deposits grew by $3 billion on a linked quarter basis or 1.3%.

Turning to slide 7 and credit quality -- total net charge-offs in the second quarter declined by 8.9% from the first quarter of 2012, while nonperforming assets decreased by 6.9% or 12.3% including covered assets.

The ratio of net charge-offs to average loans outstanding was 0.98%, improving from the 1.09% recorded in the first quarter and now below the 1% through the cycle net charge-off rate that we expect given the current mix of our loan portfolio.

Turning to slide 8 -- as the graph on the left illustrates, early and late stage delinquencies, excluding covered assets, improved again this quarter.

On the right-hand side of slide 8 you will see that the positive trend in criticized assets also continued.

Both of these statistics provide us with confidence that net charge-offs and nonperforming assets will once again trend modestly lower in the third quarter of 2012.

Given the second-quarter's improvement in credit quality and our expectation that this improvement will continue going forward, we released $50 million of reserves compared with $90 million in the first quarter and $175 million in the second quarter of last year.

I will now turn the call over to Andy.

Thanks, Richard.

Slide 9 gives you a view of our second-quarter 2012 results compared to various comparable time periods.

Record diluted EPS of $0.71 was 18.3% higher than the second quarter of 2011 and 6% higher than the prior quarter.

Slide 10 lists the key drivers of the company's second-quarter earnings.

The $212 million or 17.6% 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 a 7.3% increase in non-interest expense.

Net interest income increased year over year by $169 million or 6.6%.

The increase was largely driven by a $26.2 billion or 9.4% increase in average earning assets in addition to strong growth in low cost deposits.

The growth in average earning assets included planned increases in the securities portfolio and growth in average total loans as well as loans held for sale partially offset by a lower cash position at the [bet].

The net interest margin of 3.58% was 9 basis points lower than the same quarter of last year, primarily due to the expected increase in lower yielding investment securities and a decrease in loan yields, partially offset by lower cash balances at the Fed and lower deposit costs.

Non-interest income increased by 9.7% year-over-year.

Mortgage banking revenue is very strong again this quarter as production increased by 150% year over year and gain on sale margins improved.

These positive variances in Mortgage Banking and several other major categories were partially offset by a 17.8% decrease in credit and debit card fees due to legislative changes to debit card interchange.

Offsetting the impact of this unfavorable change in debit card fees was legislative related litigation activity including the final elimination of the unused rewards and higher overall transaction volumes.

Non-interest expense was higher year over year by $176 million or 7.3%.

The majority of the increase can be attributed to higher compensation and benefits expense, an increase in professional services primarily due to foreclosure review and other expense which included an accrual related to the Visa settlement.

This accrual accounts for the temporary reduction interchange included in the settlement terms.

Net income was higher on a linked-quarter basis by $77 million or 5.8%.

This favorable variance was the result of a 2.8% increase in net revenue and a 2.3% decrease in the provision for credit losses, partially offset by a 1.6% increase in non-interest expense.

On a linked-quarter basis net interest income was higher by $23 million or just under 1%.

Average earning assets grew by $3.7 billion and net interest margin was, as expected, 2 basis points lower than the prior quarter as a negative impact from the repricing of investment securities portfolio and slightly lower loan yields were offset by a reduction in cash balances at the Fed and the positive impact from repricing of maturing debt.

The average balance of our investment securities portfolio was $73.2 billion in the second quarter, $10.2 billion higher than the second quarter of 2011 and $1.7 billion higher than the previous quarter.

During the second quarter we transferred approximately $12 billion of securities from available for sale to held to maturity, reflecting our intention to keep these securities until maturity and subsequently reducing the volatility of OCI going forward.

Assuming stable cash balances and the current Basel III liquidity requirements, we expect to maintain the investments securities portfolio at or around this level for the next few quarters.

Also, given the net interest rate environment, we expect net interest margin to be fairly stable in the second half of 2012 as repricing pressure on the securities portfolio is offset by the benefit of a reduction in funding cost as higher cost debt matures and is replaced by lower-priced debt and/or deposits.

On a linked-quarter basis non-interest income was higher by $116 million or 5.2%.

This favorable variance was primarily the result of strong growth in payments in Mortgage Banking as well as increases in the majority of other fee categories.

On a linked quarter basis non-interest expense was higher by $41 million or 1.6% primarily due to the Visa settlement accrual and Mortgage Servicing review project partially offset by lower marketing business development expense.

Turning to slide 11.

Our capital position remains strong and it continues to grow.

We have included estimates of our Tier 1 Common equity to risk weighted asset ratio using the Basel III proposed rules published both before and after June 7.

Based on our preliminary assessment of the full impact of the proposed rules for the Basel III standardized approach released for comment in June, we have estimated that our Basel III Tier 1 Common equity ratio was approximately 7.9% at June 30 versus the 8.4% estimated at March 31 under the prior proposal.

The reduction in our estimated ratio was primarily the result of an increase in risk weighted assets under the newly proposed rules of approximately 7%.

At 7.9% we are both well above the 7% Basel III minimum requirement, but slightly below our targeted ratio of approximately 8%, which includes a cushion for a yet to be defined SIFI buffer and our own internal buffer.

We expect to reach our target ratio during the third quarter.

Slide 12 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 balance at June 30 was $164 million compared with $134 million at March 31.

As you may recall, we increased our mortgage reps and warranty reserve in the first quarter of 2012 in response to changes we have seen in the GSE sampling method.

During the second quarter of 2012 we accrued $45 million and believe the level of reserves at June 30 is appropriate.

We continue to expect mortgage repurchase requests remain fairly stable over the next several quarters.

I will now turn the call back to Richard.

Thanks, Andy.

So to conclude our formal remarks I turn your attention to slide 13 -- the momentum continues this quarter and hopefully beyond.

We grew our balance sheet and customer base and we gained market share.

We grew net revenue; we achieved record earnings and industry-leading performance metrics for the quarter, as well as positive operating leverage.

We continue to invest in our businesses and we saw credit quality continue to improve.

Our capital and liquidity positions remain strong and they are growing.

And we've returned 62% of our earnings year to date to our shareholders through dividends and buybacks.

Our Company continues to invest for the long term in our diverse and stable mix of businesses, products and services and in our employees and in the communities that we serve.

Consistent, predictable and repeatable.

Our straightforward approach to doing business has allowed us to deliver industry-leading performance and returns to our shareholders and we look forward to doing more of the same during the rest of 2012 and the years to come.

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

(Operator Instructions).

Erika Penala, Bank of America.

My first question is for Andy.

Could you walk us through in terms of the components of margin stability for the back half of the year?

And I guess my more detailed question underneath that is could you give us a sense of how much debt is maturing in the second half and at what rate and what replacement rate you are assuming?

As well as I noticed on an end-of-period basis, the cash balances were actually up.

What size bond portfolio you are assuming for the rest of the year?

Okay, Erika.

So the key moving parts are the negative is the investment securities reinvestment risk and the offset to that is the debt repricing, which will be at a lower cost replaced by either additional debt issuance and/or deposits.

The differential of those two things is essentially causing us to be -- to have an expectation of neutrality in net interest margin for the rest of the year.

In terms of the cash balance, Erika, you know any day there is fluctuations in the cash balances.

And I like to look at it more at the average for the quarter, which was down from about $4 billion in the first quarter to about $1.5 billion in the second quarter.

And again, the level of loan growth and deposit growth is fairly stable, as you saw, in the second quarter.

So I would expect a little movement around that but not substantial.

You don't happen to have the dollar number of the debt maturing and the rate at which it's maturing for the second half of the year, do you?

I do have that.

In the second quarter -- in the third quarter we have about $6 billion maturing and I would say the debt that is coming off versus what is coming on is favorable right around 100 basis points.

And my last question before I step away from the queue relates to CCAR.

I guess perhaps it's too early to tell, but now that the NPR proposal is out, do you anticipate that the CCAR is going to take into account Basel III ratios rather than Basel I when thinking about improving capital return for the banks next year?

Well, as you know, Erika, the last CCAR actually took into consideration both Basel I and Basel III.

It was Basel III under the stressed environment and Basel III -- Basel I under the stressed environment and Basel III under sort of the glide path.

And I would expect a similar sort of set of constraints in the new one next year.

Thank you.

Jon Arfstrom, RBC Capital Markets.

A question for maybe Richard or Bill on slide 7, the credit trends.

Richard, you've talked about this concept of the industry over earning in the past.

And just curious if you would be willing to take a stab at going below 1%, how long does this phenomenon last?

And how low can charge-offs potentially go for the company just kind of big picture would be helpful?

Thanks, Jon, I will start and Bill can clean up.

The 0.98 is about where I thought we would be right about now, because in the last few years we and others have not been taking much risk on lending, which is probably at the end of the day what we are supposed to do but have to be very careful.

I think that we stay below 100 basis points for a few quarters just because the math of it says that we don't have any loans that would be coming to some point of stress, I don't believe, in the next couple of quarters based on our prudent underwriting of the last year or so.

I will say remember that we have a credit card -- fairly important credit card book that does affect our overall ratios and that is probably the one that is coming now to its most -- nearest bottom where it will start to move up probably sooner than the rest of the portfolios.

But for the rest of it I think we are going to stand stay under one for a while.

My hope is that based on appropriate accounting trends that we can continue to have a certain level of unallocated reserves remaining so that we don't find ourselves releasing reserves to a point of unsustainable performance only to have to build them back as things start to move up.

I will also close by saying I don't think that 0.98 falls to anything like 0.5 or 0.6, I think it floats around the high 8's and midpoint 9's.

But it probably eventually gets above 1 and I'll actually be looking forward to that because that means we have been optimal in doing the right risk/reward balance and making sure that we are taking the right risks and rewards for our customers.

But I would say it is another few quarters and not very aggressive in its movement from here.

Bill, do you want to add?

Yes, I would just say, Jon, that how long it stays below 1 and how low it goes is in a large part a function of how strong the economy is.

If it stays at this very moderate growth level that is positive, but we wouldn't necessarily see that loss rate go way down given the continued high unemployment rate.

But if we do enter into a very robust economic growth and see unemployment count go way down, see loan growth go way up, then clearly we could get a much lower rate.

But a large of it part remains a function of the economy.

Just to follow up on that.

Obviously the pipelines are strong, but are you sensing any incremental borrower caution or any potential changes in activity between now and the end of the year.

Yes a little bit, this is Richard.

I like to characterize things in quarters.

So I think quarter four was a pretty strong ending as it related to our customers' sense of things.

Quarter one remains strong for our quarter at the beginning of the year, and then quarter two, I'd say the last month of quarter two started to taper off a bit in terms of appetite for risk.

No surprise, but as you think about it we're getting closer to a number of moments -- we are coming closer to the election, we are coming closer to the fiscal cliff decision, we are certainly not getting better news from Europe as it relates to the confidence of our customers and then the economy isn't strengthening, it is not falling apart either, it's just not getting better.

So I would say that we saw a slight tempering at the end of quarter two and I think we will continue to see that between now and the solution that is in the offing for any of those outcomes, particularly the election and the fiscal cliff which at least have deadlines on them, as we all know.

For us as it relates to loan growth, we are 1.5% linked-quarter in quarter one, 1.9% for quarter two.

Our current forecast shows us pretty steady to that level where we have been right now.

So I don't think we are going to see a ramp up; we are certainly not seeing things go backwards.

But our customers' behavior, both on their continued decision to take on commitments that they are not using and their caution in not extending themselves in places that they are not comfortable, continues to remain and that story is kind of just more of the same with a slightly negative bias to their confidence.

Okay, thanks a lot.

Scott Siefers, Sandler O'Neill.

I guess a couple questions, first is generally on mortgage.

Another pretty strong quarter and you guys obviously have beefed up the net business pretty considerably over the last couple years -- or few years.

So just curious anecdotally your thoughts on how long it can stay strong given the rate environment and any additional opportunities you might see there.

Yes, this is Richard, I'll go first.

We know that this is an unsustainable moment in time because refis are so robust, they are about two-thirds of our originations right now and with interest rates this low they are not going to stay there forever.

So we are going to continue to enjoy the benefits that accrue to a high-quality producer like we are with a good brand and we are not going to withhold any opportunities that come along.

But we are not building this church for Easter.

There are a number of things we're doing to make sure that we have the right people and the right processes in place.

We are also building with a certain level of [temporaryness] as things will eventually start to flatten out.

I think our market share will continue to grow as it has as much for our own efforts as it has been the changing in the marketplace.

And I think in the future, say three years forward, when there is a more normalized environment we should have very significant market share of a more traditional new home market business for which we will build an infrastructure that can withstand that and grow with it, but not put ourselves over our skis at moments like this where it is probably not sustainable.

I'll have Andy talk a little more about the margins we are getting right now.

And you are right, the pipeline is strong and quarter three looks a lot like quarter two.

As Richard mentioned, about 70% of our activity in the first quarter was refinancing, it dropped to the low 60%'s in the second quarter.

Gain on sale margins fell a bit from about 2.30 to about 2.18 from quarter one to quarter two.

So our expectation for quarter three is a similar volume, perhaps a little bit of further pressure on gain on sale margins and then again fourth-quarter is going to depend a little bit about where rates are at that time.

Okay, that's helpful, I appreciate it.

And I just guess -- I wanted to ask another question here.

You guys were in the Journal, I guess it was yesterday or today, on that Los Angeles lawsuit.

And you talked about sort of the market confusion regarding being a trustee versus actually owning some places when these lawsuits come up.

I guess I was just curious if you had any thoughts on that most recent one?

Yes, thanks, Scott.

I do besides the fact that I hate it is the -- we don't own any of those properties.

And it is a classic case of misinformation and the confusions created by the role of a trustee.

The trust owns these RMBS, but in turn they are owned by the investors and we have a limited duty as a trustee.

In fact we don't have any rights to go in and touch the properties.

And while that doesn't pass the test in the public jury it is accurate and it is the way the trustees were built.

We have, in this particular case, since they had their belly full of it yesterday for wholly incorrect information I guess I have my [now to say] that none of the information that they have provided was accurate.

We have been working with them for 18 months to try to understand what they really wanted and were even willing, above the duties of our responsibility, to connect with servicers and help try to figure out where these properties are in falling into disrepair and to no avail.

For the record, we have 46 of those properties in LA County for which they were actually -- we can get our hands on and U.S. Bank owns only 18 properties outright in the LA County that are foreclosed and every single one of them, with pictures to evidence, are in good shape and in great repair.

So we will continue to manage this through the courts and do our good duty of making sure that people understand the role of the trustee.

But I think at this point it is disappointing but it is not altogether surprising because if it is not here it is sometimes in bankruptcies or other places where the bank gets tagged as the owner or the creator of the problem and we just have to go back through the right courses to explain our positions.

And usually we don't have to do that after a press conference, but we will have to do that this time.

Okay.

All right, I appreciate the thoughts.

Thank you.

Thanks for bringing it up.

Ken Usdin, Jefferies.

Richard, I was wondering if you can give us a little more color on other parts of the loan book.

I notice that commercial mortgage grew a little faster this quarter, if you can walk us through that.

And also your appetite for continuing to build the residential mortgage portfolio.

I know it is a relatively still small percentage, but just from an asset liability perspective if you can give us some color on that.

Yes, a little color on all of it.

So our loan growth in the C&I market business was actually strong and I'm happy to report across the board 6% linked-quarter and it was all the way from small business including SBA up to Middle Market and all the way up to large corporate.

In terms of markets, we said last time and we'll say it again, we are not seeing a real distinction across geographies except in commercial real estate where the coasts are stronger for reasons that make sense, I think, than some of the markets in the Midwest.

Our investment in all these businesses continue to be attractive to me because it's an opportunity for us to slightly and quietly move market share and get opportunities with a business with other customers we haven't had before.

Namely the more corporate side I would say our growth is first and foremost our own new marketing efforts and being more -- invited it to more opportunities including syndicated deals and now the chance with capital markets to lead many of those deals.

Second in order would be our own customers giving us more of their business.

And third and probably at a diminishing level from prior quarters would be the benefit of the European Bank starting to retreat.

In the other parts of the market is just old-fashioned market share and customers giving us more business.

And commercial real estate happens to be a business we are very good at.

As you know, from stress test results to prior quarter's review we have a very good book and an amazingly strong team.

So that probably is a place where without a European benefit so much we have been getting invited to a lot more opportunities.

Because I think we said no to a lot of people in the last cycle and, much as they might have hated it then, they are back saying, look, you said no when it was easier to say yes and the fact is I expect you're going to take care of me all the time because your best interest must be mine.

So, let's sit down and talk.

And I'm going to continue to see growth in commercial real estate which is what I think you are seeing a bit latent.

CRE is always late, last in and last out, and I think we are getting the benefits that we saw with C&I a couple of quarters later.

So, Bill, I will stop there and turn it to you in terms of more color around the loan book.

Yes, in terms of the mortgage, obviously there is not a lot of construction activity other than multi-family.

We do have a fairly robust multi-family construction pipeline.

But on the mortgage side we have a lot of large institutional customers, a lot of REITs.

There's been a lot of repositioning of Class A properties and we are more than willing and able to provide financing to those institutional clients for that mortgage category.

My second question, just to flip it to the deposit side for a second -- continued good growth and I'm just wondering is it from new customer adds, are you seeing any flight to quality benefit?

And also just a little color on this broker dealer list that you saw in the large time deposit category?

Yes, it is across all those categories.

We are seeing good growth in our retail customer base across the branches and the savings account principally.

The DDA growth is principally driven by wholesale as well as our corporate trust business, which is a great source of DDA deposits.

And we have ever robust broker-dealer group that will have fluctuations up and down, but from a core basis in terms of long-standing deposits, those are growing across the board.

And last little nitpicky one, just the professional services was up on some mortgage-related stuff that's been elevated in the past.

Can you just explain that and then talk about is this going to be just a continued -- continued kind of elevated type of expense and that we are going to have to deal with just until all the stuff is settled out?

Yes, Ken, so that is principally due to the foreclosure -- mortgage consent order review that many banks are facing, it is a third-party review that is going on.

It cost us just over $50 million in the second quarter.

We would expect a similar level in the third quarter then start to fall off in quarters four and going into 2013.

Okay, great.

Thank you very much.

Greg Ketron, UBS.

Richard, maybe a question for you on the Visa MasterCard litigation and maybe your view on that.

I know it looked like you had accrued some charges for the quarter, but maybe how the settlement plays out for U.S. Bancorp, especially given the fact there could have been a larger negative overhang as the year progressed, now it looks like for the most part it has been resolved.

Yes, so talking about a settlement that seemingly nobody likes -- after seven years you would have thought we had got that right.

As you know, we are not a party to that directly, but we are influenced by the outcome.

And, in fact, even if it were a party we would have been allowing Visa/MasterCard to do our bidding.

In this case I think the settlement itself was acceptable because first and foremost we have, like other banks, have a great deal of money reserved for this particular lawsuit for many years, especially once they both became public companies, and that money for the most part was used for this and that is what we wanted it to be used for.

The overhang of 10 basis points for eight months, as you can see, we accrued for that, so that is now behind us.

I do worry that it might pierce the veil in terms of what merchants will want to do on month nine.

So I think we need to keep our eyes open and make sure that that has satisfied the court's requirement and we will also have eight months to see whether that money actually does get passed along to consumers or to retailers or where it goes.

And then probably the Trump card, Greg, biggest issue is surcharging and the permission now that is granted.

As you know, AMEX doesn't have that opportunity, so it will be interesting to watch between those issuers between MasterCard/Visa versus AMEX, how that plays out.

And I do think it is very interesting and provocative to see what kind of actions the retailers will take because typically surcharging is a negative feeling and impact to consumers and I would suspect that most of them probably won't jump on it.

Lastly, and you know what I have read, but it is not final and they still have opt out opportunity, so it will be interesting to see if all the large merchants and some of the chains of say fast food chains or the convenience store chains all accept this or not because it may in part be just a starting point to the continuing saga that is now seven years old.

So I don't expect it to be conclusive.

I think we have a lot to watch.

I actually appreciate the extra time we will have even over the holidays to see how this all plays out again.

It's not going to be hugely material to U.S. Bank, we are also an acquirer so at the end of the day there are some counter hedging benefits to whatever the solution is.

But I think it is very instructive to watch.

And it's very different than Durbin -- had nothing to do with congressional oversight, it had nothing to do with customers weighing in on this.

This was a retailer versus card business and I think it has got probably halfway through the game.

We will see how it goes in the next couple months.

Great, appreciate your insight.

And Andy, on margin -- when you look at the average cost of the interest bearing deposits you are [down to about] 43 basis points for the second quarter.

Do you think there is appreciable more room to down price as we work our way through the rest of this year and into 2013?

Yes, Greg, there is some room.

You know, you think about that average, that includes some deposits that are very low, somewhere between 3 and 5 basis points and then some that are well above the 40 basis points.

And the opportunity would be for those set of deposits that are above the 40, and we still have some room there.

Thank you.

Marty Mosby, Guggenheim.

I had a question -- two questions about this overall economic activity.

If you are looking at -- just curious on page 6, if you look at the deposit growth and you kind of work from third quarter to second quarter, we are seeing deposit growth go from 18% down to 10.5%.

On the other side you've got loan growth going up from 5% to almost 8%.

So the gap between those -- while we are not seeing a big shift in dollars, the growth rate gap is closing.

That has gone from about 13% down to about 3%.

And I just know given the kind of position you all have in the market place and the growth you are seeing on the revenue side, do you think that this is related to some underlying toes into the economic activities?

You know, as we talked about, Marty, you are observation is correct that the differential between loan growth and deposit growth is condensing so that they are almost at the same level now.

So we are at the 1.9 and the 1.3 on a linked-quarter and in fact flipping to loan growth being a little higher.

So there was a period last year where there was very limited loan activity and tremendous deposit activity as particular corporations were building liquidity on their balance sheet and effectively on our balance sheet.

That seems to have slowed and sort of leveled out so there is more of a balance right now.

And that is sort of what we are anticipating going into the third quarter.

And so it's not really the quick shift that we've seen in the past, but maybe there is a slow boil that is kind of going on underneath?

Yes, it isn't a massive change all in one quarter, but it is over many quarters shifting a little bit, that is correct.

Would you also say given you all's transaction processing business what are you seeing in activity levels there?

Is it encouraging at all or -- we had a nice uptick this quarter from seasonality, but how was that relative to your expectations?

I would say that in terms of same-store sales, Marty, we have both a good view of the whole domestic market and even a little peek into Europe given our position over there.

But year-over-year sales for our Elavon business was up 2.2% and primarily led by government, financial and apparel.

Without the airline which is a huge portfolio for us it is up almost 3%.

On the negative side furnishings, consumer purchases and entertainment were on the down side, on the negative.

So what you are seeing is I think the reduction of a long, torturously long recession with a slow recovery where people are spending what they have to spend on, but they are probably still lagging on spending a more discretionary benefits.

And for us the 2.2% year over year growth is pretty much where we thought it would be and expecting it to probably be settling into the summer months somewhere in that same range -- not getting much better, not getting much weaker.

And consumers are less affected by those issues I mentioned earlier like the election and the fiscal cliff.

But as we get closer to those points in time, for better or for worse they will start to become more engaged in that dialogue and their actions and behaviors might be affected by it.

But for now we are thinking it is pretty steady state.

And just a last question -- detail, you mentioned the Visa accrual.

In a couple of places in the press release you say that non-interest expense was up $41 million primarily due to Visa.

Can you -- what was the actual number for the Visa accrual this quarter?

$65 million.

$65 million, okay.

Thank you.

Todd Hagerman, Sterne, Agee.

Richard, I have a couple questions just in terms of the loan growth.

One, in terms of the commercial real estate and you specifically referenced the multi-family opportunity pipeline.

But I am curious, obviously you have more room to grow that portfolio relative to the overall size.

And I'm just curious as you think about your risk balance, if you will, how do I think about just kind of that risk balance and the ongoing growth in commercial real estate, multi-family in particular.

How much -- where are you in terms of pricing and kind of thoughts in terms of where you want that portfolio to go all else being equal?

Thanks, Todd.

First of all I'll remind you historically -- gosh, you can go back probably a decade -- we have always had a fairly large commercial real estate book.

So at any point in time I am not worried about the size of that as it compares to the size of our total assets.

So we are comfortable with that because we are good at it.

I had the same management team for 19 years running that business and so I would take more opportunity like you said.

But let me jump on one thing.

Multi-family -- we are not always a bellwether, but we had a strong opinion two quarters ago, first part of the year where we felt new construction, strong as it is, is risky in overheated markets.

And we have been actually walking away from deals in certain markets where we think the total housing stock is going to be too high once you put the foreclosed property back into the marketplace and you have what has yet to be built multi-family.

So you might be disappointed or impressed, I don't know which, but we are not engaging in some of those opportunities in overheated markets, particularly like Boston and Chicago, but we just think it is just too risky.

So we are passing on opportunities not because the credit quality doesn't look good today, we just think the future as we see it isn't going to be strong enough to account for it.

You've got other categories though, new housing sales, we are at historic lows and we will continue to be light and we are going to continue to participate with the only high-quality national builders.

Office buildings, new constructions continue to be limited.

Vacancy rates in the big cities are about 15% ranging from 7% to 20% and major suburban markets are even worse, more like 15% to 20%.

So there is not a lot there but to work with your current customers, refi them or take higher positions.

On the retail side there is new construction which is virtually nonexistent unless you are building a next phase or a fill in to finish off a project.

Hotels and motels are experiencing pretty good trends right now, but new construction is still limited.

Industrial is limited by the same views that C&I customers are when they are not sure what we are going to need in the future.

And as I said earlier, the coasts are stronger than the middle of the country where we have a lot of our business.

So for us the growth you're seeing is an extension of invitations by customers that we have not worked with before, and current customers reducing the number of banks they are using and giving us first shot in many cases to have a higher position.

Nothing magic, but there is no -- I have no guard rails on this one.

If the right business is there I trust this group and our underwriting to take all that they can.

I am not concerned about the concentration, but I'm also telling you we are not going to get probably half as much as we could have because we simply don't think it is strong enough right now to get that deep into that business.

That's helpful.

And I'm assuming again within that portfolio you haven't changed the underwriting standards in terms of what you traditionally required in the past, as you mentioned.

No, I mean -- this is Bill.

No, we -- short answer, no, we haven't changed our underwriting standards.

Okay --.

By the way -- by the way, anywhere.

And then that I'll just segue into the card portfolio, again stabilizing credit metrics over the last couple quarters.

If you could just kind of give us an update in terms of where you think that portfolio is headed at this point, if you are doing anything different from a marketing or point of sale customer contact position.

So one of the efforts we have which has been very successful is selling through the branches.

So we have -- obviously we have always had direct mail as a source, but we have made a point of improving our originations out of our retail branches.

That gets a very high-quality customer, one that we can provide other products and services to.

So that is one change that we have really focused on especially this year.

In terms of just the outlook, credit conditions are obviously very favorable for cards right now, it's a competitive market.

But the credit outlook is very strong.

This is Richard.

But we are not going to go downstream on that line, we are not going to go to sub-prime or near prime.

We're just not going to do that and that is probably a lot of opportunity, and I'm not even saying those doing it are making a mistake if they get paid for it.

We are simply going to stay in the very prime as much as we can customer generated business where we know our customer and we believe that they would think that relationship is strong enough to make it first among few to be paid back.

So I see it as a growth business.

Our group is very good at it.

We will continue to extract more opportunity from the customers we have.

But I am not going to go into an underwriting game here to try to improve the volume.

Yes, the point I was just trying to make was you are kind of within your normalized band now today.

And I am just kind of more curious in terms of do you see more of the growth opportunities staying within that band?

Yes, and so I think the answer is within that band, yes, but not to extend the band to get more.

Right.

No, I appreciate it.

Thanks very much.

Nancy Bush, NAB Research.

Sort of a big question for you.

I don't know if you listened to the Bernanke testimony yesterday, but one of the senators went through this long litany of evil deeds associated with the banking industry including LIBOR and blowing up hedges and everything else, many of which are not directly applicable to you, but unfortunately your company gets caught in that same web.

But I think more ominously we are hearing from a lot of investors who are just looking at the returns in the banking industry over not just the past several years but a very long term and just saying, you know what, the returns haven't been there.

How do you remedy this?

And how do you get your company out of this -- it's a bank, therefore I don't want to invest in it -- kind of psychology that seems to be developing pretty quickly here?

Yes, that is a big question.

And I saw parts of the testimony.

If there was a long rambling senator I probably checked out.

But I will tell you the way for us to tell the story for U.S. Bank, and it does derive to the entire industry eventually, but the thing you have got to love about a bank and you hate about a bank -- what you love is an annuity, technically and literally an annuity.

And unless you have big surprises, which is what we are dealing with in the last couple of years, you really can pretty much bank on it -- pun intended.

But you know this.

I mean you've got -- you can't kill it and you can't change its course very quickly because the loan book and the deposit book move fairly slowly.

But, first of all you've got to ring fence the risk and describe to your investors what those risks might be and convince them in a way you didn't used to that you have your handle on the risk and that you are not willing to take additional risks for rewards that are unsustainable.

The second thing for the U.S. Bank story, and I'm preaching to the choir here, is that the derivative of our income, 50% or thereabouts, coming from fee businesses like trusts and like payment businesses also serves as kind of a buffer against the vagaries of interest rates and market perception.

We care only the half as much about what Bernanke is thinking about interest rates as somebody else because, while they are all affected by the economy, you and I both know we have these other cylinders that provide us with this fee business, which is less consistent but also has a whole lot of less variability.

So ours is to tell the story of the composition of earnings; to talk about the simplicity of the business; remind them of the annuity function of it; identify the risks, call them out, ring fence them and let people know that we have got a pretty good handle on it and always be straightforward and as consistent as we can be and when we have to guess, prove that we were as close to right as possible so the next time we guess you are going to trust it.

I will say that as -- I will ring fence that.

The second piece to us for the industry, Nancy, I don't know that I will be here long enough for the industry to get its legs back and the reputation it probably used to have.

We have done a lot of studies, we know that people love their bankers, that is who they pick, they actually like their bank, that is what they picked, they actually hate this industry because they have been told to hate it and every once in while there is another break-in in the neighborhood that doesn't help.

So I think we have to work from the bottom up and let each bank rehabilitate its own relationship with its customers.

Eventually that will pass through.

And I think high tide helps everybody.

And when the economy does get better, and it will, and if banks can prove themselves to be the catalyst of that recovering situation, which we used to do and I think we will just de facto be one of the reasons for it.

Then I think a lot of that criticism starts to fall away, and a future senator in a future hearing won't feel the need to pick on a bank for the popularity beliefs but actually -- might actually thank the bank for having been there when they needed it to be.

But that is years away.

So in the meantime we will mind our own business, tell our own story and cross our fingers.

Yes, this story that -- in LA is sort of illustrative that it is nebulous -- it is not true, but it's -- these municipalities feel that they can throw that out there and get some bucks in return from some settlement somewhere.

And as we look at the Wells Fargo settlement we see that actually does work.

I mean how long do you think it is going to take this stuff specifically around your company to go away?

Is it just a residual of the housing crisis and when the housing crisis turns that kind of (multiple speakers) finally goes away?

I think it's -- the housing crisis is the original issue, but let's agree that it's basically an economy.

So the week of economy caused the City of LA to have a city attorney looking for places to raise up revenue.

And what they are asking us to do there is change the legal bounds upon which -- a trustee's responsibility because they can't get to the original servicers.

So the housing is the reason for the topic and frankly people forget that there are three places where people own houses -- there are the GSEs, by far the majority; there are the banks that own them outright which people spend all their time on; and then there is this private group of trusts that own the RMBS's and no one can get to them and there is no construct to get that group together.

It is like a bad co-op getting together for their annual meeting in apartment 16b.

I mean, you can't get them together to identify where they can agree to reduce the value of their trust in order to get the houses onto the market.

So they are going to go through another door.

I should only hope that it doesn't impede the original goal of a trustee, because if it changes the rules of what that means then I don't know that anybody would want to be a trustee if all the responsibility falls to them eventually through some eyes of the law.

And so far that hasn't happened.

But I think -- answering your questions -- I think as long as the economy is weak everybody everywhere will seek a place where there might be a deeper pocket to try to find an opportunity, even if it's not legal, to raise the specter of question and try to find some opportunity.

I am not a settler.

I don't like to settle much at all because I think right is right and I'm a fairness doctrine guy.

At the end of the day I'll settle if it's better for my shareholders, but not at all in the first, second or third pass because it is just wrong if it's not right.

And so we will hold on a little longer to make sure we get treated fairly.

At the end of the day we will do what is right at the end, but I will tell you, Nancy, this is a multi-year issue and we'll probably face this and many others we haven't heard from yet as an industry for the night couple until the economy is assuredly on its feet and doing well again.

Thank you.

We will talk world peace next time, huh?

Thanks, Nancy.

Mike Mayo, CLSA.

I think you have talked some about the interest rate environment, but could you elaborate more -- how much more negative impact could there be if rates stay at these unexpectedly low levels?

Well, Mike, this is Andy.

We are expecting to stay at this level for the rest of the year certainly and that is the environment for which we are projecting relatively stable net interest margin.

Because again, the headwind of the reinvestment risk on the securities portfolio is essentially offset by the opportunity in the reestablishment of our debt at a lower cost.

And those two things right now, as far as we can see the rest of this year are stabilized margin to today's levels.

But more generally, if over the next three years we have the rate curve the way it is today, are you half done with the pain, do you expect a lot more pain for you or for the industry?

Because one bank yesterday said, well, it's all done, it is all in the numbers and these low rates shouldn't hurt anymore.

Whereas I thought you gave one presentation saying, well, no, it could actually hurt some.

Yes, so, Mike, for the rest of the year, again, it's stable.

If this exact rate environment went into next year I think for us and for the industry it would be a little bit of a negative bias because the yield curve is relatively flat, low rates are at the low -- at the short end, rates are as low as they are going to go.

So -- and we are, as you know, positively biased to an increase in rates, we are asset sensitive.

So we would benefit from an increase in rates or a steeper yield curve.

I don't think it is material next year if it stays at the current level, but there is a negative bias.

And longer term can you go two or three years out?

I would have the same answer.

So not material though?

Continued negative bias but not hugely material.

And then separately, as far as acquisitions what is your appetite?

One thing you can do in an environment with some revenue headwinds is cut more costs or buy their banks.

Where do you stand on that?

Well, you know we always look at opportunities that are presented.

I will tell you that right now it is a fairly quiet environment in terms of M&A, there isn't a lot of activity going on from the traditional bank standpoint.

What you have seen us in the past look at are small corporate trust transactions, payments transactions, that is both on the merchant acquiring side as well as the card issuing side.

And those types of things are always in the works, none of them are huge or material but those are the types of things we are focused on.

And, Mike, we have all the powder we need, both time, energy and capital if we want to go after something.

So it's not an issue of not wanting to, we just don't have anything that is out there we like and we look at a lot of things and turn them down because the price points aren't very attractive.

I think you will see between now and the end of the year a number of payments and/or corporate trust deals that won't register at headline level but they will continue to be the calling together of opportunity that we think presents itself for scale and/or efficiency in markets and we are going to continue to deliver those to you all.

But in terms of -- as Andy says, of traditional bank deals, they are simply not out there at the level we like and we are not reaching for them because we don't need them.

Okay, thank you.

David George, Baird.

A question on capital.

You bought back it looks like 13 million shares, you returned over 50% again of your earnings to shareholders in the quarter.

I notice you released your estimate of the new Basel guidelines and you're at 7.9 using that math.

Does that make you think any differently about buybacks?

Are you -- does that change your view on returning capital near term?

Thanks.

Sure, David thanks, David.

So this is Andy.

We -- as you know, the new rules came out on June 7. On June 7 as we worked through the new rules we paused our buybacks for the remainder of the second quarter.

The new rules resulted in about a 7% increase in our risk weighted assets.

We are bound by the standardized approach because our capital ratios would actually be better or higher under the advanced approaches.

So we are bound by the standardized.

We, as you also -- as we also talked about, moved about $12 billion from available for sale to held to maturity in our securities portfolio because we intend to hold those securities and because it reduces the volatility.

So given all that our target capital ratio under the new calculation is approximately 8%.

And as you mentioned, we are at 7.9%.

So we expect to be the there in the third quarter and expect to continue to go back to the buyback program in the third quarter.

So let me -- this is Richard, let me just -- I will make it easier in that I will do the math for you.

Last quarter we were at 8.4% Tier 1 under Basel III and we had stated our goal of 8.15%.

That 8.15% was 7% plus 0.5% for -- a buffer for a domestic SIFI which we have no guidance for and 0.65% for just other buffers.

Based on the actions that Andy just talked about we think that the OCI volatility is lower so we are bringing that 8.15% down to 8% which is 0.5 and 0.5 and we are now at 7.9% under the new rules.

So we went to from 8.4% compared to 8.15%, now we are at 7.9% compared to 8%.

And based on your question and his answer we will accrete back to 8% very quickly in this quarter and then we will continue our way.

Okay, sounds good.

Thanks, guys, appreciate it.

Paul Miller, FBR.

I want to go back to the -- again your average balance sheet on your NIM.

And I think one of the first questions you talked about, somebody asked a question about how much borrowings you got repricing.

Are they short-term borrowings or long-term borrowings that are repricing?

It's a combination of both, Paul, and it is about $6.5 billion that is going to mature.

So it's not repricing, it is maturing third-quarter and it will be replaced by either other issued debt or deposits.

And then on your -- in your time deposits you have $14 billion that is staying relatively consistent.

My guess is most of that is one-year paper.

Is that repricing also?

And what type of level are they repricing at?

Yes, so, I would say our deposit balances in total, including those time deposits you are referring to, are repricing.

But the differential on what is coming on versus what is coming off is not as dramatic as the debt side of the equation.

So you have CDs out there that you are repricing above 1%?

We have -- either -- the differential between what is coming off and on is not nearly the same again as what the debt differential is and that's why I focused on that.

Because that debt differential is the big tailwind --

The big driver.

-- offsetting the headwind on the securities, that's right.

Okay.

And then on the security portfolio, did you guys disclose -- if you did, because I've been jumping all around today -- what type of CPR rates you were seeing on those portfolios?

We did not.

And it hasn't changed dramatically.

We had a little bit higher repayments because of the rate environment but it wasn't a dramatic change from where it has been the last few quarters.

And is your duration -- I think you have said it is short-term, but have you disclosed what it is?

I think it's -- is it around three years?

It is under that number.

What we are putting on -- what the duration -- the average life of the book is stated in our Q, the duration is in that two year neighborhood.

Two year neighborhood.

Okay, hey, guys, thank you very much.

And at this time there are no further questions.

I would like to turn the conference back over to you for closing remarks.

Good, thank you, Holly.

And thank you all for listening to our results.

If you have any follow-up questions, as usual, feel free to call.

And we will talk to you next quarter.

Thank you.

Thank you for your participation on today's conference call.

You may now disconnect.